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The Market May Rally, but What is Reality

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The biggest gaping hole for the world economy is this:

There is no country, not China, India, Europe or any other, that is in a position or has the financial resources to pick-up the slack left by the retrenching, tapped-out US consumer. The engine of global growth is missing. This is a fact.

China has been looked to as the one to pull the world up and out of the collapse, but China's growth has been based on its exports and the FDI (Foreign direct investment) and not its consumers. Exports are the true engine of the Chinese economy, equal to more than 30 percent of GDP. Exports fell 17.5 percent in January, compared to the same month a year earlier. They plummeted 25.7 percent in February, 17.1 percent drop in March, and 23% in April.

The private-consumption share of developing Asia's overall GDP fell to a record low of 47% in 2008, down from 55% as recently as 2001. In other words, Asia remains an export machine. Developing Asia's export share rose from 36% of pan-regional GDP during the financial crisis of 1997-98 to a record 47% in 2007. And recent research by the International Monetary Fund shows that Asian exports continue to be underpinned by demand from consumers in the industrial world, especially from the U.S. Despite a surge of trade within Asia, the bulk of these intraregional flows have been concentrated in parts and components that go into finished goods eventually consumed by developed economies.

When the international market shrinks, China shrinks no matter how much artificial stimuli sugar they through at the problem.
May 30 '09(Bloomberg) -- World Bank President Robert Zoellick warned policy makers that fiscal-stimulus plans are insufficient to turn around the “real economy” and rising joblessness threatens to set off political unrest across the globe.
"The bottom line (for China) is that almost none of the official stimulus package is actually going to help China’s industry, faltering as it is due to lack of export orders. China’s vector for that effort originates not in direct government spending, but in loans from the various state banks. From January to April, Chinese bank loans exploded to more than triple their already high rates. Nearly $1 trillion was lended during that period — more than in all of 2008 — in order to force-feed the capital necessary into the system to keep China’s legions of factories from releasing armies of unemployed citizens.
But a policy shift that sudden and holistic cannot be done with much oversight — and it wasn’t. China is more concerned about maintaining employment than about ensuring that money is used efficiently. And the result of such a sudden surge in loan-granting will inevitably be a mounting of nonperforming loans that will eat at the very heart of the Chinese financial system (a similar problem is what brought down Japan in 1991).

....The government has offered tax breaks and rebates to help exporters keep exporting whether profitable or not. It is offering incentives and threatening punishments for companies to retain workers whether necessary or not. And it is urging banks to loan more money — and the first four months have seen a massive increase in domestic loans to companies (though primarily to state-owned enterprises, not the private sector) to help them fulfill their employment and export requirements — whether profitable or not. At the same time, real estate prices are falling. On the surface, this may seem positive for those looking to buy. But it may have a major impact on Chinese companies that have been using inflated real estate as collateral for loans. So even as China is showing economic activity, it may be digging a deeper hole than before the current crisis.

The problem for Beijing is that the days of 12 percent and 13 percent GDP growth look to be over for quite a while. Moreover, China’s recovery remains heavily dependent upon a major recovery of global consumption (particularly in the United States). But that is by no means guaranteed. While there are signs of hope for the U.S. economy, they do not necessarily mean consumption levels will surge again as if nothing has happened. Even a U.S. recovery in the second half of 2009 followed six to 12 months later by Europe would leave China’s recovery another year or more in the future. Which leads to the dilemma Beijing faces."

Analyst Michael Pettis has recently proclaimed that "future historians will mark 2008 as the year that the development model that has driven much of Asia’s rapid growth for the past two decades went bankrupt." He argues that China is not making the difficult structural changes needed to its economy in order to develope internal consumption. 


Analysts who keep close tabs on how China is faring at creating a strong domestic consumer market warn that the country faces serious obstacles on the road to Western-style consumerism, and it could be decades before these are cleared away.
“There's nothing that really supports a consumer society in China right now,” said Jennifer Richmond, China director with Stratfor, a global intelligence company. “In 10 years, we might see the seeds of it. But the likelihood of the Chinese supplanting the American consumer is quite slim.”
China's consumers account for about 35 per cent of GDP and just over 3 per cent of the global economy. By contrast, U.S. consumers still account for two-thirds of the vastly larger U.S. economy and about 17 per cent of global GDP. “The mathematics are daunting,” said David Rosenberg, chief economist and strategist with Gluskin Sheff + Associates in Toronto. “For every 1 per cent decline in U.S. consumer spending, Chinese consumer spending has to grow by 5 per cent just to keep things where they were.”

There are those who have been trying to warn us for a while now that China's middle class was merely an illusion. In a 2007 article for BusinessWeek, Arthur Kroeber, editor of China Economic Quarterly, stated blankly that, "China doesn't have a middle class.". He blamed deceptive figures released by the Chinese government for our misperception of the situation, and estimated that total purchasing power in China to be half of what was being reported at the time. And such purchasing power was concentrated among the well-off in a few privileged urban areas. "As far as significant retailers are concerned, out of China's 1.3 billion people, 1.2 billion simply don't count," he stated.

Such views were recently echoed by David Goodman, professor at the University of Technology in Sydney. Goodman argues that the "middle class" that we see in China's urban centres are an exclusive elite forging ever-closer links with the ruling Communist party. "They are neither independent of nor excluded from the political establishment, which on the contrary seeks actively to incorporate them," he states. He attributes this development to former party leader Jiang Zemin, who "opened the doors for capitalists to join the party."

While everyone seems to have an opinion about China, these arguments seem to be supported by recent events. As China's manufacturing sector has witnessed a significant drop in foreign demand, its earnings, as well as the money that in turn pours into government coffers, have dropped substantially. As a direct result of this, the growth of China's domestic economy has plummeted."

It's an open question if China can change it's economic model:
I am just not sure that China can change its model. This is the same reason why I am not sure that what economists often look at as great fundamentals necessarily translate into sustainable economic growth.
Latin America's per capita income in the 50’s was 25% of the US. Asia’s was 10%. It was thought that the mineral wealth, sophisticated society, education, and people would allow Latin America to catch up in 30 years. Today Asia’s per capita income is 25% of the US, while Latin America is 20%.
Africa has enormous potential and had had since I was born almost 60 years ago. It has never lived up to it.
Economists are just beginning to understand something that I think is crucial. The rules. (see Good Capitalism, Bad Capitalism, Power and Prosperity). Good government is the magic ingredient that helps all of the other assets actually produces wealth. It’s like two business firms. One succeeds. The other doesn’t. Good management is the difference.
Still however good a manager is, it is rare that they are always right all of the time. The average age of a Dow company is only 40 years. The average tenure of a CEO is 10 years. Half that for a Fortune 100 company.
The question is whether China can change with the same set of leaders. I am not sure if it can. When leaders everywhere get into power they compensate the people who keep them there at the expense of the economy as a whole. As time goes on the situation becomes worse.
To change, China will have to change its model or the W will turn into an L."--William Gamble



All of that splitting and grouping gives investors the false sense that the BRIC countries are essentially interchangeable: emerging, large, poised for growth.

Even basic country data demonstrates just how large this fallacy is:


Country GDP per person (in U.S. dollars)*

United States











*Calculated using GDP as purchasing power parity and population per CIA World Factbook.


China recovery hits flat spot June 2, 2009 12:00AM 

 CHINA'S economic recovery is likely to remain slow for months after manufacturing stayed flat in May on top of a disappointing previous result.

Most forecasters, including Australian Trade Minister Simon Crean, predict China's gross domestic product will grow 7-8 per cent this year, rising from a 17-year low of 6.1 per cent in the first quarter following an $800 billion government stimulus package. But there is growing concern about China's government-fuelled growth, mainly pushed through large and inefficient state enterprises, leaving much of the private sector -- which has supported the country's boom -- out in the cold. A report by China's Ministry of Industry and Information Technology has warned of rising risks to a recovery in industrial activity, highlighting continued weakness in export demand and manufacturing overcapacity. China's closely watched purchasing managers index (PMI) remained just in positive territory and is seen as proxy for production growth. "Expect PMI to bounce around low 50s for next few months as economy expands, but barely," Royal Bank of Scotland economist Ben Simpfendorfer said. "Headline figures can disguise what is massive structural change taking place in the manufacturing sector. There is more pain to come as a result of this change and that is an obstacle to a sharp bounce in activity." 

China bank regulator warns over loan, economy risks

Thomson Reuters 06.01.09, 08:44 AM EDT

China's economy faces marked economic difficulties that are contributing to serious credit risks for the nation's lenders, the China Banking Regulatory Commission said on Monday.

The downbeat assessment contrasts with a string of economic data recently that have fed hopes that China, whose banks have been barely scathed by the credit crunch, will be one of the first economies to emerge from the global recession.

'Internationally, the financial crisis has not reached bottom; domestically, with the impact of the crisis, economic growth has slowed markedly and downward pressures have grown,' the CBRC said in its 2008 annual report.

'The international financial system remains weak,' it added.

Deficit spending by various governments around the world aimed at hauling their economies out of recession could sow the seeds of stagflation, the CBRC warned.

In China, by contrast, the agency said deflationary pressures were growing. Exports and industrial production have slowed, and some sectors are burdened with overcapacity.

All in all, the CBRC said this year would be the most difficult this decade for the Chinese economy.

'The bank sector faces serious credit and market risks. Credit risks remain the main danger confronting the sector,' the report, posted on its website, said.

...It warned of a rebound in non-performing loans, including in the export sector, and expressed concern that a recent surge in bank lending has been concentrated on a few sectors and regions.

'In severe circumstances, this may result in systemic risks,' the report said.

Banks lent a record 5.17 trillion yuan in the first four months of 2009 as they rushed to help finance the central government's 4 trillion yuan ($585 billion) economic stimulus package.

The CBRC singled out the risk of lending to the real estate sector after a drop in both prices and transactions in 2008.

'There may be risks of credit defaults in real estate development,' the CBRC said.


China’s Vast International Dimensions

by George Zhibin Gu | May 1, 2009

...China's real exposure to the global financial crisis is huge and has many dimensions. First, the country's growth in this era, especially in the past two decades, has depended heavily on international trade, which accounted for US$2.56 trillion as of 2008, as well as foreign direct investment, accounting to over $870 billion.

Second, China's foreign reserves stand at about $1.95 trillion, with more than half invested in US government and agency bonds. Third, over 25 million Chinese employees now work for overseas companies inside China.

So, altogether, China's economic and political health is directly tied to the fortunes of global markets and world development. Any negative development in the global markets and economy must have adverse consequences for China. At the same time, slow growth inside the nation could be negative to the world economy.

This new crisis is like no other, for the world is highly inter-connected like never before. What then is the next stage of global development? What is the best-case scenario and the worst-case scenario?

There is no short-term solution. The best-case scenario is that the US-centered global financial crisis will be stabilized within the next 18 months. People's confidence will pick up and a more rational resolution of problems will arise. In particular, the employment picture can change for the better. Thereafter, the world's governments could focus on reform of the global financial system so that it become more accountable and therefore more stable - hopefully. But people's entrepreneurship is the ultimate solution to getting out of the mud of the global financial crisis, or any other crisis.

But things could go from bad to worse. The worst-case scenario is this: the global financial crisis drags on for many years. What is more, economic crisis could lead to geopolitical-economic conflicts. For example, it could promote nationalist protectionist trade barriers and conflicts. Also, if the dollar goes into free fall, or if the US government prints too many dollars as a way to deal with its astronomical debts and trade deficits, it would lead to an unstable period for the global economy and political life. This aspect requires new attention.

China’s pains

There is no winner out of this recession. China's political and economic health is already deeply affected.

For China, the biggest issue is with the poor unemployment situation. Not to mention other things, shrinking international trade is causing vast pain in this part of the world. Indeed, in the first quarter of 2009, China's international trade dropped 24.9% over a year earlier. This slowing international trade is to continue for the immediate future. So far, countless small- and mid-sized trading and manufacturing companies in coastal regions have gone under. Over 20 million rural migrant workers have lost their jobs. What is more, some 6 million new college graduates have enormous trouble in securing employment. Such troubles could lead to dramatically adverse consequences.

The most fundamental issue related to sustained economic development inside China is to move decisively toward a law-based market economy, free from the deadly meddling of an unlimited bureaucratic power. The most basic requirement for this end is to have a firm separation of government from the business sphere. In such a way, the government can truly function like a government and the business entities can truly develop to become modern business organizations with a right set of owners, legal protection and governance. All said, turning the political body into a true modern service body must be carried out, the sooner the better. Unfortunately, these basic issues have yet to be resolved, along with the deepening of reform.

What is more unfortunate, this ongoing global financial crisis has meant a continuing delay in true and basic economic reform. But without fundamental economic reform, sustained and rational development will be filled with crisis, which is built into the old economic and political systems.

This aspect of the basic issues is little understood by the outside world, but it is fundamental for the healthy economic development of China in the long run. Simply put, all the positive economic development in the past three decades must be installed in a law-based modern institutional and legal system. That is something China has no way of avoiding if its sustained development is to be maintained...."




The economic crisis and China’s role

I’m having a debate with a commenter/blogger about that topic over here. Very interesting, especially considering the great pains to which China is going to make sure the US gets 100 percent of the blame. And let me add, I believe the US deserves the lion’s share of the blame. But when you keep repeating it ad nauseum and reflexively, people begin to wonder what the motivation is. To those who say, “But it’s true!” I would respond with an analogy: It’s also true, for example, that Hillary Clinton is a white woman, but to add a parenthetical phrase about that every time her name comes up would be bizarre. “Today Hillary Clinton, who is a white woman, met with so and so…” That’s what the Chinese media are doing across the board with the economic crisis. “Washing machine manufacturers in Dongguan are losing their jobs due to the global recession, which the US caused.” “The crisis, which was caused by greedy bankers on Wall Street, may go on for years.” Again, it’s factually not inaccurate, but journalistically absurd. It’s called overkill.

Back to the debate - check it out and you can leave your comments there.



"There has been some of talk recently about how China’s stimulus may not be doing exactly what it had intended to do as they are now starting to audit the results…especially all the easy credit made available to SOE’s who instead of bolstering employment, took the money and invested it in the stock market. Exports are still not great and the real estate bubble, rather than having a longer healthy contraction, is being artificially blown up again. I’m thinking China may be falling into some of the same traps that the US did at the turn of the century during that recession. I think Richard points out the basic flaw in Chinese economic policy in his debate with Dror, namely it is at times short-sighted. This stimulus package was thrown together in a rush, almost as much a PR campaign as it was an economic strategy…it will be interesting to see the results, but ultimately I think it will only help to keep the government out of criticism’s reach during this downturn, and ultimately end up being a big investment for little long-term benefit. But then again, this might be all that it was meant for…"

"China is in a crisis due to over-investment in certain sectors (manufacturing, real estate). The government is now pouring additional money into these sectors (directly or via state owned banks). This brings to an apparent growth in the short term, but also means that not only the bubble is not being deflated, but it grows bigger. Hence, the next crash will be more dramatic and painful. It’s only a matter of time. Chinese people save money because they have little faith in the system and because most of China’s growth does not trickle down to the right places where most people are. Pouring more money into real estate and manufacturing can do little to change that.

China should have spent the good years investing in human capital, healthcare, and education. Even if it start doing so now, it will be half a generation before a real difference is felt.

On top of that, there a basic question of whether or not you believe that a totalitarian market economy model is viable. I think it isn’t. During the last 6 months China has taken big steps towards a more centralized economy and regained ownership of various assets that were previously privatized."



Dror has written another provocative post about China’s economy that is well worth a read, even if I don’t completely agree with him. It’s about an issue many of us reflexively shy away from, i.e., the true sustainability of China’s boom, and the West’s refusal to acknowledge the possibility that much of the boom is smoke and mirrors. As Dror points out, there seems to be something irrational about leading economists writing in all seriousness about a recovery, for example, in China’s real estate industry when so many huge half-built and empty new structures dot the skylines of most of its cities (Chongqing seems to take the cake for this one but Beijing seems determined to catch up). And yet new malls and luxury housing are still being built left and right. Should they count as proof of China’s booming construction business and overall growth? In manufacturing, over-production and sometimes really bad production (dry wall and melamine toothpaste) are often par for the course, though on paper the results may look impressive - people are employed, factories are busy, production is rising.

On the other hand, China’s manufacturing has gone far beyond shoes and toys and they now make most of the electronics we’re buying, and increasingly the more complex items like sophisticated semiconductors. Many of their factories are truly world class (and I know, many are not). They seem to be serious about correcting their environmental mess (if not, they’re doomed). The infrastructure improvements in many Chinese cities are as impressive as America’s. And while I agree with Dror that consumer spending won’t start until the masses are assured they don’t need to save every cent for healthcare and education costs, there’s still a massive amount of money being spent here by a rising middle class. While the dream of 1.2 billion customers is exactly that, a dream and a fantasy, even if it’s just 400 million customers it can be one of the world’s most robust markets.

We all know the downside, the environment, the impossible problems, the corruption and the crimes of the government. But there is still enough change and progress that is real here to justify a lot of attention from the West, and everywhere else. As I quoted James Kynge in an earlier post:

It must be said that from a global perspective, China’s emergence is of enormous economic benefit. The value created by the release of 400 million people from poverty, the migration of over 120 million from farms where they perhaps raised chickens to factories where they churn out electronics, the quantum leap in educational standards for tens of millions of children, the construction of a first-class infrastructure, the growth of over 40 cities with populations of over a million, the commercialization of housing and the vaulting progress up the technology ladder have helped unleash one of the greatest ever surges in general prosperity.

Before anyone jumps on the quote with evidence to the contrary and the laundry list of reasons why China cannot succeed, please go back and read the entire post - this is one of many quotes, and all those problems are acknowledged. Kynge is not looking at China like a wide-eyed and naive child, and he sees much of what Dror sees. But he believes China will continue to “shake the world.” And “shaking the world” is not necessarily a good thing; in fact, it can be pretty awful. But China has the leverage, the tenacity, the ambition and the government coffers (and government protectionism) to shake the world for many years to come, so I suggest we get used to it and think about how to deal with it rather than denying it.

A part of me says those husks of buildings looming over us and the warehouses full of unbought refrigerators and dysfunctional state-owned businesses that employ millions of unnecessary workers - it all has to catch up with them and plunge them into a far worse crisis than they expect. Like China’s recently collapsed “modern art” industry, I see many, many of bubbles in Chinese construction and manufacturing. The structural deficiencies in the Chinese system are as deep and as many as the structural flaws in the Three Gorges Dam. But at least for now, the dam keeps operating, and China does too.

Fragile, improbable, sometimes absurd - yet in its own surreal way China “works,” no matter how much of its success is built on corruption, protectionism and/or Western self-delusion. If you write it off and conclude it is not a real, dynamic and ever-present force in global economics and politics, you do so at your own peril.





Chinese banks are steering clear of investments in their Western counterparts, says Guo Shuqing, chairman of China Construction Bank, because of concerns about their financial health and limited growth potential in developed markets

The End of the Big Business-China Love Affair
By Justin Fox Monday, Jun. 08, 2009

"Bremmer recently co-authored the book The Fat Tail, which details the political risks facing the global economy. (Major, unlikely events that are difficult to fit into statistical models are known as fat tails.) He counts the U.S. relationship with China among the fattest of fat tails. American corporations may come to see China as a rival — meaning they'll be less likely to fight congressional crackdowns on trade. The U.S. investment banks that have been China's biggest boosters are not the powers they were two years ago. And in China, the troubles of the U.S. financial system have led to a growing mistrust of U.S. intentions and the American form of capitalism. The love affair was strange and overdone. The aftermath could be ugly."


Progressives' plan problemby disraelTue Jun 02, 2009 at 06:56:19 AM PDT

Chimarica's death now has a ticker.

Thanks to EconPop for this
The good news is that America will either regain a lot of manufacturing jobs and/or stop consuming as much.  The bad news is that the longer we try to sustain Chimerica the uglier its death will be.  This is because Chimerica is fundamentally a bubble - the granddaddy of all bubbles in fact.

Sure I know plenty of people think without bubbles America wouldn't have the tech or all these houses built.  This is just not true.  Having companies pursue the same software or hardware at a ratio of 25:1 instead of just a few didn't make anything go faster.  And the houses we need would have been built anyway without building so many we don't need.

Instead of bubbles we need a, (please read) national industrial policy.  But most progressives are not any more keen on America having a self-serving national policy then corporations are...

  Volume 56, Number 10 · June 11, 2009The Crisis and How to Deal with It 

Niall Ferguson: This is the end of the age of leverage, which began, I guess, in the late 1970s, and saw an explosive rise in the ratio of debt to gross domestic product, not only in this country, but in many, many other countries. Once you end up with public and private debts in excess of three and a half times the size of your annual output, you are Argentina. You know, it's funny that people refer all the time back to the collapse of Lehman last September. Let's remember that this crisis actually began in June 2007. It fully became clear in August of 2007 that major financial institutions were almost certainly on the brink of insolvency to anybody who bothered to think about the impact of subprime mortgage defaults on their balance sheets.

But we were in denial. And we stayed in denial until September, more than a year later, of last year. Then we had the breakdown. Notice how psychological terms are very helpful when economics fails as a discipline. After the breakdown, we came out of denial and we realized that probably more than one major bank was insolvent. Then in September and October the world went into shock. It was deeply traumatic.

Now we're in the therapy phase. And what therapy are we using? Well, it's very interesting because we're using two quite contradictory courses of therapy. One is the prescription of Dr. Friedman—Milton Friedman, that is —which is being administered by the Federal Reserve: massive injections of liquidity to avert the kind of banking crisis that caused the Great Depression of the early 1930s. I'm fine with that. That's the right thing to do. But there is another course of therapy that is simultaneously being administered, which is the therapy prescribed by Dr. Keynes—John Maynard Keynes—and that therapy involves the running of massive fiscal deficits in excess of 12 percent of gross domestic product this year, and the issuance therefore of vast quantities of freshly minted bonds.

There is a clear contradiction between these two policies, and we're trying to have it both ways. You can't be a monetarist and a Keynesian simultaneously—at least I can't see how you can, because if the aim of the monetarist policy is to keep interest rates down, to keep liquidity high, the effect of the Keynesian policy must be to drive interest rates up.

After all, $1.75 trillion is an awful lot of freshly minted treasuries to land on the bond market at a time of recession, and I still don't quite know who is going to buy them. It's certainly not going to be the Chinese. That worked fine in the good times, but what I call "Chimerica," the marriage between China and America, is coming to an end. Maybe it's going to end in a messy divorce.

No, the problem is that only the Fed can buy these freshly minted treasuries, and there is going to be, I predict, in the weeks and months ahead, a very painful tug-of-war between our monetary policy and our fiscal policy as the markets realize just what a vast quantity of bonds are going to have to be absorbed by the financial system this year. That will tend to drive the price of the bonds down, and drive up interest rates, which will also have an effect on mortgage rates—the precise opposite of what Ben Bernanke is trying to achieve at the Fed.

One final thought: Let's not think of this as a purely American phenomenon. This is a crisis of the global economy. I'd go so far as to say it's a crisis of globalization itself. The US economy is not going to contract the most this year, even if the worst projections at the International Monetary Fund turn out to be right; a 2.6 percent contraction is far, far less than the shock already being inflicted on Japan, on South Korea, on Taiwan, to say nothing of the shock being inflicted on Europe. Germany is contracting at something close to 5 or 6 percent. So we are faced not just with a problem to be dealt with by American policy, we are faced with a crisis of global proportions, and it's far from clear to me that the prescriptions of Dr. Friedman and Dr. Keynes together can solve that massive global crisis."


Positive Chinese Shipments Data Not a Sign of Decoupling

 June 02, 2009

 My old friend Joe at The Business Insider suspects that some recent positive data for Chinese manufacturers' shipments could be proof of decoupling. As a devil's advocate, I would like to add some data which might make one less confident that indeed this is a sign of decoupling.

It is a chart I showed a few posts back, put together by Charles de Trenck at transportation industry research firm Transport Trackers. Basically, it shows that key Asian export data has been linked, historically, to US consumer confidence data. Thus, given that we recently had a jump in US Consumer Confidence, the jump in Chinese shipment data referenced by Joe might not be a sign of decoupling from the US, but rather the continued linkage of China and the US.


City focus: Can China keep miners smiling?

Sam Fleming, Daily Mail
29 May 2009, 9:52am

Grab your pickaxe and hard hat - the miners are on the move again. The FTSE mining index has rallied 50% in the past three months, with shares including Rio Tinto, Anglo American, Xstrata and Kazakhmys recording glowing gains.

Commodity prices have rebounded, with the price of copper up 65% from its one-year low.

Ship-spotters are reporting long queues of vessels waiting to disgorge cargoes at Chinese ports. The People's Republic imported record quantities of base metals in April.

Indeed, aluminium imports last month equalled the entire figure for

2008. Analysts at Standard Chartered describe the scale of the surge as 'shocking'.

This burst of activity has wrongfooted many investors. The first quarter of 2009 saw an unprecedented crash in global trade.

Major economies are spiralling into their deepest slumps for over half a century, with the US shedding half am jobs a month. Why is the metals sector regaining its shine?

Oddly enough, one answer lies in the crash in global industrial output at the end of last year.

The manufacturing cycle normally churns out huge amounts of scrap metal, as old cars, fridges and consumer electronics kit are replaced.

But with factories shutting down across the world, there has been a dearth of metal for recycling.

Analysts at Macquarie estimate scrap copper imports into China halved in the first two months of 2009. This led to a jump in demand for freshly produced metal, boosting prices and catching miners off guard.

But the more important force at work is the Chinese government itself. Beijing's £364bn fiscal stimulus includes initiatives aimed at sustaining industrial demand, such as programmes renewing electricity grids and building lowcost housing.

China's State Reserve Bureau has been busily building up its stockpiles of copper, aluminium, zinc, and nickel.

This is partly to cushion the economy against a possible future spike in prices. But analyst Jonathan Guy of Investec said it is also motivated by politics.

Put simply, the last thing Beijing wants to see is legions of jobless workers from shuttered mines, steel mills and aluminium smelters.

'The big fear of the Chinese government is unemployment, which leads to social unrest, so they are buying metals just to maintain employment,' he said. Accordingly, the state has been maintaining an artificial floor under prices by buying metals on the market.

That clearly cannot go on forever. At some point soon we will need to see a sustained rebound in industrial demand, both in China and elsewhere around the world, if metal valuations are to be sustained. Some analysts believe we will come to a crunch point soon - perhaps as early as this summer.

'There is a risk things have got ahead of themselves, and that may manifest itself in the third quarter of the year,' said commodities strategist David Barclay of Standard Chartered.

Aluminium is a particular worry. Inventories have grown at an unprecedented rate in recent months, reaching 4m tonnes - a level described by Citigroup as 'staggering'.

If there are green shoots for the mining industry, it argues, they are appearing 'at the bottom of a well'.

On top of this, the role of financial speculators in metals markets remains cloudy. Traders have maintained their interest, and there is recent evidence of a pickup in investment flows into commodities, helping push prices higher. All this suggests investors should be wary of false dawns. Firms with heavy aluminium exposure, like Rio Tinto (up 19p at 2756p), look particularly vulnerable, as do 'racier' shares like Xstrata (down 111/2p at 6491/2p), said Investec's Guy.

The captains of the mining industry are certainly not counting their canaries. Marius Kloppers, chief executive of BHP Billiton (down 3p at 1431p), told a conference this week that he is not expecting a 'sharp rebound'.

'Our view is that overall world economic recovery will be slow and protracted,' he added. As much as I would like to be able to say that with 2008 behind us, so too are the economic challenges, unfortunately that is not the case.'



World markets gain as China manufacturing expands


BANGKOK — World stock markets advanced Monday as an expansion in Chinese manufacturing added to hopes the global economy is slowly clawing its way out of recession.

 Commodity stocks led gains as oil topped $68 a barrel and two surveys of Chinese companies showed manufacturing expanded in May, albeit weakly.

But this sliver of hope from the world’s third-biggest economy provided reason enough for markets to build upon the massive gains logged since early March on optimism that the global economy is recovering from a severe slowdown.

"...Any signs of deterioration in the U.S. economy, the world’s largest, could send stocks markets into a tailspin, particularly since the recent gains of 30 percent or more may be based on a too sanguine view of the prospects for a recovery..

“At current levels the upside is limited and the downside risk is quite high. If there is any negative news from data in the U.S. a correction can be expected,” said Peter Lai, an investment manager at DBS Vickers in Hong Kong.

“The fundamentals haven’t changed. The economic data has improved but is still very bad. This is a liquidity driven rally,” he said. “I’m advising my clients to sell. This isn’t a market for long-term investment.”



Is China Really on the Path to Recovery?
Posted on June 1st, 2009 at 5:37 pm by Scott Boyd

If you subscribe to Federal Reserve Chairman Ben Bernanke’s “green shoots of recovery” theory – or believe that the recent speculation and run-up in oil prices provides further evidence that the global economic crisis is easing – then you will be further encouraged by news that China’s manufacturing output has increased for three straight months now. As the world’s third largest economy, China is heavily dependent on the sales of its exports so an early recovery in China must mean that its global trading partners are also seeing an end to the crisis.

By way of evidence, China’s most recent Purchase Manager’s Index (PMI) for the month of May came in at 53.1 – down slightly from April’s 53.2 but any value over 50 indicates positive growth. Continued growth is critical for China’s future and the country’s policymakers have long targeted 8 percent annual growth as the minimum level of growth required to raise the standard of living for millions of China’s poor while still ensuring stable social conditions for the entire country.

In the past twenty years, China has worked to remake itself as a capitalist market – albeit one that still operates within the confines of a communist government. One phenomenon from this push towards freer markets, is the rise of an educated middle-class. Prior to this, unless part of the ruling class, options for most Chinese citizens were pretty-much limited to a life of working the land or toiling in a factory. In general, workers faced a meager lifestyle where most of one’s efforts went to pay for food and housing and luxuries like electronic goods and certainly a personal automobile were beyond the scope of the vast majority of most individuals.

But things began to change as China became an increasingly important center for the production of consumer goods ultimately destined for sale in the US and Europe. Originally consisting of cheap, mass-produced items and simple electronics, China’s exports have grown in sophistication and this has forced China to improve education and training opportunities for its people. Better pay resulting in additional discretionary income has given rise to a more discerning consumer and many of the goods and products that earlier generations could only dream about are now commonplace.

Growth Mostly From Government Spending

Last November, China’s government committed 4 trillion yuan (US$568 billion) to stimulus spending. According to China’s National Development and Reform Commission, government money has resulted in the construction of over 12,000 miles of new roads, 200,000 new low-rental dwellings, and billions of dollars spent to improve airports and other public infrastructure projects.

Meanwhile, external demand for China’s exports remained stagnant with no indication that the traditional export markets will return to previous buying levels any time soon. Worse still, consumer spending in China is actually shrinking as money earned through government stimulus projects finds its way into personal savings accounts rather than the local economy. According to Stephen Roach – Chairman of Morgan Stanley Asia – the lack of a social safety net in China has forced workers to increase their contributions to what he refers to as “precautionary savings” over growing fears that the economy will get worse in China before it gets better. (China View – May 30th, 2009)

Like any jurisdiction resorting to direct stimulus spending to see its way through a difficult patch, China is discovering that once the spending ends, so does the positive growth associated with the spending. Actual recovery will not take place until global economies improve and demand for China’s exports rebounds. In the meantime, China’s government is faced with a difficult decision – continue throwing billions at the economy, or endure a sharp decline in growth.




Why China Can’t Save UsPosted on June 2, 2009
Andrew Gordon

De-coupling lives again, but I wouldn’t bet the farm on it.

Remember when it made the rounds over a year ago?

The idea was, even if the U.S. economy caught pneumonia, the rest of the world would at worst get a bad cough.

It was argued that Europe and China were much less reliant on the U.S. economy than ever before. And China, with its massive import needs, would also keep economies from Brazil to Australia humming.

The theory gave governments, businesses and investors hope. It was about as good as any other unproven theory. But it didn’t quite work out, did it?

America’s economic malaise quickly spread to other countries and they caught much worse than just a cough.

When Europe also began to cut back spending and China’s export-driven economy was deprived of both of its major markets, its factories reduced production and then laid off millions of workers.

Looking back, it’s easy to see how seductive de-coupling was. If true, it meant that the good times were not going to come to an end. The economic slowdown would be mere hiccup.

But the perma-bulls who fell for it and stayed in the market were rewarded with massive losses.

Now the same theory is back, in the guise of “de-coupling 2.0.”  And it’s just as stupid and silly, and unrealistically optimistic as de-coupling 1.0.

But that hasn’t stopped it from gaining currency.

The Economist recently ran a piece on it. Their only qualification? De-coupling will bring temporary relief, not sustained prosperity.

While spending some time in Cape Town recently, I read the same thing on the front page of the Cape News. Asia will recover first. Africa should look to the east.

Many of the same people who were pushing China’s ability to continue its double-digit growth a year ago are now saying that China can lead the world back to economic health.

Why the heck are people falling for this theory again? You know the old saying. “Once fooled, shame on you. Twice fooled, shame on me.”

For one thing, what they’re saying about China is basically true…
•    China’s massive economic stimulus has stabilized growth and resurrected imports.
•    China has found other trading partners to pick up the slack
•    China’s imports of raw materials has gone up
•    And China’s gusher of loans for “shovel-ready&am... projects has created jobs and given new life to many companies.

But these positive developments miss the big picture.

China’s economic growth may have stabilized, but it is now in the 6-7.5 percent range. It’s a far cry from the 11-12 percent growth China was experiencing pre-crisis.

And while China’s paroxysm of loans contrasts sharply to banks here sitting on their mountains of money and still afraid to lend, you shouldn’t dismiss a colossal downside…

Frivolous projects are also getting funded. This is something the Chinese press doesn’t like to talk about. But evidence is leaking out that huge sums of money have been squandered on useless and non-productive projects.

What’s more, hundreds of factories remain shuttered. At the beginning of the year millions of jobless ex-factory workers returned to their home villages to celebrate the Chinese New Year. They should’ve stayed there. But the countryside is even poorer than the hard-hit urban areas. So most flooded back to the cities where, alas, no jobs awaited them.

This looms as a huge problem for the Chinese government as the 20th anniversary of the Tiananmen Square massacre approaches on June 4. But it pales against the need to find jobs for more than 10 million or so students who graduate from China’s universities every year.

China is importing more now thanks to its stimulus package. But much of that was trying to capture low prices before they turned up (which they did). Let’s see if imports continue to rise post-stimulus program.

And here’s something nobody is talking about…

China suffered its worst drought in decades a few months ago. Rice production was hit hard. China will have to import large amounts of rice this year. Sure it can afford to. But it’ll drive up the price of rice and make it tougher for out-of-work Chinese to keep their rice bowls full.

It’s another sign that this is shaping up as a very tough year for China.

Fact is, replacing the United States’ massive market is easier said than done. China’s quickest road to recovery is helping the U.S. recover. That’s why despite a lot of moaning and groaning China will continue to finance our growing debt and take their chances on a future devalued dollar.

China’s leaders understand better than most people in America that their heady economic growth was entirely dependent on our “borrow-and-spen... behavior.

With no replacement in sight, it’ll be next-to-impossible for China to turn around its economy. De-coupling has once again miscast China. China is no savior. The crisis began in the west and will end in the west. Only then will a recovery spread elsewhere.

Read my lips: A rescue is not around the corner. You should continue to invest defensively (like in gold, for example) or bet the market short because it still has another leg down to go.


 China Bubble



Democracy's long march to China

John Lee | June 03, 2009

LAST month, actor Jackie Chan created uproar across the world when he told a gathering in Hainan province that China didn't need democracy because Chinese people needed to be controlled. With the 20th anniversary of the Tiananmen protests tomorrow, the focus will return to political reform in China or the lack of it. To be fair to Chan, he is half right. China shouldn't aim for democracy right now but its people do not need to be controlled. Instead, they need to be liberated, and better institutions will do that.

There is a frequent misconception in the West that democracy - meaning one person, one vote - will bring prosperity, progress and freedom. Yet, democracy is what political scientists would call a value-neutral process. In the abstract, a democracy of angels would choose angels, and one of devils would vote in devils. When Westerners advocate democracy, they are really advocating "liberal democracy". After all, Palestinians voted in Hamas over the more moderate Fatah. That was democracy in action but not the result the West was really after.

How do we establish the best possible conditions for liberal democracy? We need a strong civil society where there is rule of law. Courts need to be independent and officials need to be accountable. Private property needs to be protected, individual enterprise needs to be given a chance to succeed, basic human rights must be enforced, and the government needs to be restrained. This is the meaning of liberating the people. These are the foundations for a liberal society that are sorely lacking in modern-day China.

Yes, it's true that China is still developing. But that excuse is wearing a bit thin. Reforms began in 1979. The reform period - 30 years and counting - has now lasted longer than Mao's 27 years of terrible rule. Since then, China's economy has grown almost four-fold. The middle class is approaching 100-200 million people, depending on the definition. The building of institutions should be speeding ahead. Instead, since the Tiananmen protests in 1989, institutions in China have in many respects gone backwards.

How can this be so? It all comes down to the increased role of the Chinese Communist Party in Chinese economy and society, without necessary institutions existing to restrain them and make them accountable.

The number of officials before and after the Tiananmen protests has more than doubled, from 20 million to 45 million. Since the early 1990s, the CCP has re-taken control of the economy. State-controlled enterprises receive more than three-quarters of the country's entire capital each year, reversing the situation prior to 1989. The private sector is denied both formal capital (bank loans) and access to the most lucrative markets which are reserved for the state-controlled sector. Only about 50 of the 1400 listed companies on the Shanghai Stock Exchange are genuinely private. Fewer than 100 of the 1000 richest people in China are not linked to the party. This state-corporatist model favours a relatively small number of well-placed insiders. Meanwhile, a billion people are largely missing out on the fruits of GDP growth. In fact, 400 million people have seen their net incomes decline during the past decade. Absolute poverty has doubled since 2000.

This extensive role of the CCP has coincided with a rise in systemic corruption. Courts at all levels are still explicitly under the control of party organs. According to the Chinese Academy of Social Sciences studies, stealing from the public purse by officials amounts to about 2 per cent of GDP each year, and it is rising. According to a 2003 CASS report, more than 40 million households have had their lands illegally seized by corrupt and unaccountable officials.

Levels of dissatisfaction with especially local authorities are so bad that there were 87,000 instances of mass unrest in 2005, according to official figures, rising from a few thousand in the mid-1990s. To appease unhappy citizens, Beijing has instituted a system of "petitions" whereby aggrieved citizens can appeal to a higher authority against their local officials. A good idea, perhaps, except for the fact that of every 10,000 petitions lodged, only three are heard.

Democracy under these circumstances is unlikely to produce a better result for the vast majority of China's people. China needs institutions. But the CCP knows that if strong institutions are built, it will lose its privileged place in Chinese society and economy. And if so, eventually it will likely lose political power.

In remembering Tiananmen, we need to think one step at a time. Push for the building of institutions, and then let democracy take care of itself.

John Lee is a visiting fellow at the Centre for Independent Studies.



Mitigating Debt Bomb for Chinese Local Governments

From Economic Observer Online:

Fund raising problems amongst local governments have not only impeded investment projects under China’s 4-trillion yuan stimulus package, they also may have laid debt bomb for local administrations, two major Chinese agencies warned.

Latest findings by  China National Audit Office (NYSE:NAO) revealed the central government had released 94% of the funding earmarked for 335 new projects by late March, but some local governments could not match their share of contributions timely, causing delays in projects’ implementation.

The NAO also disclosed that some funding failed to enter the real economy.

  • Posted by Liu Yong
  • June 2, 2009 1:22 AM   &a...



For an intelligent, skeptical view on China, it’s hard to find a better analyst than Derek Scissors of the Heritage Foundation. Scissors debunked a number of popular myths about China’s stimulus package last month on Motley Fool.

Scissors is at it again in the latest issue of Foreign Affairs with “Deng Undone”. The scope of this article is more ambitious, taking on the question of exactly how real much of China’s market “reform” has been.

Vitaliy Katsenelson has a skeptical piece on China’s economic “miracle” at MSN Money. As we pointed out earlier this month, skepticism has never been a strong suit of the Raging China Bulls and it’s refreshing to hear intelligent, contrarian voices like Vitaliy on the investment side or Derek Scissors for a broader economic/political view.

But there’s a fine line between intelligent skepticism and completely missing out on a gigantic investment opportunity for the sake of your beliefs.



China Sees ‘Grim’ Job Market, Deeper Impact From Global Crisis

 By Bloomberg News

June 3 (Bloomberg) -- China’s government said unemployment is worsening, a quick rebound in trade is becoming less likely, and the nation is yet to feel the full effects of a global slump.

The foundations for an economic recovery aren’t solid, the State Council said in a statement on a government Web site today. Trade faces “unprecedented difficulties,” Vice Commerce Minister Zhong Shan said separately.

Falling exports dragged China’s economic growth to the slowest pace in almost a decade in the first quarter as the government rolled out a 4 trillion yuan ($586 billion) stimulus package. The Shanghai Composite Index has climbed 52 percent this year as investors bet that Premier Wen Jiabao can engineer a recovery in the world’s third-biggest economy.

“Rising unemployment, if not properly addressed, could be a time-bomb in China’s economy,” said Tao Dong, Hong Kong-based chief Asia economist at Credit Suisse Group AG. Still, airing problems may signal that the government is confident that it’s in control of the situation, Tao said.

China will announce more measures to help labor-intensive industries, the State Council said, describing the job market as “grim,” with registered unemployment climbing and new jobs shrinking compared with a year earlier. The registered urban jobless rate was 4.3 percent at the end of March, a figure that doesn’t account for unemployed migrant workers.

Exports and imports are set to decline in the first half and the outlook for the rest of the year is not optimistic, Zhong said in a statement about export credit insurance posted on the commerce ministry’s Web site. He didn’t specify why a speedy recovery in trade is becoming less likely.

Shipments Plunge

The World Trade Organization in March predicted a 9 percent drop in global commerce this year.

China, the world’s second-biggest exporter, has cut export taxes, boosted credit and insurance for overseas sales and pledged to keep its currency stable as manufacturers weather the collapse in global demand. Overseas sales plunged 22.6 percent in April from a year earlier, the sixth straight monthly decline.

Zhong’s comments contrast with signs that the outlook for shipments is improving. An index of export orders increased to 50.1 in May, the first expansion in 11 months, a government backed manufacturing index showed.

“China’s exports may start to grow as early as January after the major economies such as the U.S. and Japan gradually recover later this year,” said Xing Ziqiang, a Beijing-based economist at China International Capital Corp.

Falling exports are the biggest challenge for China’s economy, the State Council said on May 27.

For Related News and Information: Most-read stories on China: MNI CHINA 1W <GO> Most-read China economy stories: TNI CHECO MOSTREAD BN <GO> For top economic news: TOP ECO <GO>

Last Updated: June 3, 2009 06:58 EDT






V-Shaped Recovery Outlook Is in Vain

The bulk of the economy's credit problems are still to come.

First Pacific Advisors

I ESTIMATE THAT BY THE close of 2011, Treasury debt outstanding will be between $14.6 and $16.6 trillion and that the U.S. debt-to-GDP ratio will rise to between 97% and 110%.

By comparison, the highest ratio ever attained was 121% at the end of World War II. Furthermore, my estimates do not include entitlement liabilities or the effective guarantee of trillions of dollars of Fannie Mae (ticker: FNM) and Freddie Mac (FRE) obligations. Treasury debt service will likely rise by 50% to 100% above the present $450 billion rate and this is with interest-rate levels near record lows. A critical question is, "How do we finance all this debt?"

 Assuming consumers save an additional $650 billion in 2009, we will still be more dependent on foreign sources of financing. Should foreign investors retain their present amount of Treasury debt ownership and then let it increase proportionally to our debt growth this year, additional purchases between $719 billion and $862 billion are required versus last year's $724 billion. This appears doubtful, given the deterioration in their domestic economies along with rapidly declining exports.

To make up the difference, the Fed will be forced to print an additional $800 billion to $1.5 trillion of new money to buy these bonds. Unless Americans increase their personal savings per my estimates and foreign investors boost their Treasury ownership by 39% to 57% between 2009 and 2011, the Fed could be forced to print additional money. This possibility may unnerve some of our trading partners, particularly the Chinese and the oil-exporting countries.

Restricting debt growth will be difficult, if not impossible to do since it will require Congress to make unpopular decisions while unemployment remains elevated. In a similar fashion, the Fed will find it tricky to retract the excess liquidity it has created as well as eliminating the various asset purchases and guarantee programs it has established.

I do not have confidence in the government's ability to execute these policies, given the history of the regulators, the Congress and the executive branch choosing to ignore the excessive growth that took place at both Fannie Mae and Freddie Mac, while looking the other way on numerous other financial institutions, including AIG and the investment brokerage firms. For over three years, Fannie and Freddie operated with excessive leverage and without public financial statements while the government twiddled its thumbs. In contrast, First Pacific Advisors saw these problems three years ago and made the difficult decision to place all of these companies on its investment restricted list. We would not reward bad behavior. I do not see government rising to our standard.

What gets me is that this outrageous size and continued growth in debt and off balance sheet entitlement liabilities is effectively stealing from our children and future generations. As Thomas Jefferson said, "Loading up the nation with debt and leaving it for the following generations to pay is morally irresponsible" and "To preserve independence, we must not let our rulers load us with perpetual debt." These sentiments ring true today except with our elected representatives. Who is to blame for this tragic set of circumstances? We are. If we, as citizens and providers of capital, do not attempt to exert control and discipline over our government, who will? At First Pacific Advisors, we will not lend long-term money to this irresponsible and fiscally inept government nor will we to other irresponsible borrowers. We are exercising nothing less than our fiduciary responsibility.

My financial market outlook is rather cautious. I believe the recent stock market rally is nothing more than a bear market rally. It is being driven by some highly optimistic expectations. A narrowing in credit spreads is encouraging some "experts" to express the view that the worst of the credit crisis is over, especially with the economic stimulus plan benefits yet to come. Many economists are forecasting an end to the recession by year end, and I have even seen one anticipating a "V" shaped recovery. If my previous comments about the stimulus plan prove to be correct, these forecasts will be wrong. With a continuing weak economy, particularly among consumers, corporate earnings growth will disappoint.

Over the last four years at First Pacific Advisors, we have argued that both reported corporate profits and profit margins were unsustainably high. This assessment has proven to be correct for financial-service companies and now we believe this process is extending to nonfinancial corporations. We estimate that at their peak, corporate profit margins were approximately 30% higher than previous peaks. With a return to more normal profit margins and substandard economic growth, I expect the stock market to be price constrained for the next ten years. This analysis tends to support my estimate that it may also take ten years for U.S. consumers to rebuild their balance sheets.

The fixed-income market faces many challenges that include an explosion in Treasury debt issuance and a return of energy price inflation, within three to five years. In light of this, First Pacific Advisors New Income's portfolio remains defensively postured, with a short duration that has averaged approximately one year or less for the past six years. I view the Treasury market as being in bubble territory with foolish leaders at the helm of our economic ship.

It appears that we have seen the worst of this credit crisis in the sense that we went over a waterfall but the river is still flowing south. The bulk of the economy's credit problems are still to come, as charge-offs on trillions of dollars in loans remain to be recognized.

The credit markets are gradually reopening but they are still supported by massive federal programs and guarantees. We do not know the costs of these actions that will have to be paid by future generations of Americans. In the short run, the 1979 Chrysler bailout looked like a winner, but from a longer term viewpoint, did we accomplish anything? Government economic interference can and will cause a price to be paid; hopefully, it will not be a large one, but I doubt it. We are in the midst of a Grand Experiment that entails high risk while the nation is in its most leveraged position in history. There is little margin for error.

-- Bob Rodriguez





Zhibin Gu: China's corruption: self-appointed bureaucracy vs global financial crisis
by globalization, politics, management forum Wednesday, Jun. 03, 2009 at 3:22 AM 

Is 21st century a Chinese century? Not really, according to provocative Chinese thinker George Zhibin Gu. Why? China remains to be trapped by a untamed bureaucratic power, totally corrupt and deadly troublesome.  

China's Self-appointed Communist Bureaucracy Remains the Nation's Source of Deadly Troubles

by George Zhibin Gu
(author of several new books: 1. China's global reach, 2. China and the new world order, and 3. Made in China.)

George Zhibin Gu responds to Tor Guimaraes’s question of 25 April:

Tor has raised an interesting issue on the possibility of a fast-expanding Chinese middle class, which could help to sustain a positive domestic Chinese economy, independent of global financial crises in the future.

My feeling is this: A further expansion of a Chinese middle class is relevant, but there are deeper issues. First, China’s global economic connections and trade are fundamental to the nation’s growth, which will be even more significant as time passes. At the same time, there is no way for China to distance itself from any troubles in the global marketplace for now or in the future.

Second, an even more relevant issue is at home: That is, China’s healthy social and economic development must be based on turning the government body from self-serving to a service provider. This issue is far from resolved as of today. Its failure would cause more harm, infinitely bigger than the adverse impacts of global financial crisis.

The following interview may shed some light on this deeper issue:

Heart of China’s Problems

1. Question: What do you think is the biggest challenge for China today–both politically/economically and socially?

Answer from George Zhibin Gu: The government is no service provider. As such, there is no way to establish a law-based, fair modern society as well as modern organizations and businesses. In short, people’s power remains weak. What is more, all market deals are turned into bureaucratic dealings.

2. Question: Is China (meaning a) the Government and b) the People) aware of the huge potential, which China has and will have in the global business world?

Answer: True, both parties are well aware of the giant potentials in the global marketplace. But China’s government remains self-serving. So that whatever it does must benefit itself above all, which happens at the very expenses of society and people. At this time, all things in the society and business world remain twisted.

3. Question: You presented the 3 elements that “pulled China out of the mud”–what will China need for the next 10 years to actually be as successful as the theories suggest?

Answer: One leg is out of the mud, while the other leg remains in the mud. Getting the other leg out of the mud will be the focus of the next decade. Further analysis exists in my books.

4. Question: And finally, some statistics suggest that China will need 1.2 million (trained and partly English-speaking) staff in the Hospitality Industries (tourism, hotels, gastronomy, meetings industry). It’s called the “war for talent.” How long will it take to actually have those needed 1.2 million new hospitality staff in place and successfully working?

Answer: More experienced international managers and staffs are badly needed. For inbound travel has been skyrocketing, but services remain narrowly minded. For example, the domestic tourism industry remains inexperienced to provide extensive services to the sophisticated corporate and business travel communities from the outside world. In this regard, more experienced and knowledgeable international marketing and service professionals are badly needed. But at the staff level, Chinese employees would do provided that they get trained.

For information about the World Association of International Studies (OTC:WAIS), and its online publication, the World Affairs Report, read its homepage by simply double-clicking on:

John Eipper, Editor-in-Chief, Adrian College, MI 49221 USA



China: Oil Stockpiling and Energy Security

Stratfor Today » June 3, 2009 | 1854 GMT

China has announced that it is suspending its oil stockpiling program until new storage facilities are in place. Beijing puts a premium on energy security to protect its growth, and hence its stability. Its oil stockpiling program is an integral part of guaranteeing this security.


China will suspend oil stockpiling until new storage facilities are constructed to provide for the second phase of the country’s strategic oil reserves plan, Vice Chief of the Policy and Regulation Department at China’s National Energy Administration Zeng Yachuan said June 3. Zeng’s statements followed a rare tour of China’s strategic oil storage sites in Zhoushan and Zhenhai, Zhejiang province, given to foreign and Chinese reporters June 3. Effectively, China is claiming that the first phase of its strategic oil storage program — which called for 100 million barrels, or about 30 days worth of imports, to be stockpiled in case of emergencies — is complete.

Energy security is a high priority for the Chinese leadership given that China’s economic growth, and in turn its socio-political stability, depends on a steady stream of energy supplies. Beijing is interested in having a strategic cache of oil to resort to in case of a crisis scenario, such as a disruption in supply from the Middle East or Africa. But it is also interested in gaining the ability to use its weight in commodity markets to affect global prices, perhaps to attempt to mitigate the negative domestic effects that could result from soaring oil prices like those seen in early 2008. Throughout the global financial and economic crisis, low global oil prices have enabled the cash-rich Chinese to pursue their plans for bulking up oil reserves more aggressively than they had previously (though admittedly, they also were purchasing oil for stockpiles while prices were high in the first half of 2008).

China’s strategic oil stockpiling plan consists of three phases, with the ultimate goal of stocking 90-100 days worth of China’s total oil demand — or about 730 million barrels, roughly equivalent to the capacity of the U.S. Strategic Petroleum Reserve (NYSE:SPR). The first phase, now allegedly complete, consisted of filling existing storage facilities at four different locations, reaching the goal of about 100 million barrels. But the actual tally of oil currently stored is roughly 87 million barrels, including Zhoushan, reportedly full with 31.45 million barrels; Zhenhai, reportedly half full with 16.35 million barrels; and Hungdao, Shandong province, and Dalian, Liaoning province, reportedly together holding 38.99 million barrels out of a capacity of 21.9 million barrels apiece.

If 87 million barrels currently in storage is an accurate count, then China has amassed something in the vicinity of 60 million barrels since May 2008, making for a relatively rapid fill-rate of roughly 165,000 barrels per day during that time. This corresponds with estimates that China funneled about 25 million barrels into its reserves between August and January. This estimated filling rate is considerably higher than the various rates at which the United States filled the SPR. The actual filling rate may have been a bit slower, as perhaps suggested by the fact that the Huangdao storage site was filled at an average rate of about 27,700 barrels per day since April 2007. But the estimate reflects how during the period of low global demand for oil caused by the recession, China has been taking advantage of its cash flow — and much of the rest of the world’s need for cash — to buy oil at bargain prices. Flagging Chinese oil consumption also has helped make more oil available for reserves.

Beijing hopes to add another 169 million barrels in 2009 for the second phase of its oil stockpile program, but the announcement today that purchases will stop raises questions as to how that plan will be affected. The Chinese may feel that oil prices, which surged in May back above $60 per barrel, are getting a bit too high to maintain purchases at the rapid clip possible when demand was lower in past months. Because China’s suspension of purchases of well more than 100,000 barrels per day could have a mild downward effect on global prices, Beijing may also be testing its ability to affect global oil prices by ramping up, or ramping down, its imports.

But ultimately, the decision to halt or continue purchases is up to the central government. The more fundamental challenge facing Beijing in the second phase of its oil stockpiling program will be the attempt to create underground storage facilities. Phase one of China’s strategic reserve has depended entirely on steel storage tanks that are expensive to build and maintain; the subsequent two phases also are likely to depend mostly on steel tanks. Relying on these tanks is certainly feasible, as Japan with its 320 million barrels of stockpiled oil has shown. But it is costly, and doing so creates problems with finding space to build new ones — something Chinese officials pointed out during the media tour on June 3 — and can lead to the corrosion of crude supplies due to chemical reactions with the metal in the tanks themselves.

Beijing also hopes to make use of mined rock caverns, and reportedly salt domes such as those used for strategic oil reserves in the United States, in the second and third phase of the Chinese stockpiling program. While mined caverns have been converted to oil storage sites before — South Korea has sheltered about 59 million barrels of its 74 million barrel of total petroleum reserves in such mines — the mines suffer from a high degree of cracking that can lead to loss of oil and an array of environmental problems like groundwater pollution. The United States was forced to close its only rock mine storage site in 1994 due to the risk that it would flood local water supplies. As for salt domes, the gift from heaven for the U.S. strategic reserves, China will run up against geological and geographical limitations. According to the U.S. Geological Survey, the Jianghan Basin is China’s only salt deposit suitable for oil storage. But it is located in Hubei province, hundreds of miles from China’s manufacturing (and oil-consuming) bases along the coast.


China: Of Salt Domes and Strategic Reserves


For several years, China has been trying to develop a strategic petroleum reserve program like the one the United States has in place. However, unlike the United States, China does not have naturally occurring salt domes in which to store its crude oil reserves. Without those underground salt domes, China will have to spend a lot of money to develop a strategic petroleum reserve that meets its domestic needs.


For several years, China has followed in the footsteps of the United States, Japan and South Korea in developing a strategic petroleum reserve (SPR) program. Like Japan and South Korea — but unlike the United States — China does not have naturally formed salt domes in which to store its crude oil reserves. These subterranean geological formations provide the ideal location for crude stockpiles, and without them China’s attempt to build an SPR will be extremely expensive.

The United States’ SPR

In 1975, after the 1973-1974 oil embargo by leading Arab exporters, the U.S. Congress passed the Energy Policy and Conservation Act to establish an SPR. The goal was to provide the country with 750 million barrels of backup crude oil to be drawn down in the event of another embargo, crippling price hikes or a natural disaster. The Department of Energy chose several underground salt domes –- formations of salt that have risen above the sedimentary deposits surrounding them — to serve as storage facilities for the SPR.

Today, there are five salt-dome storage sites in operation, each located along the Gulf Coast in Louisiana and Texas, with a capacity of 727 million barrels of oil and under expansion toward a capacity of 1 billion barrels. In the event of a disaster, the U.S. president can order a complete drawdown of the SPR. The current reserve total of 702.7 million barrels would last about 51 days, though there are physical limitations on drawdown speed at each site, and it would be nearly impossible to conduct a total drawdown in such a short time. The president also has the authority to order a limited drawdown, as was done in 1991 during the global scare over oil prices surrounding the Gulf War and in 2005 after Hurricane Katrina disrupted oil production and refining in the United States.

The salt domes provided the United States with a cheap way to store large quantities of surplus crude in the event of an emergency. Today, the United States’ SPR is superior to the reserves of Japan, South Korea and China in its current storage, total capacity, low cost and strategic security.

Salt Domes

A salt dome is a type of diapir, a mass of low-density rock that rises above its denser surroundings and cuts into overlying rock layers, creating a particular formation. Salt, shale and magma are most frequently responsible for diapirs. In a salt diapir, salt buoys above surrounding sediment, taking the shape of sheets, pillars and especially mushrooms, often trapping hydrocarbons already in place. Eventually, the “stem” of a mushroom-shaped formation breaks off and the cap remains suspended among the higher layers of sediment. This cap is called the salt dome. Wherever there are low-density sedimentary deposits, the possibility of salt domes exists — hence their location near bodies of water, such as the coast of the Gulf of Mexico in Louisiana and Texas, in Newfoundland and Nova Scotia in Canada, and near Germany’s Jade Bay on the North Sea (home of the enormous Etzel salt dome).

 The technique of preparing salt domes to store oil, called solution mining, is relatively simple. After drilling a well into the salt dome, technicians pump in fresh water according to their designs for how separate caverns should be shaped; the fresh water leaches out the salt and carves discrete caverns that will serve as oil storage units. Then the brine, or water saturated with salt, is pumped out of the newly formed cavern and sent to petrochemical disposers or pumped into the sea 8 or 9 miles offshore. The process of preparing salt-dome

caverns can take several years and requires approximately seven barrels of water for each barrel of oil to be stored. When it is time to retrieve oil from a particular cavern, fresh water is pumped into the bottom of the cavern, forcing the oil to float to the top. From there, it is sent via pipeline to refineries.

The caverns in a salt dome have a great advantage over other crude-oil storage methods such as aboveground steel cylinders or tanks, offshore floating tanks or subterranean hard-rock mining caverns, which serve as SPRs in Japan and South Korea. Salt domes are naturally formed and are large enough to hold many man-made caverns; one of the United States’ salt caverns is large enough to contain the entire Sears Tower. Also, crude oil stored in salt domes does not suffer from the corrosion and deterioration common to oil stored in steel tanks. As a function of temperature variations at different depths, the oil inside a salt cavern is constantly circulating, which helps maintain its quality and consistency. Another major advantage of salt dome storage is that, lying from 2,000-7,000 feet underground, the salt dome reserves are highly secure from foreign attack or natural disaster — though Hurricane Katrina in 2005 disrupted the control system of the SPR both at the command center and at its backup location, revealing the mistake of stationing the two facilities close to each other.

But perhaps most importantly, salt-dome oil storage is relatively cheap. Both capital expenditures and operating costs for the salt domes are low, and the solution-mining technique of carving out different caverns within the dome to serve as individual storage units is relatively inexpensive. The total U.S. investment in its SPR is $22 billion, but $17 billion of that sum covers the cost of the oil, leaving only $5 billion invested in developing the facilities. This boils down to an average cost of $27 per barrel in the U.S. SPR, a remarkable example of the cost effectiveness of the salt-dome storage method.

China’s SPR

China began thinking about an SPR program in 1993 but did not act until Hu Jintao became president in 2003. Phase I of China’s SPR includes building stockpiles in Zhenhai and Aoshan in the Zheijiang province, as well as Qingdao in Shandong and Dalian in Liaoning. Total storage capacity at these sites is planned to reach 100 million barrels by the end of 2008. If this goal is met, it will provide China with about 20 days of forward coverage, based on its net imports of 3.3 million barrels per day. By mid-2007, China had filled the 52 storage tanks at Zhenhai with 12.4 million barrels, equal to three days of China’s imports; since then, the Chinese might have stored another 5-8 million barrels. China is using steel tanks at its Phase I SPR storage sites and for most of the sites it has planned for Phases II and III.

Thus, China’s SPR program has a major problem from the beginning. Steel tanks are expensive, take up large amounts of land, are open to attacks or natural disasters and can eventually corrupt the crude oil they hold. Japan and South Korea have both discovered the limitations of steel tanks, and South Korea in particular has turned to using complexes in mined rock caverns, which house about 59 million barrels of its 74 million barrel total petroleum reserves. China has begun planning its own underground storage facilities of this type in the city of Zhanjiang, with an estimated capacity of 44 million barrels and a projected price tag of $331.6 million.

But mining caverns, unlike salt domes, require high capital expenditure to begin with because they must undergo extensive reconstruction. They also have structural problems as oil-storage sites. The one cavern of this type that the United States used in its SPR — originally a room-and-pillar salt mine — at Weeks Island, La., had to be shut down in 1994 because of groundwater seepage that threatened to crack the top of the dome and its individual chambers, which could have caused a washout and flooded local water aquifers with crude. Aside from environmental concerns, a cracked storage facility could result in considerable losses of oil. Salt domes resist this kind of cracking, as geological pressures deep below the earth cause a “self-healing&am... effect that mends cracks before they spread.

But Beijing does have one potential candidate for a genuine salt-dome storage site. The Jianghan Basin near Wuhan has thick salt beds at 1,000-2,000 feet underground that are structurally fit to store millions of barrels of oil. Construction at the Jianghan Basin is still in the planning phases, but even if the project receives Beijing’s go-ahead, it will take many years before the site becomes operational. Moreover, Jianghan Basin is 600 miles from the ocean and far from China’s northeast, where consumer demand is highest and oil shortages would strike first and hardest.

The Future Costs of China’s SPR

China will press on with its SPR projects; lack of salt domes alone is not enough to discount the entire enterprise. Japan manages an effective SPR by relying mainly on steel tanks — aboveground, underground, inland and offshore — to store its 320 million barrels of crude, while South Korea has efficiently developed the rock mining caverns in lieu of salt domes. Neither Japan nor South Korea has salt domes at its disposal.

But the problem is one of cost. Seoul’s rock mining caverns have cost about the same to develop, in relative terms, as the United States’ salt domes. But without salt domes and with few rock mines available, Japan has relied on expensive steel tanks. China is likely to do the same. Meanwhile, the global price of steel is soaring, having doubled in the last year.

High oil prices also will cause China to expend billions more to stock its SPR than its rivals did when they began. Beijing began its stockpile only after oil hit $50 per barrel and did not make real progress until prices had started rising rapidly. It currently holds about 20 million barrels, less than a third of South Korea’s oil reserves. And with oil selling for $130 per barrel, its attempt to reach the 100 million barrel mark by the end of the year will be extremely expensive (and oil costs are likely to remain high).

China will also have to sock away oil for its SPR despite the world’s opposition. To meet its target for 2008, China will add about 100,000-150,000 barrels per day to global oil demand; subsequent SPR phases will require larger daily amounts. With oil supplies already tight, this added demand will have a considerable impact on global oil prices and will trigger international denunciations. Just as countries around the world criticized the United States in the 1970s for its SPR, so too will they criticize China for jacking up prices by buying oil that it does not immediately need. But in 2008, the stakes are even higher, and tensions will increase accordingly.

To develop its SPR, China will spend billions and billions of dollars buying expensive oil and constructing costly steel tanks, all the while wishing it had lower oil and steel prices — and geology — on its side.


Can China Save the World From Depression?

Thursday 28 May 2009 by WALDEN BELLO

Will China be the "growth pole" that will snatch the world from the jaws of depression?

This question has become a favorite topic as the heroic American middle class consumer, weighed down by massive debt, ceases to be the key stimulus for global production.

Although China’s GDP growth rate fell to 6.1% in the first quarter — the lowest in almost a decade — optimists see "shoots of recovery" in a 30% surge in urban fixed-asset investment and a jump in industrial output in March. These indicators are proof, some say, that China’s stimulus program of $586 billion — which, in relation to GDP, is much larger proportionally than the Obama administration’s $787 billion package—is working.

Countryside as Launching Pad for Recovery?

With China’s export-oriented urban coastal areas suffering from the collapse of global demand, many inside and outside China are pinning their hopes for global recovery on the Chinese countryside. A significant portion of Beijing’s stimulus package is destined for infrastructure and social spending in the rural areas. The government is allocating 20 billion yuan ($3 billion) in subsidies to help rural residents buy televisions, refrigerators, and other electrical appliances.

But with export demand down, will this strategy of propping up rural demand work as an engine for the country’s massive industrial machine?

There are grounds for skepticism. For one, even when export demand was high, 75% of China’s industries were already plagued with overcapacity. Before the crisis, for instance, the automobile industry’s installed capacity was projected to turn out 100% more vehicles than could be absorbed by a growing market. In the last few years, overcapacity problems have resulted in the halving of the annual profit growth rate for all major enterprises.

There is another, greater problem with the strategy of making rural demand a substitute for export markets. Even if Beijing throws in another hundred billion dollars, the stimulus package is not likely to counteract in any significant way the depressive impact of a 25-year policy of sacrificing the countryside for export-oriented urban-based industrial growth. The implications for the global economy are considerable.

Subordinating Agriculture to Industry

Ironically, China’s ascent during the last 30 years began with the rural reforms Deng Xiaoping initiated in 1978. The peasants wanted an end to the Mao-era communes, and Deng and his reformers obliged them by introducing the "household-contract responsibility system." Under this scheme, each household received a piece of land to farm. The household was allowed to retain what was left over of the produce after selling to the state a fixed proportion at a state-determined price, or by simply paying a tax in cash. The rest it could consume or sell on the market. These were the halcyon years of the peasantry. Rural income grew by over 15% a year on average, and rural poverty declined from 33% to 11% of the population.

This golden age of the peasantry came to an end, however, when the government adopted a strategy of coast-based, export-oriented industrialization premised on rapid integration into the global capitalist economy. This strategy, which was launched at the 12th National Party Congress in 1984, essentially built the urban industrial economy on "the shoulders of peasants," as rural specialists Chen Guidi and Wu Chantao put it. The government pursued primitive capital accumulation mainly through policies that cut heavily into the peasant surplus.

The consequences of this urban-oriented industrial development strategy were stark. Peasant income, which had grown by 15.2% a year from 1978 to 1984, dropped to 2.8% a year from 1986 to 1991. Some recovery occurred in the early 1990s, but stagnation of rural income marked the latter part of the decade. In contrast, urban income, already higher than that of peasants in the mid-1980s, was on average six times the income of peasants by 2000.

The stagnation of rural income was caused by policies promoting rising costs of industrial inputs into agriculture, falling prices for agricultural products, and increased taxes, all of which combined to transfer income from the countryside to the city. But the main mechanism for the extraction of surplus from the peasantry was taxation. By 1991, central state agencies levied taxes on peasants for 149 agricultural products, but this proved to be but part of a much bigger bite, as the lower levels of government began to levy their own taxes, fees, and charges. Currently, the various tiers of rural government impose a total of 269 types of tax, along with all sorts of often arbitrarily imposed administrative charges.

Taxes and fees are not supposed to exceed 5% of a farmer’s income, but the actual amount is often much greater. Some Ministry of Agriculture surveys have reported that the peasant tax burden is 15% — three times the official national limit.

Expanded taxation would perhaps have been bearable had peasants experienced returns such as improved public health and education and more agricultural infrastructure. In the absence of such tangible benefits, the peasants saw their incomes as subsidizing what Chen and Wu describe as the "monstrous growth of the bureaucracy and the metastasizing number of officials" who seemed to have no other function than to extract more and more from them.

Aside from being subjected to higher input prices, lower prices for their goods, and more intensive taxation, peasants have borne the brunt of the urban-industrial focus of economic strategy in other ways. According to one report, "40 million peasants have been forced off their land to make way for roads, airports, dams, factories, and other public and private investments, with an additional two million to be displaced each year." Other researchers cite a much higher figure of 70 million households, meaning that, calculating 4.5 persons per household, by 2004, land grabs have displaced as many as 315 million people.

Impact of Trade Liberalization

China’s commitment to eliminate agricultural quotas and reduce tariffs, made when it joined the World Trade Organization in 2001, may yet dwarf the impact of all the previous changes experienced by peasants. The cost of admission for China is proving to be huge and disproportionate. The government slashed the average agricultural tariff from 54 to 15.3%, compared with the world average of 62%, prompting the commerce minister to boast (or complain): "Not a single member in the WTO history has made such a huge cut [in tariffs] in such a short period of time."

The WTO deal reflects China’s current priorities. If the government has chosen to put at risk large sections of its agriculture, such as soybeans and cotton, it has done so to open up or keep open global markets for its industrial exports. The social consequences of this trade-off are still to be fully felt, but the immediate effects have been alarming. In 2004, after years of being a net food exporter, China registered a deficit in its agricultural trade. Cotton imports skyrocketed from 11,300 tons in 2001 to 1.98 million tons in 2004, a 175-fold increase. Chinese sugarcane, soybean, and most of all, cotton farmers were devastated. In 2005, according to Oxfam Hong Kong, imports of cheap U.S. cotton resulted in a loss of $208 million in income for Chinese peasants, along with 720,000 jobs. Trade liberalization is also likely to have contributed to the dramatic slowdown in poverty reduction between 2000 and 2004.

Loosening the Property Regime

In the past few years, the priority placed on a capitalist transformation of the countryside to support export-oriented industrialization has moved the party to promote not only agricultural trade liberalization but a loosening of a semi-socialist property regime that favors peasants and small farmers. This involves easing public controls over land in order to move toward a full-fledged private property regime. The idea is to allow the sale of land rights (the creation of a land market) so that the most "efficient" producers can expand their holdings. In the euphemistic words of a U.S. Department of Agriculture publication, "China is strengthening farmers’ rights — although stopping short of allowing full ownership of land — so farmers can rent land, consolidate their holdings, and achieve efficiencies in size and scale."

This liberalization of land rights included the passage of the Agricultural Lease Law in 2003, which curtailed the village authorities’ ability to reallocate land and gave farmers the right to inherit and sell leaseholds for arable land for 30 years. With the buying and selling of rights to use land, the government essentially reestablished private property in land in China. In talking about "family farms" and "large-scale farmers," the Chinese Communist Party was, in fact, endorsing a capitalist development path to supplant one that had been based on small-scale peasant agriculture. As one partisan of the new policy argued, "The reform would create both an economy of scale — raising efficiency and lowering agricultural production costs — but also resolve the problem of idle land left by migrants to the cities."

Despite the Party’s assurance that it was institutionalizing the peasants’ rights to land, many feared that the new policy would legalize the process of illegal land grabbing that had been occurring on a wide scale. This would, they warned, "create a few landlords and many landless farmers who will have no means of living." Given the turbulent transformation of the countryside by the full-scale unleashing of capitalist relations of production in other countries, these fears were not misplaced.

In sum, simply allocating money to boost rural demand is unlikely to counteract the powerful economic and social structures created by subordinating the development of the countryside to export-oriented industrialization. These policies have contributed to greater inequality between urban and rural incomes and stalled the reduction of poverty in the rural areas. To enable the rural areas of China to serve as the launching pad for national and global recovery would entail a fundamental policy shift, and the government would have to go against the interests, both local and foreign, that have congealed around the strategy of foreign-capital-depend... export-oriented industrialization.

Beijing has talked a lot about a "New Deal" for the countryside over the last few years. But there are few signs that it has the political will to adopt policies that would translate its rhetoric into reality. So don’t expect Beijing to save the global economy any time soon.

Walden Bello is a member of the Philippine House of Representatives, president of the Freedom from Debt Coalition, a senior analyst of the Bangkok-based Focus on the Global South, and a columnist with Foreign Policy In Focus. The issues touched on in this commentary are discussed in greater depth in the author’s book The Food Wars, published by Verso, which will be available by July 2009.



Distribute more income to ordinary people

  • Source: The Global Times
  • [22:42 June 03 2009]

By Ma Guangyuan

The average consumption of Beijing residents tends to decrease each year. One of the key reasons is the growing gap in income distribution.

If the national wealth accumulated during the 30 years since reform and opening-up is seen as a cake, both the people and the State have taken part in distributing this cake. Normally, the income gap refers to the uneven distribution of wealth among people. However, we should also be thinking of this gap as one between the people and the State.

Currently, more than 60 percent of Chinese economic resources are still concentrated in State-owned enterprises and organizations, while the growth in GDP created by this 60 percent amounts to less than 30 percent of China’s total economic growth. And the employment opportunities created by the 60 percent is less than 10 percent of the total.

The root of the difficulty in China’s economy lies in the imbalance in allocation of resources and wealth distribution. Only a small part of the national wealth is distributed to citizens, which leads to a mismatch of residents’ purchasing power and the economic growth rate. The less of the national wealth people hold, the less they can consume.

In the long run, fiscal stimulus plans will not solve China’s fundamental economic problems, and will actually reduce the percentage of national wealth held by the people. Some programs should be launched to “return wealth to the people” from State-owned enterprises and China’s fiscal revenue.

First, take advantage of the 4 trillion yuan ($586 million) economic stimulus plan to enhance reforms in monopolized fields, lower the threshold to private investment and boost the private economy.

Second, take advantage of the reforms in education, healthcare, and other social security fields to put some shares of the State-owned enterprises under “direct management” of individual shareholders to fill funding gaps in these sectors. In a harmonious society, all people should share the majority of the national wealth. Having a wealthy State isn’t the goal – having a wealthy populace is.

The author has a PhD in economics. This article was translated by Gan Wenning


China's Growth in Western Eyes
By Dror Poleg on May 27, 2009 4:50 PM 24 Comments 0 Trackbacks
Foreigners often describe China as "different"; a mysterious land whose people have a perplexing way of getting things done. Yet, when it comes to economic data, foreign "experts" look at China as they would look at any other country. I am not talking about those who ignore the fact that China's government tweaks economic indicators to fit pre-defined goals. Enough has been written about that (here, herehere and here, for example). I am talking about the way in which well-regarded western publications look at real indicators, and the assumptions they make in the process.
This morning, for example, I received a newsletter from RGE Monitor, Nouriel Roubini's consultancy firm. Reading it, I learned that 'unlike many global markets, the residential property market in China is showing some signs of stabilization'. The facts are correct. The free fall in residential prices has stopped, and in some places there are even slight increases.  A sign of recovery? not necessarily. 
The newsletter did not mention the fact that China is (still) full of empty residential projects, and that the current growth is the result of aggressive government(proxy) investment in real estate projects. This means that China's real estate bubble not only far from being over, but it is actually being perpetuated and inflated. The "recovery" seen in the numbers is not driven by market forces and thus cannot be taken as an indication of local demand. 
This superficial approach is not unique. The Economist just published an article vindicating "decoupling", the theory that 'emerging economies had become more resilient to an American recession, thanks to their strong domestic markets and prudent macroeconomic policies'. The author uses China as the theory's 'Exhibit A' since its 'economy began to accelerate again in the first four months of this year... Fixed investment is growing at its fastest pace since 2006 and consumption is holding up well'. The author did not, however, mention the fact that 20-30 million Chinese lost their jobs in the last six months (and that's only according to official figures) or that the 'fixed investment' is done directly or indirectly by the government and thus says very little about the true market sentiment. 
The author did note that 'China's rebound will only be sustained if the economy shifts further from state-sponsored investment to private consumption', but by doing so he implies that the current "recovery" in China is indeed a result of private consumption. It isn't. 
In reality, China's consumers will not start spending until the government provides them with access to adequate healthcare and education. Even if this was China's top priority, it would take many years to implement. But is it really a top priority? A look at China's $586b stimulus package shows that most of it is devoted to infrastructure... real estate + extravagant government projects), disaster relief (read: pre-planned projects in Sichuan), and only 9% is dedicated to education and healthcare. For comparison, about 14% of  America's stimulus package is devoted to healthcare educat... This is out of a larger package ($787b) in a country with an educated population and markedly better healthcare facilities. 
Even during peaceful times, when the global economy is functioning "properly", experts talk mostly about China's GDP growth, investment in fixed assets, and the real estate and stock markets. By doing so, they are missing a big part of the story, or even the whole plot. Lao Zi once wrote that 'ruling a kingdom is like cooking a small fish', It should be done with great care and sensitivity. When it comes to China, westerners seem to be 'judging a kingdom like meeting a fat kid' - they evaluate the country's development based (mostly) on its overall economic weight. 
Imagine meeting a potential business partner online and evaluating him according to his   weight. He tells you that he weighs 80kg and - judging from your own experience - you assume that he is a mature individual. If you were to go and meet him in person, you would discover that he is actually an overweight 8-year-old kid. Not only is he not fully mature, but he also has severe health problems. Not exactly the type of person you want as a business partner. But you'll never know unless you visit. 
China is a fat, unhealthy kid. Its ignorant friends in the west encourage it to keep eating the same stuff in order to "maintain growth". Sadly, this encouragement might mean that China will stick to its non-viable development model and never grow up.



China's 'socialist road' to misery

By Jeff Jacoby, Globe Columnist  |  June 3, 2009

IT IS 20 YEARS since the Tiananmen Square massacre, and China's communist regime hasn't budged an inch.

The government has no reason to regret its murderous crackdown during "the political storm at the end of the 1980s," a foreign-ministry spokesman in Beijing told reporters last month. "China has scored remarkable success in its social and economic development. Facts have proven that the socialist road with Chinese characteristics that we pursue is in the fundamental interests of our people."

As a euphemism for dictatorial savagery, "the socialist road with Chinese characteristics" may not rise to the level of, say, "Great Leap Forward" or "Great Proletarian Cultural Revolution." And certainly the material riches and capitalist bustle that characterize much of China in the 21st century are a far cry from the mass starvation and unspeakable chaos that devastated the country in the 20th. But make no mistake: The junta in Beijing is no kinder or gentler today than it was at Tiananmen 20 years ago, and no less prepared to crush anyone who resists its grip on power.

Perhaps nothing today so exemplifies the totalitarian implacability of China's rulers as their ruthless persecution of Falun Gong, a quasi-religious discipline of meditation and breathing exercises, combined with moral teachings about truth, compassion, and forbearance. By civilized standards, it is incomprehensible that anything so innocuous and peaceable could provoke bloody repression. But China's uncivilized government fears any movement it does not control, and Falun Gong - with its uplifting values so different from the regime's Stalinist ethic - has attracted

tens of millions of adherents, independent of the Communist Party.

There is nothing subtle about Beijing's decade-long campaign to suppress Falun Gong. At, the Falun Dafa Information Center describes several of the torture techniques the government uses to break Falun Gong practitioners. Burning, for example. In hundreds of reported cases, police or labor camp authorities have used cigarettes, car lighters, or red-hot irons to sear Falun Gong believers on their faces, torsos, and genitals .

Other victims have been forced into water dungeons - locked cages immersed in filthy water. "Some water dungeons . . . have sharp spikes protruding on the inside of cramped cages," the center reports. "Usually, the water dungeons are well-hidden rooms or cells where practitioners are forced to stay for days and nights on end in total darkness. The water is most often extremely filthy, containing garbage and sewage that leaves the victim with festering skin." Other torture methods include electric shock, brutal forced "feeding" with concentrated salt water or hot pepper oil, and injection of nerve-damaging psychotropic drugs capable of inducing "horrific states of physical pain and mental anguish."

Independent and third parties have raised numerous alarms about China's inhumane war on Falun Gong.

The UN's Special Rapporteur on Extrajudicial Executions has cited reports of "harrowing scenes" of Falun Gong prisoners dying from their treatment in government custody, and noting that "the cruelty and brutality of these alleged acts of torture defy description." Amnesty International and Human Rights Watch have repeatedly highlighted the agonies inflicted on Falun Gong practitioners. So have a handful of supremely courageous Chinese lawyers, among them Gao Zhisheng and Li Heping. In 2007, Canadian attorney David Kilgour, a former prosecutor and member of Parliament, co-authored a detailed report documenting the systematic harvesting of vital organs from imprisoned Falun Gong believers, in order to supply China's lucrative transplant industry.

All these atrocities, of course, account for only one narrow lane on that "socialist road with Chinese characteristics" that Beijing so adamantly defends. The government of China is no less vicious in its persecution of devout house Christians, of Tibetan Buddhists, of democratic dissidents who seek greater liberty, of journalists who fail to toe the Communist Party line, of the countless inmates enslaved in "re-education through labor" camps, or of women who wish to decide for themselves how many children to have.

Twenty years after the screams and blood and slaughter at Tiananmen Square, the People's Republic of China is still a great dungeon. "China is first and foremost a repressive regime," the noted China scholar Ross Terrill has written. "The unchanging key to all Beijing's policies is that the nation is ruled by a Leninist dictatorship that intends to remain such." That was the truth in 1989. It remains the truth today.

Jeff Jacoby can be reached at

ECONOMIC SCENE: Can the US manage China’s economic comeback?



The giant’s revival will help cushion the blow of falling global output. But the Obama administration will need to take care in its dealings.

By David R. Francis  |  Staff Writer/ June 5, 2009 edition

    China’s back.

After a pause at the end of 2008, China’s economy rebounded in the first quarter of this year to an annual real growth rate of 6.1 percent in its output of goods and services. That’s about half China’s astonishing annual growth rate in gross domestic product (OTC:GDP) a few years back.

Nonetheless, it’s welcome news for the rest of the world.

While global output is expected to fall 1.3 percent overall this year, according to the International Monetary Fund (NYSE:IMF), China’s economic revival will help cushion the blow. Its industries will boost their purchases of expensive machinery and other capital goods from the United States and Europe – and buy more oil and raw materials from other nations.

Though the average income of an individual Chinese is only about $3,000, China, with its 1.3 billion people, has the world’s third-largest economy after the US and Japan. China has about 10 percent of world GDP, compared with 25 percent for the US. So China’s recovery will have less impact globally than one in the US.

Nevertheless, China represents “the gold standard” in terms of responding to today’s “Great Recession,” says Nicholas Lardy, an economist with the Peterson Institute for International Economics in Washington. China’s stimulus package, announced last year, was bigger relative to the size of its economy than that of any other country, including the US.

The IMF predicts China’s economy will grow 6.5 percent this year, 7.5 percent in 2010. That may help to whittle down China’s trade surplus with the US, but barring a surprise, the deficit will remain large.

That’s a cause for complaint from the AFL-CIO, the nation’s top labor organization. It regards China’s surplus as a drag on US manufacturing. Last year, China exported goods worth five times more than it imported from the US, says Thea Lee, the federation’s policy director in Washington. The trade deficit with China amounted to $256 billion. To Ms. Lee and some other economists, the deficit is a result of unfair trade practices by China, including keeping its currency undervalued and subsidizing exports.

By supporting congressional action, the AFL-CIO will be trying to pressure the Obama administration to be tougher in its economic dealings with China. Representatives Tim Ryan (NYSE:D) of Ohio and Tim Murphy (NYSE:R) of Pennsylvania have a bill demanding that the administration tackle any currency manipulation by taking strong remedial measures through the World Trade Organization.

So far the administration has acted cautiously in its dealings with China, which has piled up perhaps $1.5 trillion in US government securities. It did not formally declare that China manipulates its currency in a mid-April review of exchange-rate policies, for instance. The value of the yuan has risen 20 percent since mid-2005. Probably 15 percent more is needed, says Mr. Lardy.

With the US unemployment rate headed upward, Congress might pass “China bashing” trade legislation this year or in early 2010, Stephen Roach, chairman of investment bank Morgan Stanley Asia, warned in a recent analysis. He figures it’s a 25 to 33 percent probability.

If Congress does act, he figures Beijing would retaliate. It “would instruct its foreign-exchange-currency managers to boycott the next US Treasury auction” of federal debt instruments, he writes. This would trigger “a full-blown crisis in the dollar and a related spike in real long-term US interest rates that would exact a severe toll on a bruised and battered US economy” and the rest of the world. 

Why The West Hates Chinese Investments

Posted: June 5, 2009 at 4:37 am

The developed countries are beginning to view China as one large vulture fund which bankrolls companies that it controls to buy up key overseas asset at prices undermined by the recession. The resulting tensions may end up being more severe than a tradewar.

Australian mining and metals giant Rio Tinto (RTP) has dumped a deal to take $19.5 billion from Chinalco. Instead, it will raise more  than $15 billion in the open market and enter a joint venture with rival BHP Billiton (NYSE:BHP) which will bring in another $5.8 billion.

The Australian government had already expressed reservations about having one of its largest companies trade cash for access to valuable ore and metals access.  Rio Tinto’s debt burden is so great that taking the money from China was a huge temptation. But, the Rio deci... to reject the Chinalco money is another precedent of Western governments influencing private enterprise from taking funds from entities controlled by the communist central government. Last year, the US government blocked a deal for a buyout of 3Com which was backed in part by Chinese electronics company Huawei.

Brazil is faced with the Chinese plan to put $1o billion into oil giant Petrobras in exchange for bonds and access to oil produced by the company. The crude bought by China from Petrobras will be at market rate and not higher as a condition of its investment. The Brazilian government has sanctioned the deal, but it is not clear whether it will bless a series of Chinese investments into a greater exploration of its raw materials.

China has made it clear that it is shopping for undervalued assets outside its own borders. It will probably have success with the credit markets tight and many large companies in need of capital. The one impediment to Chinese expansion is likely to be sovereign governments that want to keep their strategic assets out of the hands of a government which they believe has motives to control critical industries in countries that it compete with for export trade.

China may argue that its aspiration were not different than those of the Japanese during the 1980s. Japanese firms bought assets around the world with a special focus on the US. The Japanese economy was booming, making unprecedented amounts of cash available to some of its largest corporations and trading firms. American officials were often unhappy by the flood of Japanese money into US real estate and financial institutions.  Japan may have had success avoiding regulatory bodies because it was a democracy and one that had been set up by America after WWII.

A Chinese machinery company has made a deal to buy US truck company Hummer, a division of GM that might fold without a buyer. The federal government will have to approve the deal and Congress may have some objections to assets of an American car company going into Chinese hands.

The Rio decision to reject Chinalco, especially under pressure from Australian regulators, certainly sets a precedent for other governments in developed countries to scrutinize transactions that would give China special access to raw material or industries where it can gain special skills that would allow it to more effectively compete with the West. China will object to the meddling by politicians and bureaucrats, but the meddling is likely to get more aggressive.

Douglas A McIntyre

China's Declining Electricity Consumption Conflicts With Party Line Growth Story

As we have said, electricity use is a very reliable contemporaneous economic indicator. China's power output and consumption figures say the economy is contracting. From China Stakes (hat tip reader Michael):
China's power consumption in May continued to decline. Although the National Bureau of Statistics denied the conflict between economic growth and power consumption decline since the beginning of the year, Zhao Bingren, ex-chairman of China Electricity Regulatory Commission, expressed his doubt on economic statistics reported by some areas.

According to the figures from the State Grid, power generation in the last 11 days of May dropped 5.7% year on year, higher than the decline in the second 10 days of May, mainly because working days in the last 11 days of May this year are lower than that in the previous year, as the Dragon Boat Festival occurred at the end of May.

The power generation situation in Yunnan and the south of Hebei is apparently better than that in the rest of China... However, power generation is still hovering at low levels in most areas with intensive high energy-consuming industries. In May, decrease in power consumption in Shanxi and Inner Mogolia stood at 5% to 6%, higher than the average level of the country.

Power consumption decrease in Guangdong, Shanghai, and Zhejiang reached about 10%, 13.6%, and 6.1%, all higher than the country's average.

“During January and May, electricity demand dropped about 4% year on year,” revealed Zhao Guobao, vice director of the National Development and Reform Commission and director of the National Energy Administration...change in product structure and decrease in inventory of high energy-consuming products is an important reason for the conflict among energy consumption, electricity consumption, and GDP growth.

Zhao Bingren said statistics reported by some local governments representing drastic economic growth might not be true. “I visited two provinces, and think their statistics are not true. They can never make up two important figures: power consumption and transportation. ”

Power consumption in Sichuan dropped 9.9% in the first quarter, but its economic growth in the same period reached 10.8%. The local government explained the economic growth is mainly led by the post-disaster reconstruction. “I don't know how the economy grows in this area,” said Zhao Bingren.

Shao Bingren is now vice director of the Committee of Population, Resources and Environment of the NPC. He thinks the economic situation in China is not so optimistic. The government's investment has mainly flowed to state-owned enterprises and infrastructure construction, instead of the whole society. In the first quarter investment in non state-owned sectors dropped by 3.3%, and the investment decline in foreign-invested and private enterprises is even bigger.

The export situation has not been improved, and internal demand has not been well stimulated. Financing difficulties of many small and medium enterprises have not been solved. The employment situation is still severe.



Asian exporters pin hopes on China as West sputters

Wed Jun 10, 2009 2:50am EDT

By Simon Rabinovitch and Doug Young - Analysis

BEIJING/HONG KONG (Reuters) - Emerging economies in Asia may outperform developed markets on the road to recovery if their exporters can capitalize on rebounding growth in China to escape sluggish U.S. and European markets.

But some exporters and economies in the region are better placed to cash in on a recovery in Chinese demand than others, and China's rising tide won't lift all Asian boats.

Companies and countries which stand to benefit from China's infrastructure spending surge -- the bulk of its $585 billion stimulus package -- have grounds for optimism as demand for building equipment and materials soars, buoying firms such as Japan's Komatsu (6301.T: Quote, Profile, Research, Stock Buzz) and Australian mining giant Rio Tinto (RIO.AX: Quote, Profile, Research, Stock Buzz)(RIO.L: Quote, Profile, Research, Stock Buzz).

Those counting on Chinese consumers, though, may be grasping at a thin reed.

"It may be that the real beneficiaries of Chinese success are going to be Australia, South Africa, Brazil and Indonesia, maybe Peru and Chile, and less so Korea, Japan and others which are geared toward the U.S. consumer market, a much higher-end type of market," said Bill Belchere, chief Asian economist at Macquarie in Hong Kong.

China's consumer sector is worth $1.5 trillion, puny next to the combined $22 trillion size of the U.S. and European markets.

Roughly speaking, counterbalancing a 1 percent decline in rich-world retail sales would require a 15 percent increase in China -- a disturbing reality for export-reliant economies.

Proof can be found in small, open Asian economies such as Singapore and Taiwan, where the brutal collapse in trade has caused gross domestic product to shrink by as much as 10 percent.

Silvia Liu, a Merrill Lynch economist in Hong Kong, said Asian exports were poised for a strong recovery over the next two quarters as companies rebuild depleted inventories in the G3 (the United States, Japan and European Union).

But she added a key caveat: no one knows when consumers will start spending again and if the demand will be sustained, which is key for a global recovery.

"That rebound could prove short-lived because we are talking about below-trend growth in the G3 for a number of years," Liu said. "The recovery is going to be a yo-yo and the momentum could lose steam in early 2010."

The International Monetary Fund (IMF) forecasts emerging economies will return to growth in the second half of this year but advanced economies are unlikely to follow until early 2010.

Hence the importance of decoupling from Western markets -- or, more to the point, of coupling with China's growing needs. Differing company outlooks across Asia tell the tale.


As early as April, Rio Tinto said it expected a revival in demand for iron ore, its most profitable product, in the second half of this year on the back of a Chinese recovery.

"Australian suppliers were always going to benefit from any upswing in industrial activity in China," said James Wilson, a mining analyst with DJ Carmichael & Co in Perth.

Australia supplies over 40 percent of the iron ore consumed by China, and Chinese imports were at record levels, he noted.

Japanese construction machinery makers Komatsu and Hitachi Construction (6305.T: Quote, Profile, Research, Stock Buzz) expect sales to decline in every region, except China, where they see double-digit sales growth resulting from Beijing's stimulus package. That boost will be enough to restore them to profit after they fell into the red in the final quarter of the last fiscal year.

Some of the biggest Asian players in consumer sectors, by contrast, envision a far more fragile recovery.

Japan's Panasonic (6758.T: Quote, Profile, Research, Stock Buzz), the world's top plasma TV maker, warned last month business plans could not rest on "unrealistic expectations." Samsung Electronics (005930.KS: Quote, Profile, Research, Stock Buzz), the world's top maker of memory chips, has said there are signs of bottoming out, but it sees no evidence of a sharp rebound in demand.

Taiwan's technology firms, from chip foundries to PC makers, looked excitedly at a surge in exports to China earlier this year, but after a rush by their customers to restock inventories they are now being reminded of limp demand in bigger markets.

"There's a lot of talk about China coming in, but it's still a huge question mark about whether they are actually able to pick up the slack left behind by the U.S. and Europe," said Andrew Teng, an analyst at Taiwan International Securities.

"We're seeing very few signs of any growth in consumer demand, and I'm not sure what companies are going to do with their goods right now," he added.

Over 60 percent of China's imports from the rest of Asia are intermediate goods for processing that are eventually sold to developed markets, and thus are primarily dependent on the economic outlook in the United States and Europe.

"Asia has to figure out its own domestic way to grow. The export market is going to be there, but it is ultimately going to be a very stagnant, slow growing market," Belchere said.

And the suppliers of commodities China needs to drive its own growth are almost entirely non-Asian, from Brazil to Angola, countries that in turn would gladly consume relatively cheap Chinese goods, Qu Hongbin, HSBC's chief China economist, wrote in a recent note.

"China's recovery will offer only modest help for neighboring Asian economies. We expect trade cycling between China and other main emerging markets to rise, setting the stage for a new world trade order."

($1=6.834 Yuan)

(Additional reporting by Aloysius Bhui in JAKARTA, James Regan in SYDNEY, and Baker Li and Kelvin Soh in TAIPEI; Writing by Simon Rabinovitch; Editing by Ken Wills & Kim Coghill)



May '09 Exports Likley to show a fall of >20%

China's exports in May will likely fall more than 20 percent year-on-year as overseas demand remains weak, according to estimates by securities and investment firms. It will be the seventh successive month exports have fallen.
Customs data released earlier showed exports fell 22.6 percent year-on-year to US$ 91.9 billion in April.



Wednesday, June 10, 2009

Japan, China, and German Green Shoots Stories Looking Doubtful

 One of the alleged reasons for cheer on the economic front is that major foreign economies are bottoming. For instance, Japan reported the biggest increase in industrial production in 56 years roughly two weeks ago, A comment from a Bloomberg story on that release:
This is not so much a green shoot as it is a green tree,” said Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong. “Optimism on Japan is certainly not misplaced as we look at a reasonably strong quarter of growth in April to June.”...

Unless you are an equity salesman, never make too much of one data point. Both capital expenditures and inflation data out of Japan today paint a much more mixed picture. Similarly, the press has keenly reported signs of life in China, despite falling electricity use. a telling indicator of economic activity. While Germany has not been a focus of optimism, the news from there continues to be less than cheery.

First to Japan. From MarketWatch 

A key indicator of Japanese corporate capital investment slipped far more than expected Wednesday, while an index of wholesale prices showed a deeper-than-expected drop, suggesting pressures remain on the world's second-largest economy.

Japanese core machinery orders fell a seasonally adjusted 5.4% in April from March, the Cabinet Office said Wednesday, a much weaker result than the 0.8% rise predicted by analysts surveyed by Nikkei and Dow Jones Newswires.

Core orders exclude those from electric power firms and shipbuilders, which can skew monthly data due to their large sizes.

"Machinery orders predict capital spending three to six months down the road. Hence, major Japanese firms still exercise great caution in capex, even as exports are recovering on a (month-on-month) basis," said Uwe Parpart, chief economist for Asia at Cantor Fitzgerald.

Manufacturing sector orders skidded 9.4% from the previous month, while non-manufacturers' orders fell 8.8%, the government data showed....

Separately, the corporate goods price index was down 5.4% in May compared to the same month last year, according to data released Wednesday by the Bank of Japan. The drop was the fastest in 22 years, according to news reports.That was more than the 5.1% drop forecast by analysts..

More commentary from Bloomberg:
Orders for Japanese machinery fell to a 22-year low in April as dwindling profits forced companies to cut costs amid the worst postwar recession.

Bookings, an indicator of capital investment in the next three to six months, fell 5.4 percent to 688.8 billion yen ($7.1 billion), the lowest since April 1987, the Cabinet Office said today in Tokyo. Economists predicted a 0.6 percent drop. . .

A separate report today showed that producer prices, or the costs companies pay for energy and raw materials, tumbled 5.4 percent from a year earlier, the biggest slide since 1987, according to the Bank of Japan. . .

Still, even after showing signs of stabilizing, exports and production have fallen by more than a third from last year’s levels. Only about half the nation’s factory capacity is being used, putting pressure on managers to cut costs and delay investment s.

A survey published this week by the Nikkei newspaper showed that Japanese companies plan to cut capital spending by an unprecedented 15.9 percent this business year. The previous record was an 11.8 percent decline that came in 1993 when the bursting of Japan’s asset bubble left companies saddled with plant and equipment they no longer needed. . .

“Capacity utilization is so low and profits have fallen so sharply that I just don’t see a strong recovery,” said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo. “What you can say is there are signs that orders are bottoming. The numbers aren’t plummeting like they were at the beginning of the year.”

A tart take on the latest news from China, a dramatic fall in producer prices, comes from Karl Denninger (hat tip reader Scott):
From Bloomberg
....Prices dropped 1.4 percent in May from a year earlier, after falling 1.5 percent in April, the statistics bureau said today. The median estimate in a Bloomberg News survey of 16 economists was for a 1.3 percent decline. Producer prices fell 7.2 percent, the most on record.

Recovery eh?

Producer prices are paid when products go into production, of course. Consumer prices are paid when products are sold.

There is a lag between production and sale (duh)

If producer prices are precipitously declining at this sort of a rate - annualized at 86.4% - it is not signaling "stabilization" or "recovery" - it is signaling incipient economic collapse as the demand for those goods at the producer level is insufficient to support prices at all.

Bluntly, that's a base jump and as noted, "the most on record."
“China’s economy is already rebounding and as soon as it regains momentum, prices will return to positive territory,” said Sherman Chan, an economist with Moody’s in Sydney.

Pure nonsense - either the PPI is wrong or their economy is nowhere near stabilization, say much less a "rebound."
Yves here. As mentioned here and elsewhere, the media cheerleading is reminiscent of the old Soviet press. Back to Denninger:
And by the way, that PPI decrease is not in raw materials:
While the Reuters/Jefferies CRB Index of 19 raw materials, including oil and copper, is down about 39 percent from a year ago, it has climbed about 14 percent in 2009.

That's especially bad - raw materials are up 14% this year (~3% monthly, if all months are equal, which of course they never are) but last month the PPI was down 7%.

Its always dangerous to believe anything in economic statistics coming out of China. If you think OUR government lies.......

Now to Germany, via Eurointelligence:
After exports stabilised in March, they got worse again in April, much worse. German exports declined by 4.8% month on month during April, and by 28.7% year-on-year, which the FT points out is the worst fall since the 1950s. Industrial production also fell in April, by 1.9%. These are really terrible figures. No green shoots here.
  • JUNE 11, 2009, 1:12 A.M. ET

China's Exports Dropped Again in May

BEIJING – The decline in China's exports continued to deepen in May, new data show, emphasizing how hopes for a recovery in the world's third-largest economy remain pinned on the effectiveness of the government's stimulus program.

Merchandise exports in May fell 26.4% from a year earlier, China's Customs agency said Thursday, accelerating from April's 22.6% decline as global demand remained weak. China's imports also extended their fall, dropping 25.2% in May from a year earlier after shrinking 23% in April.

The weak export performance is shrinking China's trade surplus, which at $13.39 billion for May is more than a third smaller than in the same month last year.

China's leadership is working to counter the global downturn with a massive program of public works and industrial aid, financed by a huge wave of bank lending as well as direct government spending.

Other data issued Thursday showed stimulus money continuing to flow into the economy. Fixed-asset investment, China's main measure of capital spending, rose 38.7% in May and is up 32.9% for the year so far. That's the fastest growth since the investment boom of 2004 – but activity still remains concentrated in the areas benefiting from the government measures.

"Government has the power to keep the economy from declining, but not to make an effective recovery," Fan Jianping, chief economist of the State Information Center, a government think tank, wrote in an article this week. "A solid rebound in the economy still needs the endogenous growth momentum from the market, especially private-sector investment and the steady growth of household consumption."

There's little question that the state is leading the way in spending so far this year. Fixed-asset investment by state-owned enterprises is up 40.6% in the first five months of the year, while capital expenditure by foreign companies showed little or no growth. But growth in real estate investment, much of which is driven by the private sector, picked up to 12% in May as a continued rise in property sales encouraged new construction of housing. That has raised hopes that companies are becoming increasingly willing to invest in things besides government infrastructure projects.

"Amidst continued weakness in external conditions, China will likely remain reliant on domestic investment for growth in the short term," Morgan Stanley economists said in research note Thursday. "The most encouraging recent development, in our view, is actually the rebound in activity in the property sector."

The heavy investment spending is supporting China's purchases of key commodities. Those continued to run at high levels in May, though many analysts suspect some of the growth is coming from stockpiling that will taper off later in the year.

Imports of iron ore slipped somewhat from April's level but at 53.46 million metric tons were still 38% higher than a year ago. Net imports of crude oil were also up 3.8% from a year earlier in May, and are running at a pace of 3.45 million barrels a day over the past 12 months.

Getting a read on consumer activity that could help boost China's imports of things besides raw materials is more difficult. In addition to vibrant housing sales, another positive sign of consumer spending is passenger car sales, which rose 42.4% in May from a year earlier to 591,300 units. Government subsidies and tax breaks for automobile purchases have aided those gains. But some indicators of consumer confidence have fallen back recently, and economists say the full impact of job losses and wage cuts has probably not yet been felt.

New China Export Rebate Sure to Fuel the Trade WarsJune 10th, 2009 ·

The trade wars continue to rage on as China has just offered a new 9 percent VAT rebate for flat-rolled steel products and hot rolled ferro-alloy products starting June 1, according to this article. The tax changes extend beyond steel to include more than 600 items according to this report. These changes were implemented as part of an overall Chinese economic recovery plan.

The new rebate for steel, however, will have the effect of two things. First, it will promote exports of steel products (vs. production for domestic consumption) as the 9% can only be claimed if goods are exported. It will further stimulate aggressive anti-dumping action on part of the US domestic steel industry (we have another anti-dumping case to report shortly).

In all fairness, China was a net importer of steel products for the months of April and May and has seen a huge drop in demand (like all other global steel producers mind you) since the beginning of this year.  We knew it was only a matter of time before China would begin tinkering with the VAT scheme again.

–Lisa Reisman


China faces WTO action on raw materials

By Joshua Chaffin in Brussels

Published: June 12 2009 00:03 |

The European Union and the US are preparing to take China to the World Trade Organisation over allegations that Beijing grants raw materials to domestic manufacturers at below-market prices, according to people familiar with the matter.

The European Commission was expected to present its findings to member states at a meeting on Friday, these people said, and would consult with China later this month. If the parties could not resolve the dispute, then the EU and US would press ahead with a WTO complaint.

The dispute is another indication of the rising trade tensions between the parties as the economic crisis grinds on. In recent months, the EU has filed anti-dumping complaints against China over products ranging from footwear to steel fasteners.

The Chinese government, in turn, has argued that those complaints amount to a form of protectionism.

The European Commission declined to comment on the matter on Thursday, but acknowledged that China’s treatment of raw materials had been a longstanding source of tension.

At the heart of the dispute is Beijing’s application of quotas and taxes on exports of raw materials such as phosphorous, coke and tungsten. Both policies drive down relative prices for those materials on the domestic market, which critics say gives Chinese manufacturers an unfair advantage over foreign competitors which have to buy raw materials on world markets.

The dispute over raw materials is particularly important, say trade officials, because it affects such a broad range of finished products – from ironing boards to aircraft, detergent and candles, to name a few.

In April, the EU imposed temporary duties on Chinese exports of aluminium foil and seamless steel pipe, claiming that they benefited from unfairly subsidised raw materials.

China agreed to reduce export taxes and quotas for raw materials when it joined the WTO in 2001.

The EU and China have gone to great lengths in recent months to restate their commitment to free trade – most recently at a summit meeting last month in Prague attended by José Manuel Barroso, European Commission president, and Wen Jibao, the Chinese premier.

China ranks as the EU’s second most important trading partner, after the US. From 2000 to 2008, EU exports to China more than tripled to €78bn ($110bn, £67bn). Yet the EU’s trade deficit with China has ballooned over the same period from €49bn to €169bn.

Some Brussels trade lawyers are expecting a spike in trade complaints over the coming months as ailing European manufactures take action against perceived offences they might have tolerated in better economic times.

Friday, June 12, 2009

World Bank Downgrades Growth Forecasts Yet Again (And More Doubts on Chinese Data)

I am beginning to feel as if I am being gaslighted. For those not familiar with the reference. Gas Light was a 1930s play in which a scheming husband keeps turning the gas lights in his house up and down, then keeps telling his wife that she is crazy when she comments on the changes. He eventually succeeds in driving her nuts.

The continuing efforts to find the most positive spin in any data release and put it in headlines continues. I just looked at the New York Times and saw "US Recovery Could Outstrip Europe's Pace." The article is admittedly more measured, but the headline implies a recovery is on in both the US and EU, which is not yet a foregone conclusion.

However, to show that the picture is a tad more complicated, DoctoRX passed along the fact that the World Bank has downgraded its 2009 global growth forecast, from a 1.7% contraction to negative 3%. This is a big change, and from what I can tell, has NOT been picked up by the major media, when past World Bank forecast changes have been. It feels as if we have controlled media.

From the World Bank:
The world economy is set to contract this year by more than previously estimated, and poor countries will continue to be hit hard by multiple waves of economic stress, said World Bank Group President Robert B. Zoellick today.

Even with the stabilization of financial markets in many developed economies, unemployment and under-utilization of capacity continue to rise, putting downward pressure on the global economy.

According to the latest Bank estimates, the global economy will decline this year by close to 3 percent, a significant revision from a previous estimate of 1.7 percent. Most developing country economies will contract this year and face increasingly bleak prospects unless the slump in their exports, remittances, and foreign direct investment is reversed by the end of 2010.

“Although growth is expected to revive during the course of 2010, the pace of the recovery is uncertain and the poor in many developing countries will continue to be buffeted by the aftershocks,” Zoellick said ahead of the Group of Eight finance ministers meeting in Italy.
Separate but related is that some of the cheery data coming out of China does not bear close scrutiny. Yesterday, Bloomberg noted that car sales in China spiked. Today we learn that the definition of a "sale" is a shipmment from the factory, whether the car has a buyer or not. And the number of registrations, a much better measure of end purchases, is much lower that the supposed sales figures.

From MetalMiner (hat tip reader Michael):
There are some apparently contradictory numbers coming out of China at the moment. Take those car sales as an example. Our man on the ground tells us BYD, a noted Chinese car maker, reported 30,000 car sales of one model by end of last year, but the number plate agency recorded only 10,000 new cars of that model registered for use on the road. What happened to the other 20,000 are they running around without number plates? In a police state, I don’t think so. Our understanding is auto sales are recorded in China when they leave the factory, not when they are registered on the road, so dealers can build up inventory while car “sales” are rising.

Coming back to Mr. [Brad] Setser in a fine analysis on the impact of a fall in China’s exports he explores the apparent dichotomy of falling electricity consumption, falling industrial production and yet rising GDP. Even Mr. Setser wasn’t able to conclusively get to the bottom of that one although his overall conclusion was that the economy was growing and it must largely be on the back of domestic consumption as exports and employment remain depressed.

These disconnects call into question our tendency to take official proclamations at face value, and we should also be careful about taking one or two months data and extrapolating that to a longer term trend. In a market so heavily influenced by state controls, a short term trend can be the distorted result of government actions rather than the more reliable measure of a sum of company actions taken over an unfettered economy. Growing China certainly is a trend, but how comprehensively across the economy and how sustainably remains to be seen.
If Setser can't reconcile the data, I'd say it needs to be taken with a handful of salt.

China is on a raw materials stockpiling binge that has helped raise commodities prices around the world but is unsustainable in the long term, the NYT writes. "At least 90 large freighters full of iron ore are idling off Chinese ports, where they face waits of up to two weeks to unload because port storage operations are overflowing," it writes. Along with the iron ore, China is also hoarding aluminum, copper, nickel, tin, zinc, canola, soybeans, and, yes, crude oil. Some of the stockpiling comes in anticipation of price rises later in the year, while in the case of aluminum and canola, the Chinese government has bought huge quantities "to insulate domestic producers of these goods from falling global prices over the winter." The end result is a false dawn from the commodities sector as it looks to recover from the global economic crash. Sure enough, Chinese exporters are still feeling the pinch. According to the BBC, "Chinese exports have dropped by a record amount in May as demand for its goods from the US and Europe slumped."

 Friday, June 12, 2009

It would be folly to put all your eggs in the Asian basket


SERIOUS MONEY: Eastern economies have now found they are not immune to the worlwide fiscal malaise

WORLD STOCK markets have advanced sharply in recent months as economic data confirm that the rate of deterioration in the global economy has slowed. This has led many to conclude that the worst economic recession since the second World War is close to an end, while some have declared confidently that it is a developing Asia which will lead the global economy out of its current malaise.

Proponents of the latter view are among the same commentators who argued just 18 months ago that the developing world would prove largely immune to an economic downturn in the West. That view proved embarrassingly wide of the mark.

The latest reformulation of the same thesis conveniently overlooks the fact that a vibrant Asia is almost certain to exacerbate the very same global imbalances that contributed greatly to economic instability.

The world economy enjoyed the strongest and most sustained boom since the early-1970s from the end of 2002 through the summer of 2007, with average growth rates in GDP close to 5 per cent. The prolonged expansion however, was centred on excess production in the East – notably China – satisfying excess consumption in the West, particularly the United States. The recycling of eastern current account surpluses kept exports competitive and placed downward pressure on world interest rates that served to push asset prices higher and enabled overstretched western consumers to accommodate higher debt loads.

The production-driven economic model of developing Asia saw the export share of pan-regional GDP jump by more than 10 percentage points in less than a decade to a record 47 per cent in 2007.

Although there was a sharp rise in intra-regional trade, dependence on consumers in the developed world increased as the growth was concentrated primarily in intermediate goods, with roughly 80 per cent of the final demand stemming from the world’s largest economies.

The dependence on the West was compounded by the high investment rates in recent years, which were geared towards the satisfaction of export demand and not domestic consumption. Indeed, the region’s consumption share of GDP dropped eight percentage points in just eight years to a record low of 47 per cent in 2008.

The US consumer was the driving force behind the global economic expansion and Asia’s export boom from the mid-1990s through 2007. It continued to be the world’s “consumer of last resort” during the current cycle, in spite of modest income gains arising from sub-par employment growth and lacklustre increases in private sector labour compensation. The gains in household income fell more than $800 billion in real terms below the trajectory of the four previous economic expansions.

Sluggish income gains did not curtail American households’ free spending ways as they increasingly turned to the wealth gains on their rapidly-appreciating homes in order to keep their binge alive.

Mortgage equity withdrawals soared to more than $700 billion in 2005 or almost 9 per cent of disposable personal income. This more than compensated for the dismal increase in real labour compensation.

The increasing reliance on asset price gains saw household debt jump more than 29 percentage points relative to GDP in just seven years to 100 per cent in 2007, a level that was higher than the comparable figure on the eve of the Great Depression.

America’s worst housing recession in modern history brought an end to the asset-dependent spending binge, and real consumption expenditures contracted at an average annual rate of more than 3.5 per cent during the final two quarters of last year. Declining consumer demand in the US wrought havoc on the world economy and export-driven Asia proved particularly vulnerable with the economies of Hong Kong, Japan, South Korea, Taiwan and even China all coming to a standstill over the past six months. Exports collapsed and have remained weak through the first four months of 2009, with Chinese exports falling 23 per cent year-on-year in April as against gains of 25 per cent 12 months earlier.

Economic growth in China slowed to 6 per cent during the first three months of the year as against almost 7 per cent during the final quarter of 2008, and with more than 15 per cent of the total migrant labour pool unemployed, the Middle Kingdom responded with a tried-and-tested formula of increased infrastructure spending and credit lending, the success of which ultimately depends on an increase in the demand for Chinese goods by American consumers.

However, the rebalancing of the US economy has barely begun with the consumption share of GDP jumping to a record of more than 72 per cent in the first quarter.

America’s consumption share of GDP is clearly unsustainable given households’ overstretched balance sheets. Deleveraging by households means that consumption growth is likely to lag increases in GDP for several years – at the very least until the GDP share returns to its pre-bubble level of roughly 65 per cent. This means that China’s current economic policies could prove self-defeating as excess capacity leads to a spike in non-performing loans, which would act as a constraint on Chinese consumption – the only genuine replacement for soft US demand.

Investors are confident that the worst of the global economic downturn is over, which is hardly surprising given the magnitude of the declines in real activity over the past six months.

However, the emerging confidence has now morphed into the idea that Asia will lead the world out of its current malaise. This new formulation of the now defunct global decoupling thesis doesn’t stand up to scrutiny just like its predecessor and astute investors would be well served to ignore the dubious logic.

China Security Memo: June 11, 2009

Stratfor Today » June 11, 2009 | 2017 GMT
Green Dam

China’s Ministry of Industry and Information Technology has issued a notice, made public June 8, requiring computer manufacturers to ensure that all computers sold in China as of July 1 are shipped with a software program called “Green Dam.” The software, designed by the Chinese company Jinhui Computer System Engineering (JCSE) in cooperation with the Chinese military and security agencies, is designed to prevent “immoral material” such as pornography and profane language from being accessed on the Internet.

China often uses such measures as cover for clamping down on political dissent by blocking access to Web sites that criticize the government or attempt to organize people into unsanctioned groups. While Green Dam is being advertised as a program that will censor immoral material, it could easily be used to censor other material perceived to be hostile to the Chinese state.

China is well known for its “Great Firewall” that prevents certain material from being accessed by computers with Chinese-based IP addresses. However, enterprising computer users have managed to get past the firewall by using proxy IP addresses from other countries. Green Dam goes a step further than the Great Firewall by placing the filter inside the individual computers instead of within the country’s entire network, which means that proxy IP addresses alone will no longer allow computer users to view banned sites.

The exact wording of the Ministry’s announcement does give computer makers and buyers an option when it comes to installing the software. PC makers are required to either pre-install the software on the computers they ship to China or, at a minimum, include a CD-ROM copy of the software in the shipment. So far the software is available only as a Windows-compatible version, so not everyone who buys a computer in China after July 1 will necessarily have Green Dam software. However, public Internet access points such as schools and Internet cafes will be required to have the software on their computers. Already, some 2.6 million computers and nearly 7,000 Web sites in China are using Green Dam.

JCSE certainly landed a plum deal with the Chinese government, which, in addition to requiring the software to be included in every new computer sold in China, reportedly spent $6.1 million subsidizing Green Dam’s development. But there are likely deeper reasons for the new policy than simply giving preferential treatment to JCSE. Encouraging every computer user in China to have a common piece of software will make it easier for Chinese cyberpolice to regulate access to the Internet. Green Dam is designed to receive updates from JCSE including newly banned Web sites, words and phrases. This means that JCSE has the ability to upload information to computers using the software.

Even computer users who install the software but don’t turn it on or don’t pay for it after their free trial year will have latent software on their computers that is programmed to receive updates from JCSE. This essentially gives JCSE (and its government collaborators) a common portal into every computer that uses Green Dam. This access could be manipulated to send any number of commands to PCs around the country, from blocking certain Web sites to tracking individual activity.

The significance of the Green Dam requirement isn’t that the government is requiring PC makers to include anti-pornography software with each PC shipped to China. The more important fact is that China is encouraging its computer users to put a single, uniform piece of software on every computer they purchase. This is an unprecedented move when it comes to national cybersecurity, and regardless of the government’s intentions, the simple fact that more and more computers in China will share common software means that a gap or weakness in that software could be manipulated by a skilled hacker with very broad consequences.

When Somebody Plucked China's Peach

June 12, 2009 | 1242 GMT

Click to play

China complains of infidelity as its state giant, Chinalco, is jilted by global mining giant Rio Tinto, but it needs to look at its own standards when complaining about the morals of commercial behavior.


‘Lost Decade’ Coming for Chinese Regime?

By D.J. McGuire Jun 13, 2009

It didn’t take long after the Tiananmen anniversary to slide into the rear-view mirror for the “engagement” crowd to spin up the CCP once more—this time as the saviors of the world economy. The lead cheerleader was World Bank President Robert Zoellick, who had this to say about recent “growth” in the CCP’s realm this year (Breitbart): “By and large (China’s growth) has not only been a stabilizing force, but a force that will pull the system (out of the downturn).”

While such nonsense is not entirely unexpected from Zoellick, who prior to his current sinecure was doing far more damage as U.S. Deputy Secretary of State, it certainly was treated as heady stuff in Zhongnanhai. There’s only one problem: the CCP’s economic “recovery” is largely a regime-driven fantasy that could very well repeat Japan’s “lost decade.”

To see what I mean, let’s take a look at the recent “growth” Zoellick trumpets (Bloomberg). For starters, growth in the first quarter (January to March) was only 6.1 percent a figure that does not keep up with population growth—meaning the average resident under the CCP’s thumb grew poorer this year.

Secondly, the forces behind the “growth” should be troubling to anyone knowledgeable of recent economic history. According to Bloomberg: “China’s spending on factories, property and roads surged by the most in five years as the government’s 4 trillion yuan ($585 billion) stimulus package countered a record slump in exports …

“Since the stimulus was announced in November, the nation has built 20,000 kilometers (12,430 miles) of rural roads, 445 kilometers of highway and 100,000 square meters (1.08 million square feet) of airport buildings, the National Development and Reform Commission said on May 21. China is also building 5.2 million low-rent homes over three years.”

No growth?

In other words, regime-driven “stimulus” was the main driver; without it, there might not have been any “growth” at all. To anyone even remotely familiar with 1990s Japan, this is not a comforting development.

A slew of Japanese governments tried public works spending in a desperate attempt to pull the Japanese economy out of the ditch. It failed so spectacularly that the period is now known as Japan’s “lost decade.” Even today, the Japanese economy is still feeling the after-effects of wasted resources, mounting debt, and lost private investment.

If this is where the CCP is headed, it will be a much rougher ride.

Japan’s “lost decade” also came with unprecedented political competition. The long-governing Liberal Democratic Party actually lost power for brief intervals, and its dominance over Japanese politics was forever destroyed. Meanwhile, even within the LDP, reformers fought pitched battles for control—and sometimes actually won them. The economic doldrums brought with them a pathway to political maturity for the Land of the Rising Sun, a pathway it is still walking to this day.

The CCP, by contrast, will be in no mood for any political competition should the economy continue to stumble. Instead, we will see more arrests, more phantom concessions to protesters, and—as always when the Chinese Communist Party is involved—more bloodshed.

Even so, one would think that the CCP would find a way to muddle through, as it always has. I’m not so sure this time, and, ironically, it could be the “engagement” crew itself that has unwittingly put in motion the regime’s unexpected endgame.

What with Zoellick’s comments (which are far from isolated) there will be many in the elites of the democratic world who are expecting and hoping for CCP-fueled economic growth to pull the rest of the world out of recession. When it doesn’t happen, Beijing will be peppered with friendly advice on what to do differently. In Japan, such advice was outwardly taken with a mixture of false gratitude and real annoyance, but opposition movements within the country seized upon the admonitions of Wall Street, Washington, and others to force domestic debates.

The CCP will allow no such thing. As it slowly dawns on the “engagement” crowd that the CCP cares less for their various nations’ economies and more about preserving its own power, it could very well lose some of its strongest and most vital foreign supporters. It will certainly make the electorates in those nations far more anti-Communist in thoughts and votes.

Thus could the largest piece missing from the anti-Communist puzzle—a united free world determined to help the Chinese people take their country back—be put in place by the very people who are trying to prevent it from happening, all because no one seems to have remembered the lessons from Japan’s “lost decade.”

Those who do not remember history…

D.J. McGuire is co-founder of the China e-Lobby and the author of “Dragon in the Dark: How and Why Communist China Helps Our Enemies in the War on Terror.”

Last Updated
Jun 13, 2009

Recent China Stock Market Ralley Not Justified On Fundamentals, Even with "Growth of 7%" - Overcapacity in China: See Video-----

“Export-led model has outlived its usefulness”
Sarika Malhotra
Posted online: Jun 14, 2009 at 0110 hrs

Few have followed the Dragon trail as closely as he has. A leading economist, former merchant banker, and Professor Finance, Peking University's Guanghua School of Management, Michael Pettis has mastered the Chinese market moves well. Currently Senior Associate at Carnegie Endowment for International Peace, Washington, DC, Pettis warns that if the Chinese government begins to weaken the Yuan against the Dollar to boost exports, it might well start a trade war in an excellent way. Sarika Malhotra tries to understand the nuances of the export-laden Chindia scenario.


Exports have been the worst hit now — worst in the last 14 years for India, how much of a loss does it spell out for India and China?

The whole Chinese growth model has depended on domestic production growing faster than domestic consumption, with the balance being exported, mostly to the US. But with the necessary rebuilding of shattered US household balance sheets, for at least the next few years the US trade deficit will contract sharply, leaving China with a very large overcapacity problem that will take many years, even a decade, to resolve.


What will be the long term ramifications of the same for India and China?

As India is far less dependent on the export market and relies more on domestic consumption it will emerge from this much faster than China. It may seem counterintuitive to some, but this crisis is going to be a long-term crisis primarily for high-savings, trade surplus countries. Just look at what happened to the US in the1930s.


Given that India and China have the biggest domestic market do you think that the domestic market can compensate for the export market loss in India and China?

I don’t know about India but the process will be brutally difficult in China. They have been trying to grow the domestic market for nearly a decade but the development model has meant that consumption growth significantly lagged GDP growth. This was fine when the US was able to absorb the excess capacity, but it is not clear how they will react to a sharp rise in US savings.


Do you think stimulus packages, government spending are only stopgap arrangements to deal with the situation?

In China I would argue that they are actually making the adjustment more difficult. They continue to focus on boosting consumption by boosting production, which actually exacerbates the overcapacity problem, and by virtually guaranteeing a future banking problem with non-performing loans, they will make it very difficult for consumption to grow as they appropriate savings to recapitalise the banks.


What can be the long term measures to combat the same?

All things that hurt in the short term. Revalue the currency, raise the minimum wage, liberalise the banking system and interest rates. These are ways to boost net consumption in the medium term, but they will boost unemployment in the short term.


Given the downturn do you think it is the right time to explore newer markets for exports and which potential markets can be targeted?

No. The world has to get used to the idea that the export-led model has outlived its usefulness. The days of rapid US GDP growth and a surge in the US trade deficit from 1% of GDP to 7% of GDP (with a smaller concomitant surge in certain other western countries) are gone for a very long time.


Chinese exports are also suffering from trade disputes in the international market. Charges on dumping, subsidy are putting exports in an unfavourable condition. What can be done to remove trade barriers and facilitate the process?

It will require great statesmanship from all the major countries, which of course leaves me pessimistic. The historical precedents are pretty gloomy and I have been arguing for two years that we will see an acceleration in trade friction over the next three or four years. I don’t see how we can avoid it.


What is the equation between quality and prices that has led to a decline in exports, given that Chinese goods are often targeted as being low on price and quality as well?

I think this is less important than many people think. The reason Chinese export have declined more slowly that those of other countries have to do with policies aimed at making Chinese exports more competitive.

How much will China grow? China, the world's largest surplus country and one of the world's most export-dependent economies, faces great uncertainty about its outlook amidst the current crisis. Over forty experts offer their predictions for China's 2009 GDP growth rate.


Plunging world trade casts doubts on early recovery

David Uren, Economics correspondent | June 15, 2009

Article from:  The Australian

THE US reported last week that its imports fell another 1.5 per cent and exports a further 3.1 per cent in April. Its imports are now a massive 38 per cent or $US74 billion ($95bn) a month below their peak in July last year. Exports are down 31.8 per cent.

To be sure, the pace of decline has eased, but if it had continued at the rate recorded from July to February, the US would have ceased trading altogether by Christmas.

It is not just US imports that are collapsing -- it is everyone's. Figures for world trade volumes to the end of March show a 17 per cent fall since their peak a year earlier. This represents a massive destruction of global demand, damaging the viability of countless export businesses and adding to the bad debts of the world's banks.

The fall of world trade far exceeds the experience of the Great Depression at the same point in its downturn. By mid-1930, world trade volumes had only dropped by about 5 per cent, according to calculations by University of California, Berkeley, Professor Barry Eichengreen and Trinity College, Dublin, Professor Kevin O'Rourke.

In the 1930s, world trade crumbled in response to the infamous Smoot Hawley Act, which raised US tariffs from June 1930 and sparked tit-for-tat tariff rises from European nations and Canada. Trade volumes ultimately fell 30 per cent by June 1932.

The fall in trade has so far not undermined the consensus that underwrote the great expansion of globalisation over the last two decades, although stress points are easy to find.

When comparing the current downturn with the Great Depression in its recent global outlook, the International Monetary Fund identified the far greater global financial and economic integration now as one of the key reasons why the early fall in activity has been more acute.

The fall in trade is not just a symptom of the global financial and economic crisis, it is also one of the main channels for its propagation.

In trade, this is most obviously apparent in Asia, where globalisation brought new methods of manufacturing based on efficient sourcing of supplies from throughout the region.

Just as this accelerated the growth of trade during the era of globalisation, it is speeding its contraction now.

The early trade figures for May from China, Korea and Taiwan all show continuing weakness, with both imports and exports down between 25 and 30 per cent on a year ago. The Chinese and Korean figures were worse than the previous month. The Taiwanese were slightly better, but nothing to cheer about.

The weakness of China's total imports remains striking, given the strong growth of Australian sales to that market.

Westpac international economist Huw Mackay says that although the annual comparisons still look dire, China's imports are 12.8 per cent higher than they were six months ago, reflecting the recovery in commodity imports.

Resource sales to China are the only thing supporting Australian exports. The value of exports to China in April was 15.1 per cent ahead of shipments in September, which marked the high-water mark for Australian trade. Sales to each of the 10 next biggest markets fell heavily, dropping about 40 per cent to Japan and Korea, 30 per cent to New Zealand, Britain and Indonesia, and between 10 per cent and 20 per cent to India, the US, Singapore, Thailand and Taiwan.

Australia's motor vehicle export market has been slaughtered. Having hit peak sales of $515 million in May last year, shipments dropped to just $164m in April. All export markets are being squeezed on price and/or volume.

Mackay argues that much of the fall in world trade reflects the decision by businesses to slash production while they run down inventories, and says it will stabilise once this process comes to an end.

Countries like Taiwan, which export mainly electronic components, will recover sooner than Korea, where motor vehicles are a large part of its exports.

However, it is hard to say (particularly from the monthly price data) how much of the trade fall has been the result of inventory adjustment.

ANZ Asia economist Paul Gruenwald says that while Asian consumption has held up, investment and net exports have fallen sharply. He says weak trade figures will continue until there is a return of discretionary consumption (such as cars and flat-screen televisions) in the US and Europe.

So far, nations are keeping tolerably to the undertakings given at the G20 summit last year to avoid protectionism. There have been piecemeal measures, ranging from the "buy American" requirements in the US stimulus package, to the recent exchange of subsidies to the dairy industries of the US and Europe. Many argue that the support given to motor industries around the world is tantamount to protection.

Closer to home, Indonesia has sought to cosset its local industry with measures such as licence requirements for importers of consumer goods and steel products, while food imports are facing new restrictions. The effect on trade volumes of such measures is tiny compared with the devastation caused by the global financial crisis.

Although there have been big swings in currencies, there has been little evidence of exchange rate manipulation. China has allowed its currency to rise along with other world currencies against the US dollar over the past two months.

There have even been a few twitches in the corpse of the Doha trade round, with World Trade Organisation director-general Pascal Lamy declaring it isn't dead yet.

Australian Trade Minister Simon Crean believes the "constructive" attitude of US trade representative Ron Kirk and the new Indian Commerce Minister Anand Sharma at the recent Cairns Group meeting, at which they were specially invited guests, holds out hope.

Lowy Organisation's international economics director Mark Thirlwell says that while globalisation was booming, the gains from Doha were too small to be worth the political capital. Looking into the abyss, governments may now place greater value on the preservation of a functioning global trading system.

 Dr. Peter Morici: China and the Great Recession - - Recalibrating US-China
By Professor Peter Morici
Jun 15, 2009 - 2:40:36 AM
Together, imports of oil and from China account for 90 percent of the US trade deficit, and that deficit has averaged more than 5 percent of GDP over the last five years.


China’s Century, China’s Corruption

June 14th, 2009

Xu Zongheng has become China’s latest media spectacle in the PRC’s efforts to stamp out corruption. The former mayor of Shenzhen was stripped of his post last week and placed under investigative detention on suspicion of “serious disciplinary offenses” involving his connections with GOME founder, Huang Guangyu, who was arrested earlier this year on charges of share-price manipulation. While China’s government and business elite appear to be crumbling under the weight of newfound wealth, many Chinese citizens are voicing their anger on the internet, vilifying those who may have financially benefited from “under the table” dealings. Who can blame these web-savvy whistleblowers? Given our collapsing global economy, ostentation is in rather poor taste and will certainly fuel the flames of many who are less financially stable now than they were a year or two ago. And, in a country with an annual GDP per capita of less than $6,000 US, driving an Aston Martin or dining on bird’s nest soup for lunch in these hard times does seem well, criminal.


While the the Western world has seen its fair share of corruption scandals in recent months, China’s culture of corruption is largely unique. Guanxi, a once-benign component of China’s social fabric, may now be considered a cancer in today’s society, buying some who choose to adhere to this traditional practice a one way ticket behind bars. Confucian principles further complicate matters and, given the drastic reforms dictating China’s economic miracle, the rule of man has had to step aside to make way for the rule of law. It is more than apparent that China’s government is now scrambling for a quick fix to a problem that stands to undermine “the Chinese century” and in doing so, has adopted policies typical of other countries. But the fact of the matter is, China is largely unlike any other country in the world and their corruption complexities are beyond comparison. Here are a few reasons why:

The legacy of guanxi: China’s cultural custom of guanxi is a centuries-old practice to further networks and social standing through the exchange of gifts or services, thereby creating a chain of obligation from giver to receiver and back again. While it has been customary to secure a business dealing or government contract by nurturing relationships via these  exchanges, this ritual- intrinsic to Chinese culture- has only very recently been criminalized and the rules governing what is now unacceptable are nebulous, at best. In a country that has historically fostered this type of reciprocity, it will be very difficult to rewrite the tenets of the game and enforce those changes when many of the star players are still adhering to the old way.

Family matters: In the US, we call it “nepotism.” For China, raising the stature of a family member through existing business relationships is seen as an obligation, regardless of whether or not that family member is actually qualified for the position that he/she has been given. In doing so, insular networks are forged and strengthened to glorify the family name- an element far more important in Chinese society than individual contribution. Given this factor, it should be no surprise then that corruption is also a family matter spanning generations and thereby ensuring the legacy of a bloodline.

Privatization of state-owned enterprises: As China continues its free market transition, the liberation of state-owned enterprises has become necessary to cultivate efficiency and innovation. During these reforms, officials involved in the transfer of management responsibilities and resources have discovered an easy way to benefit by capitalizing on the lack of transparency- taking bribes and/or assets. With no one else to govern and monitor their activities, “transitional corruption” during the restructuring process is seen as a convenient way to make money, secure guanxi and maintain power simultaneously.

Wealth as a new concept: Only fifty years ago, approximately thirty million people in China starved to death as a result of the world’s largest famine to date. Today, the historical lessons of an impoverished China have been pushed aside to make room for a new chapter in China’s legacy- a story of unprecedented economic growth and self-made wealth. This century has been handed over to China. In order to make good on the expectations set forth by a global audience, grandiose displays of prosperity are par for the course. How would you feel if your Chinese neighbor, once a poor farmer, was now spending his summers on a golf course in Kinsale, Ireland? You might experience a different type of hunger. After all, “to get rich is glorious.”

Given the unique underlying characteristics that fuel corruption in China, it would be unadvisable for the PRC to model their anticorruption efforts after countries that do not possess the same factors. While many of China’s citizens are calling for efforts that will “kill the chickens to scare the monkeys” such as public execution, there is little guarantee that these extreme tactics will be effective over the long-term. After all, participation in “under the table” activities is a very low-risk activity; it has been estimated that for every 100 officials engaged in corruption, less than 3 actually receive any jail time. Under the theory that implementation of the death penalty increases crime rates and exacerbates violence overall, the following is a loose list of alternatives which, used in combination, may effectively combat corruption in China:

Defining corruption: In light of guanxi, what exactly does corruption mean? What forms of corruption are most prevalent and how are each of them defined? It is no longer enough for the PRC to declare a crackdown on corruption; clarification of corruption-related crimes should be distributed to all companies and government branches and published in mainstream media, along with mandatory classes on compliance. Reeducating an entire culture requires a massive effort that should be accessible to every individual.

Family tax: Given the importance that family holds in Chinese society and the complicit nature of “under the table” activities among members of the same bloodline, it may be sensible to impose a tax or fine on the family of an official or business professional who has been found guilty of corruption. This idea has been similarly implemented in Japan in an effort to stem suicide attempts in the subway, as railway companies may now impose steep “delay fees” on surviving family members.

Shaming Penalties: The concept of face is an integral component to Chinese society. With that in mind, printing a comprehensive daily log of names and corresponding photographs in popular local papers and on designated internet sites to identify those who have been found guilty of corrupt activities may send a stronger message than giving media coverage to only a few high-level officials who have been caught. In publicly shaming all who have been involved in “under the table” activities, the perception of corruption as a “low risk activity” is also bound to change.

Stronger extradition laws: It is estimated that over 1000 Chinese officials who have been accused of corruption are now living comfortably in the US. As it is relatively easy to purchase a visa and passport in China’s underground market, fleeing prosecution is a popular alternative over facing harsh punishment for “under the table” crimes. Without stronger cooperation between governments to extradite black collar criminals, we should expect to see those numbers increase. We live in a globalized world and China’s corruption problem has officially jumped the fence. Laws and regulations should reflect this fact.

All party accountability: Engaging in corruption is a shared activity involving those who both give and receive bribes or kickbacks. With this in mind, penalties should apply to all actors and best efforts should be made to identify each and every link in the chain.

Protect Whistleblowers: As more citizens come forward to report instances of corruption in China, another shadow economy has surfaced. Commonly known as “black jails,” these makeshift detention centers are sometimes used not to hold corrupt officials but rather those who expose their activities to local authorities. Mechanisms to protect whistleblowers must be implemented and enforced. By asking witnesses to come forward and then persecuting them for doing so, mistrust in the PRC will ultimately increase. One major indicator of corruption-rich countries? Mistrust of one’s own government.

To quote Minxin Pei, “failure to contain endemic corruption among Chinese officials poses one of the most serious threats to the nation’s future economic and political stability.” Without the enactment of laws and protocols which specifically address China’s one-of-a-kind culture and development experience, even making a dent in corrupt activities will be next to impossible.

A Letter Home From China
By Bob Bestani | Published: May 18, 2009

From Bob Bestani, on business in Beijing.
After nearly a quarter century of visiting China, this country never ceases to amaze. In the mid 1980s, Beijing was still a very gray and shockingly backwards city. Cars were few and far between; the landscape was flat with the tallest building being only six stories or so; rivers of bicycles flowed throughout the city; its very somber people were dressed in uniforms of gray, blue or green Mao suits. Peat was still the most commonly used fuel to heat homes, even though it cast a thick pall of smoke and haze over the entire city. Rickshaws were the taxi’s of the day.

Today, Beijing is a colossal international metropolis, with countless skyscrapers and modern ten lane highways that of necessity run through and around the city to serve its 17 million people. Every make and model of car has taken over the city streets. Its citizens are very brightly dressed in all the modern designer labels, and obviously happy with the prosperity they now enjoy. Every western brand of fast food restaurants, clothes, and vendors like Lenscrafters are scattered throughout this city which seems to extend out endlessly. Greater Beijing is said to be about the size of the entire country of Belgium. Perhaps most strikingly, China has this year become the largest English speaking country in the world. What a difference a quarter of a century makes!

With a total population of 1.3 trillion and a historically unprecedented level of economic growth, it is easy to see how projections suggest that China will soon be the largest economy in the world. Even in recession, China continues to grow at “only” 6% per annum. The country is sitting on over $2 trillion in cash reserves which the government is spending on yet more infrastructure projects to add a stimulus to the economy. Their banks are actively lending and their shops and malls are packed.

But looks are deceiving; just below the surface there is a quiet sense of unease. China, like virtually every country in the world, has been hard hit by the current financial crisis. Over the last twenty years millions of workers moved from the countryside to the cities. For example, one in four residents of Beijing is a migrant from the countryside. But now, tens of millions of jobs have been lost, causing yet another mass migration, this time back out to the countryside. The problems that China faces are immense and every bit as daunting as the rest of the world is today facing – even bigger and more complex. Their 6% growth rate is hardly sufficient to maintaining stability and social order.

Their problems are such that the entire system of governance that has brought them to this point is under threat. For all of our problems, President Obama and Joe Biden do not have wake up in the morning worried that the legitimacy of the Presidency is at risk.  Hu Jintao and Wen Jiabao must worry about the future of the Communist Party. For decades now, the Chinese social contract has been very simple: we will give you economic prosperity – you keep quiet about political issues. While the next few years should remain calm, the clouds are there on the horizon.

For one thing the Chinese are coming up on a leadership change which is something that they have yet to make an orderly process. This coming transition looks to be, for a variety of reasons, a bigger and thus potentially more disruptive transition than they have seen in quite a while. That new leadership will have a myriad of serious problems to work through.

Consider only few of their major problems:

Highly Bureaucratic Governance

Given the Communist nature of their governance, all decision making remains top down. There is very little reward for pushing the system from below or seeking new and innovative ideas. This makes Chinese decision making highly sclerotic and slow. In these modern times, decision making must be fast and nimble. Right now they have hit on a formula which is working brilliantly and they are racing straight down that road. But when the road turns, as it surely will in time, will they be able to steer a new direction to stay on course? The Japanese ran off their road twenty years ago and their social and political ridgities are such that they have yet to find a new and successful direction.

State Owned Enterprises

Over the last thirty years, China has largely opened up their economy to the world and has done an extraordinary job of using the very cheap labor of their population to supply the world with very inexpensive goods. But this is still very far from creating a robust market based economy. Flexibility, innovation, marketing and quality control are still very far off. The bulk of the economy is still based on the state owned enterprises – which share all of the decision making rigidities of the broader government discussed above. Moreover, they are not being managed the basis of sophisticated production management techniques. Funding is also very rudimentary, governed largely by fiat thru the state owned banks.

Endemic Corruption

By all accounts including their own reporting, China has a very serious corruption problem which is seriously undermining the efficiency of their economy. Much of this corruption is official with an estimated 10% of the economy being lost in kickbacks, pay-offs and bribes. The Carnegie Endowment recently issued a report by Minxin Pei, an expert on economic reform and governance in China which stated that such corruption was one of the underlying causes of social tension, inequality, the rule of law which in turn threatens future investment activity and environmental protection. The root causes for China’s rampant corruption are numerous but they include partial economic reforms, lax enforcement efforts, and the reluctance by the Communist Party to adopt political reforms, which cause considerable economic losses and jeopardizes the countries financial stability.

Although the Chinese have some 1,200 separate laws to mitigate corruption, it is estimated that the odds of getting caught and prosecuted are less than 3% making such corruption a low risk, high reward undertaking. Thus, corruption is occurring even at the lowest levels and has been rising at exponential rates.
Social Unrest

The government actively exercises its right of eminent domain and is very heavy handed at moving people and communities when new factories, roads or malls “need” to go up. People are readily shunted aside with little deference to their property rights – which often take a very distant backseat to the needs of the government or national growth. Such policies are creating massive social problems. As a result, public protests rose by 50% last year. According to official government statistics there were some 87,000 violent protests and demonstrations in the country in 2005, the last year these figures were released. Chinese official statistics are notoriously inaccurate, designed to show the government in a good light. This leads one to believe that the true statistics are much higher. But certainly these figures are continuing to grow.

Massive Environmental Problems

China’s breakneck economic growth has had a devastating impact on the country’s environment. In many inland cities, the air and water pollution are at staggeringly high levels. China now has the highest number of annual deaths triggered by air pollution. By many independent assessments, if the cost of cleaning up the environment is factored back into the equation (the so called Green GNP) China is actually not growing at all, or even slipping backwards. The day of reckoning will come and China will one day need to come to grips with these issues. Unfortunately, the social and political needs associated with growth are such that those issues are being pushed down the road for the time being.


The environmental and social problems are having a devastating impact on the healthcare needs of the nation. Even the wealthier segments of the society are struggling within this system. Indeed, it has been reported that 67% of millionaires surveyed say that they are sacrificing health for money. Yet the government has not invested adequate monies to this sector and healthcare is something that most people are forced to bear largely on their own. Healthcare insurance is largely unknown. Moreover, there is no transparency to the system. Since the vast majority of the country’s hospitals are government owned and run, doctors are glorified government bureaucrats. To encourage proper attention, surgeons expect “tips” from their patients. But how much does one dole out to have the proper effect?

Graying Population

In order to rationalize the old ways of the Communist Party and the new orthodoxy, the official party line these days is that Mao was 70% correct and 30% wrong in his policies. But where was he right and where was he wrong?  Arguably, Chairman Mao’s biggest mistake was not the Cultural Revolution or the Great Leap Forward. The social cost of those disastrous social and political policies has now dissipated with time. But his active efforts to increase the country’s population has had the most profound and long term impact. China must now and forever deal with the over population that exists. In order to do so, post Mao China instituted the famous one child policy. While hard to properly enforce, it has had the effect of “encouraging” the birth of boys and thereby creating a socially unhealthy shortage of marriage partners. Moreover, in twenty years, the rapid graying of China’s population will have a disastrous impact on China’s future prosperity. The imbalance will create an enormous economic burden on future generations.

Massive Income Disparity

China’s breakneck growth has brought with it a steep and growing income disparity. Urban Chinese workers earn more than three times as much as those in the rural areas, the highest income gap since the start of the reforms in 1978. The Gini coefficient is a measure of statistical dispersion, commonly used as a measure of inequality of income distribution or inequality of wealth distribution. It is defined as a ratio with values between 0 and 1: A low Gini coefficient indicates more equal income or wealth distribution, while a high Gini coefficient indicates more unequal distribution. 0 corresponds to perfect equality (everyone having exactly the same income) and 1 corresponds to perfect inequality (where one person has all the income, while everyone else has zero income).

A research by the Chinese Finance Ministry has concluded that China’s Gini Coefficient stands at 0.46, which is well above the internationally recognized warning line of 0.4.  Most developed European nations and Canada tend to have Gini indices between 24 and 36. In a country which has a Communist expectation of social equality, this disparity has sparkled widespread concern over the inequality in income distribution and the possibility of serious social turbulence and economic turmoil.

Export Driven Economy

Economists have long regarded exports as sign of economic strength. But as Paul Krugman’s Nobel Prize winning work has shown, this is putting the cart ahead of the horse. The real advantage of trade is that it lets countries import what they need. China has benefited greatly from its export of manufactured goods. Yet it has also become captive of international markets. As the international slowdown has shown, China’s lack of a vibrant internal market has put it at the mercy of the rest of the world. If the economic crisis we are today encountering persists, it will have a very troublesome impact on China’s economy in the future.

In short, there are real clouds on China’s horizon. As Americans we are pleased to see China adopt the “capitalist road.” But at the same time, we are concerned about China’s rising economic and political might as an offset to our own. While we are right to be considering the implications of the rise of China into modernity, it is not at all assured that that rise will go smoothly or that it will propel China into the status of a superpower as some believe. Only time will tell.


Making sense of 'mass incidents'
  • Source: The Global Times
  • 20:15 May 30 2009

As “mass incidents” inevitably rise in China, both independent experts and advisors to the Chinese government are arguing for more enlightened measures to handle them.

“Mass incident” is the official Chinese euphemism for a protest, riot, demonstration or mass petition. According to official figures, 8,700 separate incidents occurred in 1993, and that number rose ten times to 87,000 in 2005 and to over 90,000 in 2006. The riot in Weng’an of Guizhou Province in July last year is widely recognized as one of the most violent and influential.

In his book New views on mass incidents – lessons from the Weng’an incident July 28 published in April, Liu Zifu, former director of Guizhou Bureau of Xinhua News Agency, explores the many local and larger reasons behind the riot and his experiences in dealing with it.

China’s most important thinktank – the Chinese Academy of Social Sciences (NASDAQ:CASS), an institution affiliated with the State Council – also published a report on Chinese legal developments last month, in which the authors analyzed the causes of last year’s mass incidents. They strongly advocate caution in dealing with them.

When there is widespread hatred of the rich and the empowered, Weng’an or similar incidents will occur sooner or later, according to a commentary by Li Deming on the People’s Daily website.


To explore countermeasures against mass incidents is an important topic for the ruling party and the government. It would be meaningful for Party members and government officials, especially at grass-roots levels, to solve social conflicts and deal with public crises, wrote Ma Ya in Phoenix Weekly magazine.

Mass incidents on the Chinese mainland can be broken into two types, according to a CASS sociologist and researcher. Some are sparked by minor events, said Shan Guangding. An example might be a fight or a traffic accident between a government official and an ordinary citizen that then escalates into something involving thousands of people.

This type of incident has no obvious specific purpose or premeditated organization. Mostly such moments simply offer an excuse to unleash pent-up anger or resentment, according to Shan. The Wanzhou incident in Chongqing in 2004 in which 10,000 rioted after an official and his wife had beaten up a humble porter or a “bang bang”, was of this type, according to Shan.

Then there was the other kind: not sudden, not disorganized, and often involving long-term economic interests. Ninety thousand demonstrated in the city of Hanyuan in Sichuan Province after they had been ordered to vacate their homes to make way for construction of a new hydroelectric plant. They demanded better compensation.

The Weng’an incident was a hybrid mixture of the two, he concluded. For that reason and others, Weng’an is destined to be remembered as a model of how the Chinese Communist Party deals with a typical “mass incident”, said Liu.

“It seems accidental, but in fact it was inevitable,” said Shi Zongyuan, Party Secretary of Guizhou Province. About 30,000 were involved in the protest on July 28 in Weng’an over an official mishandling of a 16-year-old schoolgirl’s death.

Protestors set fire to 160 offices of the local Communist committee and government buildings, looted official property and destroyed 22 police vehicles.

Li Shufen had been found dead in a river midnight, July 22 last year. The girl’s family believed she was raped and murdered by two men accompanying her that night before being thrown into the river. One of the men was said to be the son of a local official.

Unsatisfied with the police report which concluded Li had committed suicide by drowning herself, relatives blamed the police for a corrupt, shoddy investigation. Li’s uncle, local teacher Li Xiuzhong, was beaten when he questioned the police. The riot occurred on July 28, the same day as police asked Li’s family to remove her body from the riverside.

Authorities rounded up 234 people accused of taking part in the riot and arrested 117. Several local officials, including Weng’an’s Party chief, have since been dismissed for breach of duty.


Party secretary Shi, an important figure in Liu’s book, said that behind the girl’s death simmered unaddressed, deeper problems including disputes between mine owners and farmers, between local government and migrants in Weng’an. These issues, deep and with profound implications, would escalate into a full-scale riot involving more than 30,000 people.

Weng’an’s GDP had doubled between 2000 and 2007. Fiscal income increased almost three times during that period, according to Liu. Mining entrepreneurs and local government officials grew rich at the same time as local people lived on in misery, failing to benefit from any improved economic largesse, Liu claimed in the book.

Mining in Weng’an also blocked the villagers’ drinking water, forcing them to drink water drawn from ditches tainted with garbage. In response, the local government in May 2007 spent 700,000 yuan ($102,500) on a new drinking water project, without any results.

Mining near the villagers’ houses caused cracks in their homes, but only 70 of 1,000 affected households were reportedly compensated. The mining company repaired a dozen.

Villagers also had to borrow money at high interest to pay for their children’s schooling, said Liu, a veteran journalist based in Guizhou for over two decades.

Liu cited an official who had been transferred from Longli County to Weng’an: for every 10 Weng’an officials, the official said, seven or eight were involved in business or setting up a business.

Economic unfairness and growing social inequality were the root causes of a growth in protests, both Shi and Liu agreed.

“China has entered a golden age of economic development,” said Liu. “Meanwhile it is also a peak time for societal contradictions.”

The Gini coefficient measures the widening gap between the rich and the poor. China’s figure since 2000 has been higher than 0.4 percent, the international alarm level. When the coefficient hits alarm levels, social stability is endangered, said Li Yingsheng, a sociology professor with Renmin University of China.

Hatred towards the rich among everyday Chinese people reflected a hatred for unfairness in society, according to Mao Shoulong, professor at Renmin University of China.

Land grabs

Local governments who sequestered land or property from their own people were the spark behind many a mass incident, the report found. Local governments often overemphasized ecnomic development at the expense of their public service responsibility, it concluded.

The academy report mentioned more than 30,000 illegal land grabs involving more than 220,000 hectares last year. Land disputes have become the prime problem affecting the stability and development of rural areas.

Conflicts over land requisitions and the operating rights of contracted land as well as disputes between capital and labor will become increasingly significant, said Yu Jianrong, a researcher with the Rural Development Institute at CASS.

“Only when things become big trouble are problems solved in China,” said Ding Gang, a senior editor at People’s Daily in Beijing. “That proves something is wrong with the management mode.”

China’s “social management mode” – the official euphemism for government’s handling of society – should be reformed, said Ding. Government should research problems to prevent them escalating into mass incidents.

To reduce complaints, government should switch its focus from economic development towards the welfare of its people, Liu suggested.

Liu advocated democratic supervision to reduce mass incidents.

“The absence of effective democratic surveillance caused the accumulation of a large number of complaints,” Liu reportedly said in an interview with Phoenix Weekly.

“Power without supervision surely produces corruption. The ruling party should have their rights effectively supervised,” he said.

“Bureaucrats shield one another, and Criminal Law should not be applied to senior officials” is part of ancient Chinese officials’ culture, Liu wrote in the book.


To prevent officials ignoring or damaging people’s interests, the people should become involved in selection of officials, Liu also suggested.

“Only when people are fully involved in the selection of officials will those selected officials be responsible to the people,” he said.

Neither Liu nor CASS saw mass incidents as overtly political in nature, meaning there was nothing premeditated against the central government or the leadership of the Communist Party.

Most mass incidents were targeted at companies, “the haves” or the improprieties of local governments. Unrest was isolated and uncoordinated, said Shan.

Stereotyped methods of tackling mass incidents – defining protestors as “anti-government” or “anti-Communist Party” – are wholly discredited according to these policy advisors.

“Many of the protestors were only making justified demands. The majority of those involved have no such political purpose as subverting the Communist Party or the Government at all,” said Liu.

Shan attacked the time-honored practice of regarding all protestors as malicious or misled, all protests as premeditated political movements, saying these approaches provided political cover for local authorities wanting to crack down on dissent.

Conflict escalated when authorities adopted an overly tough approach or suppressed information. The CASS report cited Minister of Public Security Meng Jianzhu as saying that in dealing with mass incidents, the police force, weapons and enforcement measures should be exercised with caution, and the flow of information should be improved.

Both Yu Jianrong and Shan predict more mass incidents in 2009 and beyond.

“We should be fully prepared for more mass incidents in China,” said Shan. “Complaints about social inequalities, criticism of official corruption and hatred towards the unscrupulous rich are still so intense in many regions.”

Report defines main causes of mass incidents

Causes of “mass incidents” such as the Weng’an riot are outlined in a recent Chinese Academy of Social Sciences (CASS) report.

According to the report, most riots occur for six key reasons:

1. local government snatching land or property from its local populace;
2. China’s widening gap between rich and the poor;
3. dissatisfaction over unfair distribution of wealth and its associated unjustified richness;
4. violation of people’s economic interests and democratic rights;
5. individual inability to find a method of effective arbitration for protecting their interests;
6. inflexibility of “social management mode” – government’s handling of society – allied to an increasing popular awareness of democracy.


China's attack on democracy - and U.S. trade

Greg Autry,Peter Navarro

Friday, June 12, 2009



June 18, 2009
Op-Ed Columnist

Tear Down This Cyberwall!

The unrest unfolding in Iran is the quintessential 21st-century conflict. On one side are government thugs firing bullets. On the other side are young protesters firing “tweets.”

The protesters’ arsenal, such as those tweets on, depends on the Internet or other communications channels. So the Iranian government is blocking certain Web sites and evicting foreign reporters or keeping them away from the action.

The push to remove witnesses may be the prelude to a Tehran Tiananmen. Yet a secret Internet lifeline remains, and it’s a tribute to the crazy, globalized world we live in. The lifeline was designed by Chinese computer engineers in America to evade Communist Party censorship of a repressed Chinese spiritual group, the Falun Gong.

Today, it is these Chinese supporters of Falun Gong who are the best hope for Iranians trying to reach blocked sites.

“We don’t have the heart to cut off the Iranians,” said Shiyu Zhou, a computer scientist and leader in the Chinese effort, called the Global Internet Freedom Consortium. “But if our servers overload too much, we may have to cut down the traffic.”

Mr. Zhou said that usage of the consortium’s software has tripled in the last week. It set a record on Wednesday of more than 200 million hits from Iran, representing more than 400,000 people.

If President Obama wants to support democratic movements on a shoestring, he should support an “Internet freedom initiative” pending in Congress. This would include $50 million in the appropriations bill for these censorship-evasion technologies. The 21st-century equivalent of the Berlin wall is a cyberbarrier, and we can help puncture it.

Mr. Zhou, the son of a Chinese army general, said that he and his colleagues began to develop such software after the 1999 Chinese government crackdown on Falun Gong (which the authorities denounce as a cult). One result was a free software called Freegate, small enough to carry on a flash drive. It takes a surfer to an overseas server that changes I.P. addresses every second or so, too quickly for a government to block it, and then from there to a banned site.

Freegate amounts to a dissident’s cyberkit. E-mails sent with it can be encrypted. And after a session is complete, a press of a button eliminates any sign that it was used on that computer.

The consortium also makes available variants of the software, such as Ultrasurf, and other software to evade censors is available from Tor Project and the University of Toronto.

Originally, Freegate was available only in Chinese and English, but a growing number of people have been using it in other countries, such as Myanmar. Responding to the growing use of Freegate in Iran, the consortium introduced a Farsi-language version last July — and usage there skyrocketed.

Soon almost as many Iranians were using it as Chinese, straining server capacity (many Chinese are wary of Freegate because of its links to Falun Gong, which even ordinary citizens often distrust). The engineers in the consortium, worrying that the Iran traffic would crash their servers, dropped access in Iran in January but restored it before the Iran election.

“We know the pain of people in closed societies, and we do want to accommodate them,” Mr. Zhou said.

China is fighting back against the “hacktivists.” The government has announced that new computers sold beginning next month will have to have Internet filtering software, called Green Dam (the consortium has already developed software called Green Tsunami to neutralize it). More alarming, in 2006 a consortium engineer living outside Atlanta was attacked in his home, beaten up and his computers stolen. The engineers behind Freegate are now careful not to disclose their physical locations.

Granted, these technologies are not a panacea. One Chinese journalist estimated that only 5 percent of the country’s Netizens use proxy software, and the Iranians themselves managed a grass-roots revolution in 1979 without high-tech help. And at the end of the day, bullets usually trump tweets.

Still, it does make a difference when people inside closed regimes get access to information — which is why dictatorships make such efforts to block comprehensive Internet access.

“Freegate was a kind of bridge to the outside world for me,” said a Chinese journalist with dissident leanings, who asked not to be named. “Before accessing the Internet through Freegate, I was really a pro-government guy.”

Human-rights activists from Cuba, North Korea, Syria and elsewhere have appealed to Congress to approve the $50 million Internet freedom initiative, and Tom Malinowski of Human Rights Watch says he supports it as well.

The Obama administration has been quiet on the proposal. For Mr. Obama, this would be a cheap and effective way of standing with Iranians while chipping away at the 21st-century walls of dictatorship.


It's becoming a regular spectacle: American government officials such as Treasury Secretary Timothy Geithner and corporate executives like Yahoo co-founder Jerry Yang are forced to kowtow to Chinese government demands. The latest humiliation involves Beijing's edict requiring all computer manufacturers selling into China to include Internet censorship software made in China.

From a free-trade perspective, Beijing's "Net nanny" edict is yet another brick in China's Great Wall of Protectionism. In fact, China has a long track record of using unreasonable regulatory and technology standards to block foreign access to its markets. (A poster child for this is China's inferior, homegrown 3G standard that has cost foreign cell phone manufacturers a large share of that market.) In this case, Beijing's gambit steals a market segment from U.S. software companies (such as McAfee, Symantec) while strategically aiding China's PC-builder, Lenovo, at the expense of U.S. computer-makers Dell and Hewlett-Packard. Lenovo will certainly abide by the mandate, but American executives must either accede to Beijing's demands or lose out in the world's fastest-growing market.

The dilemma facing Dell and HP is just one more reason why the United States should be wary of selling off corporate assets to China. If IBM hadn't sold its PC business to Lenovo, American computer-makers could present a united front and resist this protectionist mandate. Now, Dell and HP executives have little choice but to bow to Beijing, and both free trade and corporate ethics will be much the worse for it.

From a free-speech and human rights perspective, Beijing's Net nanny directive is also another virtual brick in the Great Firewall of China - the most omnipotent Internet censorship tool on the planet. This "Golden Shield" runs 24/7 to hunt down, prosecute and jail all manner of political and religious prisoners - as many as 2 million Chinese citizens suffer in China's gulags, and many only because they ran afoul of the Great Firewall. Most recently, in an impressive display of its cyber might, the Great Firewall locked down much of the Internet during the 20th anniversary of the Tiananmen Square massacre.

In fact, this Great Firewall was built with the technology provided voluntarily (and very profitably) by American companies such as Cisco and Skype. However, other companies such as Google and Yahoo were publicly forced to collaborate in censorship as a quid pro quo for the opportunity to play in the Chinese market.

In considering their response to China's latest demand, Dell and HP execs - along with the U.S. government officials - must consider the far-ranging implications of what is being laughably propagandized as a fight against pornography. The real insidiousness is that the innocuously named "Green Dam Youth Escort" has the potential to be far more than a passive lock like the one for TVs used to protect your kids.

Indeed, it's far more likely that over time, this Net nanny software will become more and more interactive in ways that would make even George Orwell flinch. Green Dam may be nothing more than a Trojan horse that Chinese officials will use to install further surveillance tools using the same "automated update" process you've seen on your own computer to bring new features to programs like Windows and iTunes.

As the software moves from Version 1.0 to 2.0 and beyond, the most obvious danger is that such updates can be used by the Chinese government to very effectively increase the scope of censored words and images far beyond the pornography at which Chinese officials claim it is aimed.

A bigger worry is that the software will go beyond simply blocking queries of forbidden words like "democracy", "freedom" and "religion." It might also report the perpetrator's attempts to exercise free thinking to China's vast army of cyber-cops - an army already numbering well over 30,000. Once the software graduates to proactive snitch, the efficiency of China's censorship efforts will be greatly enhanced. Even if this isn't done, a wary Chinese public will assume it is. It will take very brave students to type "Bill of Rights" into the search engines from their home PCs.

Updated versions of Beijing's Net nanny may also be able to install all manner of other Trojan devices (see "Green Dam 2.0"). These range from keystroke-logging programs and file scanners to the capability of spying on people with their own Webcams. It may even include trapdoor access to allow cyber-cops and secret police to roam freely through people's financial, political and personal lives. The bottom line here is that every time China imposes yet another such edict on American companies or the U.S. government, it not only presents our leaders in Washington with another difficult economic, moral, and ethical dilemma, it also exposes American weakness on a whole range of policies related to China.

Putting this weakness in its starkest terms, the U.S. government is desperately dependent on China to fund its budget and trade deficits and thus lacks the courage to challenge China on any topic. Likewise, American corporations desperate for entry into China's markets will bow to any demand - ethics be damned.

This is not free trade and a path to international peace. It is merely the death of economic prosperity and democratic freedoms by a thousand humiliating cuts.

Green Dam 2.0A few scenarios, from bad to worst case:

To avoid a ruckus, the People's Republic of China might start with repressive policies with unpopular targets such as gambling or pornography before moving onto more controversial items. Thus, Green Dam 1.0 may be rather toothless, but, like any software that uses automatic updates, Green Dam will surely be "upgraded" to address other government concerns. Likely directions it may take:

Expanding to political speech - Extremely likely, consider the co-opting of Yahoo, Google, et. al.

Disabling access - Very likely. Even in a Western hotel in China, browsing to a "harmful" site like those discussing press freedoms, or anti-China views, will result in a temporarily disabled Internet connection.

Reporting access - Very likely. Thousands of "minders" already monitor e-mail and phone calls. The Chinese version of Skype scans messages for political content and logs offending messages.


File scanner - Likely. A "helpful" virus scanner-like update could scan your files for content and report.


Keystroke logger - Possible. Monitors your typing in all applications.

Remote control - Possible. Just like "remote assistance" help desks use to debug your PC. Could allow cyber-cops to browse through PCs undetected.

Webcam / microphone spy - Possible. Big Brother PC records your conversations and sends them to the cyber-cops.

- Greg Autry

Greg Autry is a Ph.D. student of public policy and economics at the Paul Merage School of Business at UC Irvine. Peter Navarro is a business professor at the Merage School, a CNBC contributor and author of "The Coming China Wars."


 ‘Bubble of Belief’ in China Economy Seen Bursting: Chart of Day

By David Wilson

June 17 (Bloomberg) -- Rallies in commodity prices and mining-company shares stem from a “bubble of belief” in China’s economy that is likely to burst, according to Albert Edwards, a strategist at Societe Generale.

“I believe we will look back on the Chinese economic miracle as the sickest joke yet played on investors,” Edwards wrote yesterday in a report. To support his argument, he cited falling earnings at the country’s industrial companies.

The CHART OF THE DAY shows year-over-year percentage changes in profits, as compiled by China’s National Bureau of Statistics. The chart combines monthly data from 2005 and 2006 with a quarterly index, started in 2007, that tracks companies in 22 provinces. This quarter’s report is set for June 26.

Commodity prices climbed 21 percent this year through yesterday, according to the UBS Bloomberg Constant Maturity Commodity Index. Mining stocks paced a 23 percent gain in the MSCI World Materials Index, the year’s top performer among 10 industry groups in the MSCI World Index.

While the Chinese economy expanded 6.1 percent in the first quarter from a year earlier, Edwards wrote that he was skeptical about its ability to sustain that level of growth during a global recession.

“The bullish group-think on China is just as vulnerable to massive disappointment as any other extreme example of bubble- nonsense I have seen over the last two decades,” his report said. “The fall to earth will be equally as shocking.”


Edward Albert Warns of “China Bubble”June 17th, 2009 by roylat



Regular readers will recall that I am a great fan of Edward Albert and James Montier. Not only did they predict the financial meltdown of 2008 early in the year, when most were still bullish, but they explained accurately the underlying mechanisms that would cause it. Early this year, Mr. Albert argued that the Chinese economy was headed downward far more seriously than the prevailing opinion.

As the year progressed, China has been increasingly viewed as the great success story of the world economy. Mr. Edwards, has reiterated and increased his warnings about China in a recently released report. If he is correct, the bursting of this bubble will be the impetus to bring the S&P 500 down to the 500 level (40% below current level) that he has been forecasting.

Here is a writeup of his report by Zero Hedge:

Wednesday, June 17, 2009


Soc Gen: "Expect New Equity Lows In H2", China Is The Global Achilles Heel

Posted by Tyler Durden at 1:35 PM

Just released, a new and highly relevant Weekly Strategy report out from Albert Edwards of Societe Generale. Not only does Edwards, who was previously vilified then praised for calling the 1997 Asian Bubble, see a significant drop in equities before the end of the year, his main concern is every optimist’s greatest green shoot: China.

Most areas in the markets have now discounted a V-shaped recovery. Any doubt will trigger a rapid reversal in prices. I continue to be extremely sceptical and see recent events as part of a 1930s-like, long march to revulsion. Talking about long marches, nowhere in the world fills me with more scepticism than the Chinese economic recovery. The continued enthusiasm for all things China reminds me so much of the way investors were almost totally blind to the fact the US growth miracle was built on sand. China could be the biggest disappointment yet.

Edwards follows up with some very amusing observations on mass delusions:

It is amazing how easily group-think takes a vice-like hold in the financial markets. As the BRIC economies meet for their debut summit, few dare to speak out against the new, ‘New Paradigm’. We also saw this same investor mania 13 years ago with the Asian Bubble, which the consensus thought was a growth miracle. But to go that far against the consensus invites a deluge of hate mail. That is why I keep a copy of a World Bank book entitled Thailand’s Macroeconomic Miracle: Stable Adjustment and Sustained Growth It was published in October 1996, less than a year before Thailand’s (and Asia’s) economic collapse. It is all too easy for investors to buy into beguiling ‘growth’ stories which are in fact utter nonsense. If the bubble of belief in China’s medium-term growth prospects finally bursts it will have huge investment implications. I will be writing far more about this subject over this summer. But one thought, if China is doing so well how come Chinese company profits in the year to April are down some 30% yoy (see chart)?


SG have an excellent Asian economist, Glenn Maguire, who, unlike me, has been totally right about the recovery in the Chinese data this year (e.g. for example his Asian Economic Scrapbook – link). But it was notable that when the 6.1% yoy rise in Q1 GDP was published he said the real outturn was actually more like 3.5% yoy, but that the authorities “smooth” the data at turning points. Let me put that into plain English. The Q1 6.1% GDP outturn is simply a lie - and it helps explain why the Chinese data is derided by so many economic commentators. Many have highlighted that the GDP seems inconsistent with other data such as electricity output. This latter series remains weak. In May it declined 3.2% yoy and by 3% on the smoothed basis.

Yet few dare to point out that the emperor’s clothes might be absent. When, for example, the International Energy Agency had the temerity, a few weeks back, to suggest that the Chinese authorities were inflating the data (link), they were met with a robust broadside from the Chinese National Bureau of Statistics. The NBS said on its website "“It is regrettable that the point of view in the original article is groundless……We believe that, for an international organization, this approach lacks seriousness”"– link. I think this is a case of me thinks thou doth protest too much. Nevertheless, an article on Radio Free Asia reported that The National People’s Congress had found “serious fabrication” in official statistics – link and link.

The China doomsday scenario is nothing new, although mocking Edwards would be deja vu (and reckless) based on his prior correct prognostications. Furthermore, it is in both the US and China’s interest to perpetuate the con game that everything in either country is fine. Yet the truth is that the economies of both countries are accelerating their deterioration, yet the respective governments, in an attempt to hold the wool over everybody’s eyes, will be unable to do anything to really address the issue, until in tried and true fashion, it is much too late.

Instead of feigning concern over declining 401(k)’s and the lack of Joe Sixpack’s latest credit fueled Plasma TV spending spree, our President should address every single weakness that America is suffering from, highlight it, and provide realistic alternatives to fix it, instead of betting the farm on increased leverage and speculative second derivatives of hope. The same goes double for our biggest creditor, although both imploding at the same time due to a disconnect between reality and perception, would have a poetic symmetry to it.

I agree completely with the first sentence of last paragraph. As big a fan as I am of Obama on most fronts, I find it increasingly difficult to overcome my distaste for his approach to economic “salvation” so pointedly skewered by the author of the above post, Tyler Durden.


Oil at $250 Is Pipe Dream Without Chinese Boom: William Pesek

Commentary by William Pesek


June 19 (Bloomberg) -- Green shoots could be great news for black gold.

That is how some traders are reading signs that global growth is returning. They are bidding up the prices of oil and other key commodities, and there are two primary reasons: U.S. stimulus efforts and China. Optimists may be wrong on both accounts, particularly the latter.

Expectations of a quick U.S. rebound cooled in the last 10 days. U.S. stocks slumped this week after Standard & Poor’s downgraded the credit ratings of 18 banks. Optimism is still coursing down Wall Street, though, that the worst is over.

The more obvious area of misplaced cheer is Asia’s second- biggest economy. China bulls argue government largess will not only boost Chinese growth, but global demand, too. In this scenario, recent gains in commodity prices will be sustained over the next few years. Things may be more complex than that.

“The reality is not so rosy,” says Jamie Dannhauser, an economist at Lombard Street Research in London. “Exports show no sign of life and the increase in domestic spending reflects a massive state-led program of raw material stockpiling -- hardly the foundations for sustained gains in domestic final demand in an export-dependent economy.”

Oil Forecast

Commodity prices were a key issue this week when the leaders of Brazil, Russia, India and China, the so-called BRICs, met in the Russian city of Yekaterinburg. Steady increases in costs will undermine their development efforts. Recent comments by Alexei Miller, deputy chairman of OAO Gazprom, about oil reaching $250 a barrel were also probably on officials’ minds.

Miller first made that forecast last year, before it was clear that the collapse of Lehman Brothers Holdings Inc. was an omen of global chaos. On June 9, Miller said recent market turmoil “does not mean our forecast was unrealistic.”

Imagine how $250 oil would hurt rich economies such as the U.S., Japan and Germany, never mind Thailand or Vietnam. Watching how the Federal Reserve, Bank of Japan and Bank of England are shoveling liquidity into global markets, one can’t help but wonder if crude oil -- now priced at about $71 a barrel -- will rise further.

Also, China aims to diversify its $2 trillion of currency reserves away from the dollar. Along with buying other currencies, says investment strategist Simon Grose-Hodge of LGT Group in Singapore, that may mean stockpiling commodities. China “will keep a very large reserve of oil,” Grose-Hodge says.

Driving Growth

China’s ability to drive global growth is more limited than many investors realize. In a June 16 report, Albert Edwards, a London-based strategist at Societe Generale SA, argued that a “bubble of belief” in China’s outlook is likely to burst and end rallies in commodity prices and mining-company shocks.

“We will look back on the Chinese economic miracle as the sickest joke yet played on investors,” Edwards wrote.

That may also explain why some oil-industry bigwigs are dismissing Miller’s $250 forecast. Peter Sutherland, chairman of BP Plc, called it an “apocalyptic” claim, the London-based Times reported on June 11. That’s strong language, and from Europe’s second-largest oil company.

Of course, any argument for skyrocketing oil prices has some basis in China. With most of the world’s biggest economies in recession, attention is turning to Asia. China, along with India, is among the few bright spots on the growth front. China is expanding more than 6 percent, India slightly less than that.

Chinese Challenges

China’s sheer size and level of development put it at the core of any commodity-price speculation. Petro-states have lots riding on whether officials in Beijing can maintain rapid growth. And to China’s credit, they acted quickly and assertively to stabilize their domestic economy.

Looking at the breakdown of import data, though, much of China’s demand is for raw materials -- not final goods that households might buy or parts used to assemble exports. That means China’s growth may be doing more to prop up despotic African governments than other nations’ economies are.

Without a snapback, especially in the U.S., China will be hard-pressed to grow at 6 percent or faster on a consistent basis. If it can, is that expansion rate in a $3.2 trillion economy enough to fill the global void? It’s simply not. And a U.S. recovery may be farther away than economists say.

Policy makers won’t be spending much time in the short run retooling China’s lopsided economy. Without national safety nets for the unemployed, the household savings rate will remain absurdly high. The impediments to developing a stronger domestic economy are structural and formidable.

China’s 4 trillion yuan ($585 billion) stimulus plan certainly helps, yet it’s not a long-term growth strategy. If global growth doesn’t return soon, today’s public spending may morph into tomorrow’s bad loans. A deflationary cycle may even hit China.

It’s possible all that liquidity sloshing around the world will boost commodity prices. Those betting a Chinese boom will get us to $250 oil should get used to disappointment.

CHINA REAL ESTATE STORYBy Terence Doherty, guest author

Here’s some recent news about the real estate markets in China. I think it is fascinating watching how these things unfold. This proves once again that the lesson of history is that we don’t learn the lessons of history.

I predicted over 2 years ago that the Chinese stock markets would implode dramatically, much to everybody’s disbelief and skepticism. It began a few months sooner than I predicted, but, that is exactly what has happened. Now for the last year or so, I have predicted that things will get VERY bad in the Chinese real estate markets over the next several years. Again, most people I have talked to about this (especially Chinese) have almost universally dismissed this notion as absurd.

But this is not just a guess.  When you read these articles, you will see just some of the evidence that leads me to this conclusion. There are a lot of data on this, and most of it comes from statistics issued by various Chinese government agencies. But it is not advertised by the mainland press or TV.   So, many Chinese are not at all aware, and think that everything will soon be wonderful, because that is pretty much what they constantly hear from the official media.

That is one thing I noticed immediately about China: there is a constant barrage everywhere you turn—-TV, advertisements, magazines, newspapers, billboards, etc.—-that essentially suggests that everything is wonderful and getting more wonderful all the time, and everybody is just happy happy happy, and China is getting better and better and better and stronger and stronger and stronger.  I was really struck by this. It was like living in a never-ending infomercial. Maybe some go to China and are not very aware of this, but to me it was like a constant din. I really found that amazing.

Actually, at least some of this data is readily available on the mainland (see for example the story in Caijing in the first link below). But it requires digging.  The official news agencies like Xinhua and the People’s Daily just keep repeating the same mindless mantra in endlessly varying ways every day: “Everything is good, there are only a few small little problems, but the Motherland is unstoppable and will just get mightier and mightier and mightier.” If the Falun Gong would just chant that mantra, they would get to keep their organs and they would have no more problems in China.

The news here is actually worse than I realized. One very alarming thing is that the Chinese banks have avoided writing down bad debt. I should have assumed this would happen, since it is hard to see how it could be avoided, given the nature of the Chinese culture. This is NOT a good idea. It is like pretending that defaults and bad debt simply don’t exist, and this is very bad for the financial sector in the long run. 

This is exactly what the Japanese banks have done, and it is partly because of this that their stock markets have imploded over the last 20 years, and their economy has been stagnant for many years—-the Nikkei collapsed in late 1989 after peaking at about 39,000. Now, a full 20 years later, it is only trading at around 8800, and would have to rise another 450% just to equal the old highs, and that would not even consider the effects of the reduced buying power of the yen today vs. 1989. When you take that and inflation into consideration, the Nikkei would probably have to rise more like 700% or 800% or more from current levels to equal the equivalent of 1989 values. This is actually not very atypical for an imploded bubble. And that is exactly what the Shanghai and Shenzhen markets are looking at, since you have the exact same lethal combination in 1989 Japan as you do now in China: dual bubbles in real estate and stocks (one has imploded), and a decided reluctance to face facts and write down bad debt and defaults. In contrast, in the US in March 2000, we had a bubble in the stock market but not the real estate sector. And even though 7 trillion dollars in stock equity disappeared after March 2000, there was an increase in value of the real estate markets of 8 trillion dollars that more than offset those losses. That is a major factor that allowed the economy to expand in subsequent years, but that is not possible in China, just as it was not possible in 1989 Japan.

This is a singularly ominous combination that makes China’s economic future outlook over the next 25 years very grim. And that, in turn, will lead to acceleration of civil unrest. In fact, that has already happened: incidents of violent civil unrest have accelerated markedly all across China over the past year or two. But I think this could well get far more noticeable and disruptive. Some economists have said that in order to avoid disruptive amounts of civil unrest (as opposed to the more manageable baseline levels of unrest that are a constant), China’s economy must grow by 8.5% per year or more, just to keep enough people quiet. I suspect that is probably more or less approximately true in principle, although I don’t know where they came up with that number. But regardless of what that magic number might be, when that economy gets really bad—–watch out. That’s the seeds of civil war, if you ask me. If you have a very large group of desperate people coupled with an extreme polarization of wealth, you have a classic “haves” vs. “have  nots” Marxian confrontation that is the underpinning of most if not all major revolutions. Then, the only missing ingredient is a charismatic leader (like Mao, for example…..).

This is just a really, really stupid thing to do from an economic perspective. Eventually, they must write down the debt, otherwise confidence in the banking sector will be insufficient to promote liquidity, and if you cannot promote liquidity and credit markets, you can not stimulate economic recovery. And that is the story of Japan over the last 20 years. That is what has been happening here in the US over the last year or two, but this is getting better here because banks and other financial institutions have been booking their losses (mostly because the government forced them to do this when they gave them the stimulus money!). So why do banks resist writing down bad debt? Because in the short term, it makes them look like failures, and people in positions of power are afraid they will lose their jobs. So, to keep their jobs and to “save face,” (NEVER underestimate the critical importance of “face” in Asian cultures!), they just keep pretending everything is wonderful. The problem is they keep their jobs and look like they are very clever, but that just makes things worse and worse, and eventually causes the economy to just stagnate and go nowhere. Just ask the Japanese…….

Anyway, just FYI… matter what people may tell you, this is the worst possible time to buy real estate in China in particular, or to invest in China in general. Read these and you will see why.

So how to make money in China? I think you could make a lot of money in China in two rather obvious ways:

Short-sell the Shanghai and Shenzhen stock indexes (there are ways to do that here in the US, albeit not ideal ways)
Short-sell the Chinese real estate market (not sure how you can do that)

See also:   Soc Gen: "Expect New Equity Lows In H2", China Is The Global Achilles Heel, Zero Hedge (and Favorites article, below)

This entry was posted on Saturday, June 20th, 2009 at 9:29 pm


Xie: Chinese Banks Funding Commodities Speculation, Casting Doubt on Recovery


Andy Xie, writing for Cajing, questions the durability of China's recovery. He argues that much of the upsurge in lending, which was one of the developments that cheered commentators, is fueling asset speculation, in this case in commodities, Reports this spring has suggested that as much as a third of the new lending was going into the stock market.

Observers have argued that China is stockpiling commodities as a diversification strategy., Xie adds an important tidbit to this equation, that banks are lending against commodities, using mortgage-like structures, and argues that the current price levels of commodities are a function of easy credit, not fundamentals.


China's credit boom....
China: Rural Consumption and Real Estate Sales
Stratfor Today » June 16, 2009 | 1748 GMT

China’s effort to turn its economy into more of a consumer-oriented system, in part to weather the global financial storm, has shown some progress. But a closer look at two of the touted hallmarks of that success — rising rural consumption and a revival of residential real estate sales — suggests they may not be the leading indicators of a sustainable shift in China’s economic patterns.


One of the mantras of China’s economic recovery plans has been the desire to boost domestic consumption, thus reducing China’s dependence on exports and its vulnerability to shifting commodity prices and international consumer markets. Two examples of China’s recovery being touted by Beijing are the rise in rural consumption and the revival of residential real estate sales. But these may not necessarily be indicators of a sustainable shift in Chinese consumption patterns.

Even before the onset of the global economic crisis in the second half of 2008, Chinese economists, academics and government officials were calling for an increase in domestic consumption, after seeing the role of domestic spending decline steadily as a percentage of gross domestic product (OTC:GDP). China’s booming export sector and the country’s ability to attract foreign direct investment (NYSE:FDI) fueled a rapidly rising GDP, but exports and FDI also contributed to a widening disparity between urban and rural Chinese, between the coastal provinces feeding the export markets and the interior provinces supplying labor to the coast.

In addition to the widening wealth gap (and the attendant concerns of social unrest triggered by the disparity), Beijing also worried about the impact of volatile commodity prices and the uncertainty of export markets in sustaining Chinese economic growth. Both potential problems became realities in 2008 as commodity prices soared, followed by the near collapse of the export markets in Japan, Europe and the United States.

As part of its response, Beijing once again emphasized the need to stimulate domestic consumption, calling on banks to loosen credit while the central, regional and local governments offered incentives to spur consumption. And the actions appear to be paying off, at least according to the statistics. Chinese officials and media touted 14.7 percent retail sales growth in March, which bumped upward slightly to 14.8 percent mark in April. The National Bureau of Statistics of China noted that April saw rural spending rise 16.7 percent, outpacing an urban spending rise of 13.9 percent.

Further adding to the apparently positive figures was the uptick in real estate prices, which climbed 0.4 percent in April in the 70 largest cities, rising from the 0.2 percent growth seen in March. Real estate investment rose 6.8 percent in the first five months of 2009, with the fastest growth rate seen in central China, though the east saw by far the most volume. Commercial sales volume rose 45.3 percent over the same period. Chinese media have begun to discuss the recovery of the real estate sector in China as another sign of national recovery based on domestic activity, and anecdotal reports from Hong Kong confirm that real estate investment firms are hot once again.

But the two prominent symbols of Chinese recovery are somewhat misleading. Much of the growth in rural consumption, for example, was due to a government rebate program to encourage the purchase of some 15 billion yuan ($2.2 billion) in household appliances. This soaked up some of the domestic oversupply of appliances and contributed to consumption numbers, but it is not exactly a sustainable policy — there are only so many refrigerators a person can buy. Government tax rebates and stimulus money also contributed to the rise in small-car sales and purchases of agricultural equipment. Again, these are durable goods, bought largely with government incentive monies, and such activity may be more a one-off gain than a repeatable example of energized domestic consumption.

The real estate numbers may also be misleading. Rather than signaling a resumption of economic activity, or portending a follow-on spending surge on household furnishings, published and anecdotal reports suggest that real estate investment, particularly residential real estate, is often seen as a long-term investment to secure money — like buying gold — rather than as something to use or even re-sell or rent. The revival of the real estate markets, rather than a sign of recovery and confidence in the Chinese economy, may instead represent the search for a savings safe haven that is better than banks with their the minimal interest and the unreliable stock market.

Also, the secondary housing market remains small in comparison, dampened by the surge in real estate investment, which is causing more new units to be built. As long as investors do not need to access their money, they can keep it tied up in real estate. Technically, it retains its value, sitting as a concrete asset for years until its time to sell in order to provide something similar to retirement income. Unlike gold, however, real estate cannot be dumped quickly in times of sudden personal crisis, particularly when the secondary market remains underdeveloped (and potential buyers are going after new real estate).

While China’s current policies appear to be softening social tensions over an economic slowdown, they do not appear to be bringing about substantial changes to the economic system that left China so vulnerable to external factors in the first place.

China Security Memo: June 19, 2009

Stratfor Today » June 19, 2009 | 1700 GMT
Economic Woes and Increasing Protests

Several reports and incidents in China this past week indicate that protests and violence are on the rise in China. Officials in Shanghai reported June 15 that attacks on police officers in the city are up in 2009. Meanwhile, STRATFOR security sources in China say the number of protests in rural areas is increasing.

While protests in China are quite common, demonstrations in Nankang on June 15 stand out because they follow directly from recent troubles with China’s export economy and the central government’s economic stimulus plan — which is designed to maintain employment to promote social stability. (Beijing worries that if the Chinese economy were allowed to continue slowing down along with the rest of the world, the subsequent instability caused by unemployment could threaten the regime.)

Officials in Nankang, Jiangxi province, said June 15 that several hundred protesters had taken to the streets, blocking National Highway 105, which connects Beijing to Guangzhou, for several hours by overturning and burning police cars. The protests came in response to a local plan for more thorough tax collection on unlicensed furniture manufacturers, which make up about half of Nankang’s furniture companies. (The Nankang government retracted the new tax proposals later that day, ending the gridlock.)

Nankang is a major furniture producing center. (Even though the furniture industry is hurting, it is still a bright spot in Jiangxi’s economy.) The furniture industry there is hurting, with exports down nearly 8 percent so far this year, according to official numbers. Business owners and employees in this sector therefore already are very sensitive to any increases on their overhead, and thorough tax collection would likely force many to shut down and lay off employees.

But Nankang and Jiangxi province in general are relatively poor compared to the exporting hubs along the coast, so governments there have fewer options when it comes to raising funds. And this is a problem because the burden of paying for the $586 billion stimulus package approved by China’s central government in November 2008 largely will fall on the shoulders of local governments.

The central government is only providing about one-quarter of the total stimulus funds, requiring local governments to provide the rest. While Beijing has put measures in place to assist the local governments, STRATFOR has noted that local governments will most likely have problems meeting this unfunded mandate. Options include issuing bonds, something the central government has facilitated on a limited scale, or raising taxes.

Complicating this task for local governments is the strong trust deficit they face from their citizens. Local governments are constantly accused — and found guilty — of corruption and organized criminal activity, leading many Chinese citizens see these government bodies as incompetent and untrustworthy. It is not surprising, then, that Nankang citizens already hurting from setbacks to furniture trade would be even more likely to protest when confronted with the prospect of more taxes.

This type of protest stemming from economic troubles (as opposed to the more traditional reasons for protests, namely, isolated cases of corruption or government land grabs) could become more frequent and widespread countrywide. The economic crisis in China generally has moved from south to north. So as the weight of the slowdown becomes apparent to people, economic protests (which started in Guangdong and Fujian provinces) most likely also will move north.

The economic protests in Nankang, along with reports of increased attacks on police in Shanghai and overall increase in social unrest in rural areas around China, could be an indicator of this spread.

Southern provinces like Guangdong and Fujian are better positioned to handle such unrest given their stronger economies. But poorer provinces further north lack options for stimulating their economies. Ultimately, if local governments cannot find a way to raise the cash needed for the stimulus without stirring up a popular backlash, then the goal behind the stimulus of preventing social unrest will be undermined.

China-driven commodities rally nearing end

By D'Arcy Doran – 22 hours ago

SHANGHAI (AFP) — China has been driving up commodities prices by stockpiling to prepare for global recovery, but with inventories overflowing and no end to the crisis in sight, analysts say the rally may soon end.

China has been buying up crude oil, copper, coal and a host of other key raw materials even while the financial slump has slashed demand for the exports responsible for the Asian giant's once ravenous appetite.

Despite the sharp drop in shipments, Chinese raw materials buyers have tapped a surge in bank loans to capitalise on low commodity prices and low shipping fees, analysts said.

But the buying is likely to slow, they warned.

"China has been stockpiling commodities since the fourth quarter when prices became really cheap," said Yang Yijun, a commodities analyst at Wellxin Consulting based in the southwestern city of Chengdu.

"But large scale buying is gradually coming to an end. China's reserves are almost at full capacity."

Macquarie Bank warned in a research note last week that "the key concern centres around the scale of Chinese buying".

Over the past three months, as the volume of China's purchases increased, the Standard & Poor's GSCI, an index of global commodity prices, shot up 26.5 percent.

However, overall prices remain lower than before the financial crisis struck. Even with those gains, the overall index is down 58.5 percent from a year ago.

Crude oil prices have risen 39.6 percent in the past three months while copper prices climbed 45 percent, according to the GSCI.

China's State Reserve Bureau has been stockpiling, but so too have producers, distributors and other speculators hoping to profit from an expected rise in prices once the world economy starts to recover.

The China Iron and Steel Association began investigating surging imports after the amount of iron ore coming into the country jumped 33 percent year on year in April, hitting a monthly record of 57 million tonnes, state media said.

Spot prices for iron ore for delivery into China hit their highest level in nearly four months in mid-June, touching 76.50 a tonne, including cost, freight and insurance, according to Dow Jones Newswires.

Beijing ordered banks to cut lending to steelmakers and iron ore importers, who it admonished for failing to "correctly control the volume and pace of iron ore imports in line with the actual demand of domestic steel production," state media reported.

China, the world's biggest steel producer and consumer, imported 188.5 million tonnes of iron ore in the first four months of the year, up 22.9 percent year on year, according to customs data.

"Because of the massive supply, some ships carrying iron ore are having to wait to offload at ports," said Xu Minle, an analyst with Bank of China.

But iron ore was not the only hot commodity in April. Crude oil imports climbed nearly 14 percent, aluminium oxide imports were up 16 percent and copper was up 64.4 percent, according to JP Morgan.

Coal imports soared 168 percent as Chinese utilities increased foreign coal buying during negotiations with domestic producers for better prices.

However, Moody's has changed its outlook to negative for base metals, mining and steel industries in the Asia Pacific region over the next 12-18 months, saying buying has soared ahead of demand.

"China's strategic stockpiling and replacement of lower-quality domestic production with higher-quality imports have supported the recent rally in prices for many base metals," said Terry Fanous, Moody's chief Asia metals and mining analyst.

"But we will not see a sustainable turnaround in demand until the major economies of the US, Europe, and Japan recover," Fanous wrote in a note.

Copper, essential for home appliances and other staples in China's economic boom, was seen as being on the most solid footing, hitting an eight-month high of over 2.45 dollars a pound on the New York Mercantile Exchange on June 11.

But prices fell in the past week as traders feared China's stockpiling was tailing off.

"As China has been the main driver of the copper price recovery so far this year, a period of reduced buying activity may see prices take a bit of a pause," Standard Bank analyst Leon Westgate wrote in a note.

Stockpiling is fraught with risk, especially when borrowed money is used to buy goods when there is no demand, independent Shanghai-based economist Andy Xie said.

"Last year people who stockpiled went out of business," Xie said. "I know one distributor who stockpiled six million tonnes of steel and went bust when it dropped by more than half."

Real Estate:
Funds Escaping from Manufacture Re-balloon China's Housing Market Bubble
byCSC staff, Shanghai

With the rebound in the property market, more and more funds in the manufacturing sector are entering Shenzhen's property market. As a result of the profit decline, many private employers have closed factories or downsized staff and turned funds into the real estate market.

This is particularly evident in Shenzhen. Many export-oriented enterprises in Shengzhen are having difficulty in their export trading and their domestic sales haven't improved either. Many companies have reduced half of their scale and invested excess funds into real estate. On the one hand, they worry about inflation and expect houses may be against inflation; and on the other they are apprehensive about their companies’ prospects due to not knowing when the market will become better. Due to this, they are taking the opportunity to buy some real estate and expect to make money with the increasing housing prices. 

Many entrepreneurs engaged in foreign trade for a long time conducted investment in the property market in the first half of this year. They estimate that foreign trade will not turn for the better for a long time. Some companies have no choice but to put money into the real estate market after shutting down their foreign trade business. As housing prices in Shenzhen have undergone substantial restructuring in 2008, investors are confident they have reached the bottom with housing prices in Shenzhen, in particular the luxurious properties. The targets of property speculation are mainly medium or high-end residential buildings with fast growing potential in prices and high total prices.
The Houhai area of Nanshan district in Shenzhen boasts many high-end residential buildings with mature supporting facilities. Buyers of luxurious apartments in this area are mainly private business owners and executives. Prices of second-hand houses have risen by 20% recently and some projects such as Blue Coast Estate Project has increased by as high as 30%.

With loose credit, inflation expectation and the lift of measures against property speculation, more and more investors are entering the market to gamble, which is making the housing bubble prices in Shenzhen rise again.

After being silence for a long time, Wenzhou's real estate speculators have appeared again in the property market in Shanghai, Hangzhou, Wenzhou Beijing, Tianjin, and even overseas. Since the outbreak of the financial crisis at the end of last year, many Wenzhounese have closed their foreign trade and manufacturing companies and took the funds into the real estate market. Different from a few years ago, they don’t have a high expectation on the returns however the annual returns of 8% to 12% are obviously meeting their needs.

According to E-House China, in April the turnover of luxurious apartments with 30,000 yuan / square meter in Shanghai reached 672 sets, up 44% compared to March. The turnover of second-hand luxurious apartments in the Zhongyuan Agency in the first four months amounted to 9, 13, 30 and 52 respectively. The acceleration of the turnover of mansions have lead to the increasing prices of average apartments in the property market.

The economist Lang Xianping believes that in accordance with changes in domestic funds, Shenzhen, Guangzhou will be among some of the next cities following the price surge in Shanghai and Hangzhou. He also holds the opinion that the current state of China's economy is still in a bubble and the whole investment environment has not radically improved.

Since the global financial crisis, China has launched a 4 trillion investment plan. The newly-added 4.58 trillion yuan into the market has become the most direct driving force behind the economic rebound and it's said that signs of economic rebound will be reflected in the coming three months.

Lang Xianping believes that under the deteriorating tangible investment environment, companies cannot conduct tangible investments after receiving their funds. Parts of funds, in particular those coming from the banks, enter the virtual economy, causing illusive rebound in the stock and property markets. The current rebound in the property market is not driven by the fundamental improvement of China's economy and the rise of residents’ income.

The skyrocketing increase of Shenzhen's housing prices in 2007 resulted from the plight in the manufacturing sector. Businessmen drew money from the manufacturing sector and put it into the property market, creating a huge “castle in the air” in the property market. All of this is putting to the test whether or not the economy can recover sustainably.
According to the supply and demand in the real estate market, the basic situation of supply exceeding demand has not changed. It is estimated that there are vacant areas of 160 million square meters across the country. To reduce the current stock is a priority. Take Beijing for example, by the end of March, existing vacant commodity housing areas reached 14.372 million square meters, an increase of 34.5% over the same period of last year and it would at least take 13 months to digest the stock. 

Increase in Chinese oil imports 'due to stockpiling'
23rd June 2009 08:19 GMT
Chinese said to be maxing stocks before the next price spike


Traders say reports suggesting Chinese oil consumption in May was up year-on-year for the second consecutive month should not be seen as sign of a recovery in demand in the world's second largest oil consuming nation.

“Yes, more has been imported, but not for actual consumption. The government or state oil players are trying to max their stockpiles before crude spikes again,” a Singapore-based crude futures trader told Tankerworld Tuesday.

Brokers also told Tankerworld that most of the data indicating a recovery in demand from China was based on tanker fixtures, “which only accounts for traded cargoes and not actual domestic consumption.”

Analyst Neil McMahon from Bernstein Research has suggested the recent crude oil price spike came on the back of Chinese stockpiling.

McMahon was quoted saying that “satellite tanker movement data had revealed that during the spring China had cranked up imports and hoarding in its strategic petroleum reserve.”

According to him that coincided with a surge in oil prices from below $50 per barrel to more than $70 per barrel in a matter of six weeks.

Now using similar tracking data, McMahon says China has reduced imports, indicating its reserves may now be at maximum capacity.

Chinese demand in May has been estimated at 33.23 million metric tonnes (mt), up 6% from May 2008, PRNewswire quoted independent analysis of official data.

Calculations of oil demand figures are based on crude oil throughput volumes at domestic refineries and net oil imports as reported by China's General Administration of Customs and the National Bureau of Statistics.

These latest figures for May imply that Chinese oil demand has gone up year-on-year for a second consecutive month.

Cowan Thant Zin, 23rd June 2009 08:19 GMT

China no longer learns East Asian lessons by John Lee

Looks can be deceiving for China’s economy, writes John Lee in The Korea Herald, 22 June and New Straits Times, 23 June

When the Nobel Prize-winning economist Kenneth Arrow was asked which country had the best managed economy recently, he nominated China, Taiwan and South Korea. This viewpoint is consistent with the widely shared belief that China is the latest successful instalment of the ‘East Asian model’ of authoritarian development.

That is certainly what Beijing would like to think. But looks can be deceiving. The nature, purpose and extent of the role of the state in Chinese economy and society set it apart from successful East Asian neighbours. In fact, the differences are significant enough to call into question whether China will taste the fruits of successful modernization that Asian economies such as Taiwan enjoy.

The key to success in Korea, Taiwan and Japan was the creation of conditions needed for vibrant organizations, competition, and private enterprise to eventually take off. Even though it was within a context of state-guided capitalism and mistakes were made, the government ultimately offered a ‘helping hand’ to lay the foundations for future private enterprise and capitalist activity – in particular, widespread and open access to economic opportunity, rule of law, property rights, and social and political stability.

How does China achieve growth? Most Western commentators focus on the spectacular success of China's export sector and the emergence of China as the world's factory. But the greater contributor to Chinese growth is actually domestically funded fixed-investment which constituted over 50% of GDP in 2008 and over 40% of growth in that year. China is way off the charts in this regard. Taiwan, for example, which had an unparalleled growth rate of 8% each year over 50 years never had capital investment spending of more than 30% of GDP.

But it is not just the high reliance on fixed-investment that is striking. It is where the capital goes that is all important. China is unusual in that bank loans – drawn from the deposits of its citizens funneled into state-controlled banks – constitute around 80% of all investment activity in the country. Even though state-controlled enterprises produce between one quarter and one third of all output in the country, they receive over 75% of the country's capital, and the figure is rising. The Chinese state sector owns almost two thirds of all fixed assets in the country. This is the reverse of what occurred in South Korea, Japan and Taiwan, where the private sector received over three quarters of all capital during the 1960s and 1970s.

Another case in point is shares listed on the Shanghai Stock Exchange: only around 50 of the approximately 1,300 companies are genuinely private. Between 1990 and 2003, less than 7% of the initial public offerings on the Shanghai and Shenzhen stock exchanges were from private-sector companies. The Chinese state owns about 50% of all the shares of listed companies. When state-controlled entities are included in the calculation, it is likely to be around 70–80% of all listed shares.

The massive bias toward the state sector would be acceptable if the 120,000 state-controlled enterprises could learn to innovate and adapt. Unfortunately, except for a handful of centrally managed state-controlled enterprises, this is not the case.

To put the situation in perspective, China's overall use of capital is twice as inefficient as India's. World Bank findings indicated that about one third of recent investments made by the state-controlled sector generated zero or negative returns. This might increase the chances that the Chinese Communist Party can remain in power but it is at enormous cost to the country.

The economic cost in terms of loans that go bad is great. But the social costs, and impact on civil society, are greater.

An economic system that leads to the concentrating of economic opportunity and wealth in just the hands of the few creates an unsound and unstable political economy. Since the state dispenses the most valued business, career and professional opportunities, a relatively small group of well placed and well connected insiders benefit while opportunities to prosper are denied to the vast majority. Despite impressive GDP growth, about 400 million people have seen their net incomes stagnate or decline over the past decade. The income of the poorest 10% has been declining by 2.4% each year since the beginning of this century. Since 2000, absolute poverty has actually increased, as has illiteracy.

Not surprisingly then that China's Gini coefficient, a measurement of income inequality, rose from around 0.25 in the 1980s to around 0.38 in the 1990s. It is now around 0.5 – the highest in Asia. In contrast, the Gini coefficients of South Korea and Taiwan from the 1960s to the 1990s hovered around 0.34 and 0.29 even when the economies of these countries were growing rapidly.

The Chinese Communist Party has cleverly tightened its grip on economic and therefore political power. But worryingly this has meant that the building of institutions such as the ‘rule of law’ and enforceable property rights have been stagnant for almost two decades. Beijing's model of ‘authoritarian transition’ is failing and its longer term prospects are poor.

China is not becoming South Korea writ large. A large, stumbling giant like Russia or Brazil might be a more accurate indication of its future.

Dr John Lee is the Foreign Policy Fellow at the Centre for Independent Studies in Sydney and a visiting scholar at the Hudson Institute in Washington. The second edition of his book ‘Will China Fail’? will be released on June 27. 

June 24, 2009 | 1833 GMT

China: Alleged WTO Violations and Commodity Prices


Beijing has rejected accusations that it is violating World Trade Organization (WTO) rules and distorting global commodity prices after the United States and the European Union filed a complaint with the WTO over Chinese restrictions on nine primary commodities. The case highlights Beijing’s ongoing attempts to insulate itself from global commodity price fluctuations.


The United States and the European Union have filed complaints against China at the World Trade Organization (WTO) on June 23 accusing Beijing of placing export restrictions on raw materials and partially processed raw materials critical to many industries. The nine materials cited by the United States are bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorus and zinc. The complaint accuses China of restricting exports, thus creating an unfair advantage by contributing to disparities in prices of these precursor materials inside and outside China. The European Union also complained that the restrictions could undercut some 4 percent of European industrial production if the resources are no longer easily accessible from Chinese suppliers.

Beijing has countered that its export restrictions are perfectly legitimate under WTO regulations, with a Ministry of Commerce official telling China’s official Xinhua news agency the restrictions were part of environmental protection and energy conservation measures approved under the 11th five-year economic plan (2006-2011). Zhao Jinping, senior researcher and deputy chief of the Research Department of Foreign Economic Relations of Development Research Center — the main consulting institution for China’s State Council — added that the West’s demands on China were “conflicted.” He accused the West of saying Beijing should work to protect the environment and reduce excessive energy consumption while simultaneously criticizing Beijing for taking measures to reduce energy-intensive polluting industries like those being restricted.

At its core, the focus of the U.S. and EU complaint is the manipulation of prices for several critical primary commodities. Bauxite is used for aluminum production, which in turn is used in anything from soda cans to electronics. Coke is a primary ingredient in producing steel, while magnesium and manganese have numerous uses. (Both magnesium and manganese are also used in the steel manufacturing process, as well as in creating alloys with steel and aluminum.) Silicon carbide is used as an abrasive and in high-end brake discs, while silicon metal is used for, among other things, the production of silicon wafers for semiconductors and photovoltaic cells. Yellow phosphorus is used in flame retardant materials, and zinc is used in galvanization of steel, in battery production, and as a major component of brass.

China is a major producer of several of these commodities (for example, China was the world’s largest producer of zinc in 2006, nearly double the output of its next-nearest competitor, Australia), making its export restrictions significant in the overall global supply-and-demand balance. The accusation is that by restricting exports, China reduces supply internationally, driving up international prices. It also maintains that China has a glut of these resources, comprising both domestically produced and imported commodities, so Chinese domestic prices are artificially low due to oversupply. China thus not only has the advantage of lower precursor prices, it also can supply lower-priced secondary products like steel and raw aluminum to international consumers. This gives it additional market share and potentially drives out higher-priced overseas competitors.

China certainly can make a case for the environmental side of its export restrictions. (Beijing has been working to try to consolidate numerous industry sectors to reduce waste, cut energy consumption and address pollution problems.) But the restrictions and their “unintended” consequences regarding resource availability fit with Beijing’s longer-term program of seeking ways to insulate China from the vagaries of international commodity pricing. China has been buying up resources, and buying or investing in resource producers and mines around the world. This is part of its efforts to maintain control of the entire chain from extraction to Chinese manufacturing as a way to mitigate price and availability changes. China also has been stockpiling natural resources as a further buffer. Restricting exports of key industrial commodities gives Beijing the ability to better regulate resource prices at home; if it gains additional influence in shaping international prices, all the better from China’s point of view.

As the case enters the WTO process, it is unclear whether China can make a strong enough case on environmental grounds to counter the charges effectively, or whether some compromise will have to be made. China has become adept at using the WTO mechanisms to avoid significant punitive trade actions by the United States and others, exploiting the time it takes to process a WTO complaint to gain ground before compromising. Perhaps not coincidentally, on the same day the United States filed its complaint, Beijing sent a letter to the WTO complaining about U.S. restrictions on the import of Chinese poultry — demonstrating China’s willingness to use the WTO for its own ends as well.

As China stirs economy, US, EU see protectionism
Chinese government has quietly started adopting policies aimed at encouraging exports while curbing imports
Keith Bradsher / NYT
Hong Kong: China has begun a concerted effort to keep its export economy humming, even as demand for its goods has plummeted with the global downturn.
Risking the ire of the US and other trading partners, the Chinese government has quietly started adopting policies aimed at encouraging exports while curbing imports, even though China, as one of the world’s largest exporters, has aggressively criticized protectionism in other countries.
The government has sharply expanded three programmes to help exporters, giving them larger tax rebates, more generous loans from state-owned banks to finance trade, and more government-paid travel to promote themselves at trade shows around the world.
At the same time, Beijing has banned all local, provincial and national government agencies from buying imported goods except in cases where no local substitute exists.
The rule, issued as part of the country’s economic stimulus plan and enforcing a seldom honoured Chinese law from 2003 favouring domestic suppliers, exploits China’s failure so far to sign a global agreement barring protectionism in government procurement. And in an effort to strengthen its own exporters, it is limiting how much of certain key raw materials can leave the country.
Ron Kirk, the US trade representative, announced on Tuesday that the US and the European Union had filed a complaint with the World Trade Organization, or WTO, accusing China of limiting exports of raw materials such as bauxite and zinc, of which China is one of the world’s largest producers, to give an unfair advantage to Chinese manufacturers.
“China is not only continuing but accelerating many of the protectionist approaches they’ve taken in the past to promote economic development,” said Michael R. Wessel, who was appointed by Nancy Pelosi, the speaker of the House, to the US-China Economic and Security Review Commission.
The policies could help ensure that China’s economy continues to grow, but at the risk of increasing global trade tensions at a sensitive time when more countries are resorting to administrative measures to restrict trade and WTO has warned against protectionism. The policies also fly in the face of China’s own promises and incentives to build an economy based on domestic consumption as well as international exports.
“The focus on maintaining export competitiveness to prevent job losses is clearly trumping longer-term considerations of rebalancing growth and reducing reliance on exports,” Eswar S. Prasad, a senior fellow at the Brookings Institution in Washington, wrote in an email message. “But this is a dangerous strategy. Protectionist measures, both explicit and implicit, could be difficult to pull back.”
In other moves, Beijing has halted the rise of the renminbi against the dollar by intervening heavily in currency markets, dumping billions in renminbi and buying dollars and other currencies.
Provincial governments also appear to have cut back on their enforcement of counterfeiting laws and other intellectual property protections. Chinese consumers have less need to buy imported goods when they can buy much less expensive copies produced locally.
In March, Prime Minister Wen Jiabao announced that his country would rely on domestic consumption to keep the economy growing as exports shrank in the global downturn. The pronouncement was greeted with a mixture of delight and scepticism by economists and governments the world over, but the sceptics appear to have been borne out.
Despite the havoc the global downturn has wreaked on export-driven economies—exports are down 45% in Japan—China’s exports to the US fell only 12.1% in the first four months of this year, compared with the same period last year. Over the same interval, US exports to China dropped 17.2%.
Yet, the US trade deficit paradoxically narrowed to $67 billion (around Rs3.25 trillion), from $75 billion, for these periods. That is because the trade is so lopsided that a shrinkage of overall trade results in a smaller deficit even when US exports drop faster. The US imports at least $4 worth of goods from China for every $1 of goods that it exports to China.
Chinese officials and economists are quick to defend their country’s policies.
Li Junfeng, an official at China’s top economic planning agency, said recent complaints from foreign wind turbine manufacturers about domestic purchasing rules were without merit. These manufacturers have factories in China and can use them to fill Chinese orders, he said.
Li’s agency, the National Development and Reform Commission, ordered on 4 June that government agencies buy only Chinese goods of all types with money from the government’s stimulus programme. Yet early this year, China criticized a much narrower preference for US-made steel in Barack Obama’s stimulus plan.
Under the rules of WTO, China is prohibited from discriminating by nationality in the purchasing of goods—except for government procurement, which is covered by a separate WTO agreement that virtually all industrialized nations have signed. When China joined WTO in November 2001, and gained full access for its exports to foreign markets, it pledged to join the agreement on government procurement “as soon as possible”.
Subsequent talks in Geneva produced no progress, leaving China, with its enormous state sector, free to favour domestic suppliers in government contracting.
At the same time, the plunge last winter and this spring in Chinese exports has resulted in a shift by many Chinese factories from exports only to a shared reliance on export and domestic markets, said Merle A. Hinrichs, the chairman and chief executive of Global Sources, a Hong Kong company that connects Chinese suppliers with Western buyers. These factories do not always pay licensing fees for patents transferred to them for exports but then used to supply the domestic market.
Richard Gould, the manager of southern China operations at CBI Consulting, a Shanghai-based investigative firm specializing in intellectual property, said cutbacks in enforcement of intellectual property laws stemmed in part from policies aimed at temporarily reducing the regulatory burden on Chinese businesses.
Counterfeiters “have a very good sense of the legal system”, Gould said. “They really don’t think they’re going to be raided.”
China protectionism narrative hitting mainstream      
Written by Stumo   
Wednesday, 24 June 2009

The free trade with China, win-win, narrative is breaking down.  The China as protectionist narrative is on the ascendancy. 

The Office of the U.S. Trade Representative and the European Union have filed a WTO suit against China for export tariffs on raw materials.  And China's protestations of the U.S. "Buy American" provision merely highlighted their lack of credibility as they strengthened their pre-existing "Buy Chinese" policy. 

Today, the NY Times has a major article today "As China Stirs Economy, Some See Protectionism," which is a broad indictment of China's practices.

Risking the ire of the United States and other trading partners, the Chinese government has quietly started adopting policies aimed at encouraging exports while curbing imports, even though China, as one of the world’s largest exporters, has aggressively criticized protectionism in other countries.

Yes, I know.  China has not merely "started" adopting policies.  They had them all along.  Also, government intervention to maximize exports is technically "mercantilism."  While "protectionism" is taking action to prevent foreign import competition, which they also do.  But the point is the narrative is now closer to reality. 

The government has sharply expanded three programs to help exporters, giving them larger tax rebates, more generous loans from state-owned banks to finance trade, and more government-paid travel to promote themselves at trade shows around the world.

At the same time, Beijing has banned all local, provincial and national government agencies from buying imported goods except in cases where no local substitute exists.

The rule, issued as part of the country’s economic stimulus plan and enforcing a seldom honored Chinese law from 2003 favoring domestic suppliers, exploits China’s failure so far to sign a global agreement barring protectionism in government procurement. 

A good three paragraphs outlining a portion of China's non-free-trade practices.  Different from the "China price" line which implies natural trade advantages.

“China is not only continuing but accelerating many of the protectionist approaches they’ve taken in the past to promote economic development,” said Michael R. Wessel, who was appointed by Nancy Pelosi, the speaker of the House, to the United States-China Economic and Security Review Commission.

Wessell is an expert, and knows a lot about China by virtue of the US-China Commission, which holds multiple hearings on this topic.  But the Commission has gotten very little ink in the past few years.

So, on one hand, it is not helpful to describe the U.S.-China relationship as free trade related.  They are a non-market economy.  Free markets and free trade have virtually nothing to do with the export-import dynamics.

On the other hand, China does need to promote more domestic consumption.  That is good for us, because they need not rely on our consumption so much.  We, in the U.S., need to do the opposite.  We need to promote more domestic production and lessen reliance on consumption.  Out 70% of GDP which is represented by consumption is too much... too out of balance... exceeding that of other developed countries who are 7 to 12 points less.

China intervenes heavily in currency again      
Written by Stumo   
Wednesday, 24 June 2009

I want to highlight the currency issue in the NY Times article, blogged below, about China's protectionism.  Remeber that everyone thinks that China is our "banker." That is really not true becuase they hold only about 12% of our Treasury bonds.  There are many, many buyers of those bonds out there.

And as to the fraction purchased by the Chinese?  They keep buying because they are committed to keeping their currency too low, to make their exports artificially cheap and to make imports artificially expensive.

In other moves, Beijing has halted the rise of the renminbi against the dollar by intervening heavily in currency markets, dumping billions in renminbi and buying dollars and other currencies.



Jun 26, 2009
Beijing's facade of resilience
By John Lee

SYDNEY- Some analysts speculate that the turmoil caused by the global financial crisis presents an opportunity for the Chinese government to push ahead with fundamental economic reforms that will raise the importance of domestic consumption as a driver of economic growth.

This point of view ignores political reality. The current crisis makes it more difficult for the Chinese, not less, to pursue reforms given the political need to achieve high growth at all costs. As Premier Wen Jiabao reaffirmed at the post-National People's Congress (NYSE:NPC) press briefing in March this year, "An 8% GDP [gross domestic product] expansion is the government's pledge and responsibility."

The major response to declining growth was the announcement of a 4 trillion yuan (US$586 billion) stimulus package in November 2008 to be spent over the next two years. As usual, provincial authorities will be the main entities that effectively oversee any stimulus spending. After the announcement was made, within a fortnight, provincial authorities submitted proposals worth approximately 10 trillion yuan.

For example, investment proposals worth 3 trillion yuan from Yunnan province and worth 2.3 trillion yuan from Guangdong province were received. Significantly, these proposals overwhelmingly consisted of big-ticket fixed-investment projects. The amount provincial authorities proposed to allocate to poverty alleviation and social welfare initiatives was small.

As Cao Honghui, a senior researcher at the Chinese Academy of Social Sciences (CASS) warned in commenting on the government stimulus, "Some projects are meant to serve the real needs of the regions [but] some are not based on realistic considerations, and others are merely efforts [by local governments] to angle money out of central authorities."

Beijing explained that the rationale behind the stimulus was to loosen credit and encourage state-owned banks to lend more as part of a more "proactive fiscal policy". This would, according to government officials, incite consumer spending and boost the economy. Yet, the fiscal stimulus plan relies heavily on bulking up China's state-led fixed investment strategy.

For example, massive infrastructure construction projects such as railways, roads and airports are being planned. Tax credits are to be given to businesses to buy machinery. Unfortunately, putting more and more money into a strategy that is becoming less and less effective will lead to more capital waste, which China can hardly afford. Even though 370 billion yuan was specifically allocated for rural China, most of it will be allocated to rural infrastructure building rather than direct social welfare. The stimulus plan is much more about maintaining employment and growth than it is about re-orientating China's economy towards a consumption-based one.

The beneficiaries of any stimulus will overwhelmingly be provincial governments who extend favors to state-owned and state-controlled enterprises (SOE). Indeed, official media have estimated that around 90% of any new lending will be directed towards state-controlled entities. Very little of the stimulus package will be used to create better conditions for private sector enterprises. The exception is tax rebates for export firms even though China remains far too dependent on exports for growth. The amount likely to go towards social welfare initiatives is also small. For example, housing for the poor was promoted as a major part of the stimulus when announced. In March 2009, Premier Wen confirmed that 7.5 million poor Chinese will be provided with housing over three years - a modest number.

To be fair, any stimulus package in the current environment is designed to alleviate any hard landing for the economy in the short term. But the package indicates that Beijing will continue to rely on dangerously high levels of fixed investment to achieve a softer landing, while it waits impatiently for the export market to recover. In just the first quarter of 2009, banks have extended a total of US$669 billion worth of loans, which is 93% of the government's initial target for the whole of 2009. This is 600% higher than the same time last year. Fixed investment in the first quarter of 2009 was up 28.8% compared to the same period in 2008. In urban regions, fixed investment was up 30.3% at the end of March 2009, compared to the same period in 2008. Commenting on the unprecedented increase in lending, Jiang Dingzhi, former Vice Chairman of the China Banking Regulatory Commission warned that 'the biggest dangers to China's economy and financial system come from within, not from outside,' adding that 'The biggest of these dangers is the degree of bad loans in China.'

The stubborn donkey of Chinese consumption
The belief that the current environment makes it more likely that Beijing will pursue fundamental economic reforms that will transform its economic growth model to one driven by consumption is wide off the mark.

Since the 1990s, there has been a saying that the Chinese economy has been pulled by two strong horses (fixed investment and exports) and one weak donkey (domestic consumption). Poor countries tend to devote about 60% of GDP to consumption. From 1978-89, domestic consumption as a proportion of GDP in China hovered above 50%. In the 1990s, it was at around 45% but has been declining since 2000. It is now at around 32%, by far the lowest of any major economy in the world. Even domestic consumption in India as a proportion of GDP is around 56%.

The trauma caused by the global financial crisis and the subsequent steep fall in GDP growth has brought renewed attention to the urgency of raising Chinese domestic demand. There is an overwhelming consensus among China's leaders and leading economists that China needs to increase domestic consumption in order to move towards a more balanced and sustainable economy. In particular, many are hoping that domestic consumption can take up the slack following the decline in exports.

As mentioned before, the GDP proportion share for domestic consumption is worryingly low with a downward trend. For example, it is estimated that even if just 10% of China's shoe exports were transferred to the domestic market, the whole shoe market in China would be saturated. More generally, one economist has calculated that if US savings rise and consumption decreases by a sum equal to 5% of US GDP, consumption in China would have to rise by a sum equal to 17% of Chinese GDP. Chinese leaders have been promising the creation of a demand-driven economy for a decade but with limited success so far. Nevertheless, more optimistic commentators put forward a number of reasons why the prospects for domestic consumption in China are good.

The first is the so-called "tiger in the cage" scenario: the world-beating saving habits of the Chinese. The national savings rate has reached almost 50% of total annual output. The idea is that the "tiger" (savings in banks) once released will lead to a tide of consumer spending that will take up any slack from the reduction in fiscal stimulus and also increase demand to reduce over-supply problems.

The problems with this position are threefold. First, savings are at such high levels largely because there are very few and poor provisions for social welfare, health, and old age. Only about one-seventh of the population, for example, is covered by basic health insurance, so many households save to cover medical expenses. Families save for retirement because the basic pension scheme covers only about 16% of the economically active population - and in any case provides a pension equal to just 20% of average wages. Households also save for education. Primary school fees are a large financial burden, particularly for poorer rural households. It is unlikely that rises in domestic consumption will provide a way out.

Second, the average disposable income of urban dwellers is about US$1,350 annually, growing at between 10-20% each year. In rural areas, it is about a third of that figure. It will be a long while before it is possible to reach the US$5,000 figure, the point at which discretionary spending is said to take off.

Third, the regime needs these savings in the bank because the banks need them to maintain liquidity ratios. As mentioned earlier, most of China's banks are only solvent because of the high savings rates. The government simply cannot afford massive withdrawals from the banks to fund a consumption-led growth.

Others believe that Chinese state-owned enterprises can become increasingly innovative and learn to make better use of capital. This, it is argued, would ensure a much more efficient and prosperous economy, the effects of which will eventually flow on to create the conditions for increased domestic consumption. But since moving towards a state-led development model from the 1990s onwards, total factor productivity (TFP) is diminishing in China. Various research studies, depending on sample and methodology, offer different results. But all clearly show a declining trend in TFP. For example, one report estimates that TFP grew annually by 3.26% from 1978-95, but slowed to 0.32% from 1995-2001. Another report shows that TFP grew annually by 3.83% from 1988-94 but declined to 0.52% from 1995 onwards.

Evidence shows that dramatic improvements in the use of capital are more indicative of hope than reality. As long as SOEs - which receive the lion's share of capital - are coddled and protected, they have no incentive to innovate. Moreover, too much capital is being denied to the private sector, which is much more likely to invest in innovation or invest innovatively. Even the most successful private sector firms tend to flat-line at around 30 employees because of capital restraints. In other words, capital that should be reserved for innovators in the private sector is instead increasingly wasted on inefficient state-owned businesses whose productivity is about half that of private industry both by aggregate and sector. Whereas in 1985-90, the private sector accounted for 20.7% of all fixed asset investment, in 1996-2000 it was only 13.9%.

Private firms with poor political connections need to rely on the informal lending market. A report by consultants McKinsey estimated that this was around US$100 billion in 2006. In 2009, the People's Bank of China estimated that it could be around US$300 billion. Even so, this is a relatively small proportion compared to loans by banks, and the most profitable private businesses continue to pay higher rates of interest on capital than inefficient state-owned businesses.

Clearly, the SOEs are consuming a rising proportion of the country's available capital and crowding out the private sector. During the past decade, there has been little evidence of SOEs changing their mindsets and taking the innovation route. Even the three or four of China's most profitable SOEs are far short of world class standards in terms of sustained innovation, performance and financials. Moreover, the capital denied to the private sector, which really is the cradle of innovation, is not measurable but surely significant.

In general terms, the Chinese political-economy is preventing the robust growth of domestic consumption even as GDP growth surges. As mentioned earlier, when the state supported the private sector in the 1980s, household incomes were rising across the board largely as one and with the tide. Once Beijing moved towards its current state-led model, the private sector bottom-up economy that offered the best hope for hundreds of millions to prosper suffered. Only a relatively small number of "insiders" thrived, and development as well as income growth became much more unequal. This is substantiated by the fact that between 1992 and 2003, China's household disposable income as a share of GDP fell 5%; and fell another 4% in 2004.

John Stuart Mill famously described the study of "political economy" as "the sources and conditions of wealth and material prosperity for aggregate bodies of human beings." The use of the term "aggregate" is crucial because it gets to the heart of why economic growth matters. It does so because it offers lifestyle improvements to the majority of the population. As the evidence shows, this is something better achieved through a bottom-up entrepreneurial model than a top-down statist one. The fact that domestic consumption has been dragging its feet for more than a decade is one manifestation of the limitations of the China's political-economy model.

Dr John Lee is a foreign policy fellow at the Center for Independent Studies in Sydney and a visiting fellow at the Hudson Institute in Washington. The fully revised and updated 2nd edition of his book, Will China Fail?, will be released next week by CIS.
  Will China Fail? The Limits and Contradictions of Market Socialism

Fully revised and updated 2nd edition
Dr John Lee

With the onset of the global economic crisis, China remains one of the only major economies likely to avoid recession. Released in 2007, the first edition of Will China Fail? probed the profound contradictions, tensions, and dysfunctions within Chinese economy and society. This second edition reassesses these imbalances in Chinese political-economy as it negotiates the global financial crisis.

Although China is likely to achieve their target of 8 percent growth in 2009, the GFC has exposed China’s structural weakness in its growth model.
The second edition argues that the Chinese Communist Party are no longer able or willing to pursue further fundamental reforms. Instead, they are stuck in a holding pattern in order to remain in power. Constrained by a decentralized model of authority and administration that is highly corrupt and inefficient, Beijing has only been able to plaster over institutional cracks.

Rather than moving toward a modern, successful civil society as occurred in East Asian countries such as Japan, Taiwan and South Korea, China is walking a more dangerous and unpredictable path.

China’s economic problems are causing troubling developments in Chinese civil society: including the rise of a chauvinistic nationalism encouraged by the CCP, ascent of a new army—the People’s Armed Police—to enforce order, worsening corruption, as well as inequality caused by the CCP’s state-led development model and the crowding out of the fledging domestic private sector.

Friday, June 26, 2009 3:59:00 AM
Is China faking economic recovery?
Venkatesan Vembu / DNA


Cynical crunchers of statistical data believe there are three degrees of ‘mistruths’: lies, damned lies and statistics.

Increasingly, economy watchers are beginning to believe falsehood could go a step beyond: China’s GDP numbers. Ever since the official Chinese statistical agency announced earlier this year that the country’s GDP grew 6.1% in the first quarter of 2009, there have been murmurs of scepticism about the authenticity of those figures. A few have observed that the GDP data are inconsistent with other data, such as weak power production.

Those murmurs have in recent weeks turned into a high-decibel chorus that is beginning to openly rubbish the validity of the official numbers.

“The Q1 6.1% GDP outturn is simply a lie,” notes Albert Edwards, chief global strategist, Societe Generale. “It helps explain why the Chinese data is derided by so many economic commentators.”

Commodity prices worldwide have surged in recent weeks on the hopes of a robust V-shaped revival in the Chinese economy. But Edwards, who had rightly called the Malaysian economic crisis of 1997 and the dotcom bust of 2000, believes that “to the extent that the renewed surge in commodities and the metals and mining sectors are based on the Chinese growth miracle, the markets are relying on a combination of hype, lies and wishful thinking.”

Edwards isn’t alone in questioning the validity of the official data. Last month, the International Energy Agency (IEA) observed that China’s first-quarter GDP data “does not tally with oil demand data, which contracted by 3.5% year on year.” One explanation for this, IEA analysts reasoned, “is simply that real GDP data are not accurate, and therefore should not be taken at face value.”

Simultaneously, analysts at Lombard Street Research, a London-based economic consultancy, too argued that the 6.1% GDP growth figure was inconsistent with the 20% decline in trade volumes over the same period, because it would have required domestic demand to expand by 9% in real terms. Using official nominal annual growth rates for GDP and consumption for the first quarter, and consumer and fixed investment price indices as deflators for consumer spending and investment, respectively, Lombard analysts claimed that domestic demand expanded at most by 2% year on year in real terms.

They therefore concluded that real GDP growth in the first quarter was probably slightly negative or nil at best, and even in the fourth quarter of 2008, real growth was likely negative or flat. “If so, the last two quarters would effectively signal, from a Chinese perspective, a recession of a rare magnitude.”

China’s official statistical agency, the National Bureau of Statistics, responded to IEA’s scepticism with a stern rap on the knuckles. “It is regrettable that the point of view in the… article is groundless,” a notice on its website said.

“We believe that, for an international organisation, this approach lacks seriousness.””
Even economists who point to anecdotal evidence of China’s recovery concede that interpreting official Chinese data is problematic.

“Trying to understand China’s GDP data is always a nightmare for professional China economists,” observes Credit Suisse chief regional economist Dong Tao. “Since I joined this industry 14 years ago, I’ve had this trouble, I still have this trouble, and I suspect I will continue to have this trouble.”

He points out that there is abundant anecdotal evidence of a “phenomenal improvement” in China’s economy over the previous quarter too. “Go to restaurants, talk to real estate agents, count the number of shipping containers at terminals, see the number of cars being sold… I believe in my eyes.”

The plain-speaking Edwards, however, argues that “if the bubble of belief in China’s medium-term growth prospects finally bursts, it will have huge investment implications.”

It is all too easy, he reckons, for investors to buy into “beguiling growth stories, which are in fact utter nonsense.” He concedes that China’s mammoth 4 trillion yuan stimulus has had a beneficial effect on economic activity this year, but says that he still questions the “quaint notion the markets now seem to have that the Chinese economy can grow at a respectable rate when the rest of the world is in a deep recession.”

The “bullish group think on China is just as vulnerable to massive disappointment as any other extreme of bubble nonsense I have seen over the last two decades,” says Edwards. “The fall to earth will be equally shocking.”

 Is China Safe from Economic Crisis?Reflections on the truth of the Chinese economy
Epoch Times Staff Jun 26, 2009

Shen Peng, a 52-year-old owner of a small parts manufacturer in a mid-size city in China, never really paid attention to the buzz about the economic crisis.  That was until his own business suffered a major blow at the end of 2008. His biggest client, an export company, suddenly cut their orders by half and laid off most of their staff, leaving Shen with a significant drop in revenue.

But while news reports suggest a worsening of the crisis around the world, Shen found his business was already recovering by February 2009. Large enterprises in his city were also back to running at full capacity. “Is the crisis over in China?” Shen wondered.

Some of China’s economic statistics seem to say yes. Since Beijing announced its 4 trillion yuan (US$585 million) stimulus plan, China’s banks have granted more loans in three months than in the whole year of 2008. Stocks soared in mainland China as well as in Hong Kong, and the real estate market flourished with a 30 to 40 percent increase in the first four months of 2009.

But while some economists have eagerly declared the recovery of the Chinese economy, others suggest that China is merely experiencing a brief surge that is bringing a problematic overexcitement to the market. Among these critics is finance professor Xu Xiaonian.

“The crisis stemmed from imbalance, so the key to recovery lies in the restoring of balance,” Xu remarked. “But the efforts to stimulate investment are only aggravating the imbalance.”

Paradoxical Statistics

The imbalance Xu mentioned is well reflected in the economic paradoxes discovered by Liu Yuanchun, Associate Dean of the School of Economics of People’s University in Beijing. Based on observations of this year’s economic statistics, Liu listed eight pairs of conflicting facts, including:

1.    Sharp increase in investment vs. fast drop in export and import
2.    Rising industrial added value vs. lower increase in electricity consumption
3.    Fast industrial growth vs. slow financial growth
4.    The increase in cargo transportation vs. the decrease in port throughput
5.    The increase in nominal consumption vs. the decrease in actual consumption
6.    The increase in stock index vs. the decrease in the profit of listed companies
7.    The increase in industrial added value vs. the decrease in industrial profit
8.    Increasing real estate sales volume vs. stagnant actual real estate investment

Liu says that such inconsistencies may be signs of bigger troubles, such as deepening deflation, rising unemployment, shrinking demand abroad, excessive real estate inventory and excessive production capacity. According to Liu, the current boom is just the forefront of a dire future.

How Long Can 4 Trillion Keep China Going?

Among the three key drivers of economic development—consumption, investment and export—China has largely relied on the latter two. However, exportation has long been the corner stone of the Chinese economy, contributing 59 percent to China’s GDP in 2008, making China’s economy susceptible to the global economic environment. As a result of the recent crisis, many mid- and small-scale enterprises have gone bankrupt in south and southeast China since mid 2008, leaving over 20 million immigrant workers unemployed.

Investment, on the other hand, has also made a major GDP contribution over the last decade. However, the overgrowth of investment has given rise to excessive capacity, which is worsened by weak domestic consumption.

Furthermore, China’s domestic consumption is hindered by low income growth, particularly in rural areas. In recent years, the nation’s gross salary is about 12 percent of the GDP, compared 50 to 60 percent in developed countries and 40 percent worldwide. The high growth in GDP and the low growth in income indicate that China has been generating huge production capacities by sacrificing domestic consumption. The nation’s poor medical care and other social welfare coverage and the high housing costs are also factors that hinder domestic consumption.

While these issues are left largely unsolved, the stimulus plan lavishes precious resources on energy and infrastructure industries, sectors that quickly promote GDP but worsen capacity excesses. The ensuing boom in stock market and real estate will further burden China’s unbalanced economy. As some analysts estimate, the stimulus plan will work like an excitant with an enduring negative effect.

The pessimistic have cited evidence on both micro and macro levels. On the one hand, most businesses are still struggling from sluggish performance and are reluctant to invest more. On the other, increasing inventories are seen across almost all industries, which indicate low probability of industrial recovery in the near future.

China’s official statistics revealed that the CPI (Consumer Price Index) and PPI (Production Price Index) continued to drop in May, with the CPI 1.4 percent lower and PPI 7.2 percent lower than the same time last year. Economists say both are signs for deflation on a national level.

China’s Big Spender

Sales of apartments, automobiles, and lots more are rising, but it's the government, not consumers, that's paying.

By Rana Foroohar | NEWSWEEK
Published Jun 27, 2009

The hottest debate over the world economy is not on the fate of America; it's on the fate of China. Will it be the worst victim, or the most successful survivor, of the global crisis of 2009? So far the news all points to success, as the Asian giant defies the old assumption that an American recession would trigger a Chinese depression. Long dependent on exports to America, China continues to grow strongly despite a collapse of exports, down 26.4 percent in May alone. The reason is growth at home, with retail sales up 15.2 percent in May, and house and car sales taking off. To some, this is evidence that China has hit a new state of development, emerging as a consumer society wealthy enough to rival America as the world's best customer, and in some ways it has. The problem is that the consumer driving the boom is not the individual, because the Chinese shopper has been in retreat in recent years. The real big spender is the government.

China's economic recovery is real, but it's been bought by the state. No political party in the world can spend quite as freely right now as China's Communist Party, with its nearly $2 trillion in reserves and budget authority unchecked by rival parties or institutions. Beijing's stimulus plan amounts to 4 percent of GDP, double America's 2 percent, and China can deliver this booster shot without resorting to foreign borrowing. Government investment has driven the Chinese boom for a long time, and it is up 30 percent since the beginning of the year, with 75 percent of the money going into infrastructure; spending on rail lines and roads has more than doubled over the past 12 months. New community centers, convention halls, and sports facilities are springing up in major cities and provinces. Central and local governments are raising subsidies to support idle factories, retrain workers, and boost income aid in hard-hit areas. New government lending, as well as government orders to banks to raise lending, is helping to spur a surge in apartment sales. The state is even handing out spending vouchers directly to consumers, particularly in rural areas, good for cars, refrigerators, and other products, many with price restrictions that effectively limit the vouchers to inexpensive Chinese brands. As a top executive at one Chinese state-owned bank puts it, "This is all about the government propping things up."

The hidden hand of the state can obscure the degree to which China still depends on subsidized exports to America. Among the hardest-hit areas are those such as Guangdong province, a southern factory hub that represents an eighth of China's wealth and a quarter of its exports. There five-star hotels built in the boom times stand empty, while job centers for laid-off migrant workers are full. On a recent evening, the Pearl River itself seemed dimmer—many of the garish light displays that usually blaze from waterfront inns and restaurants had been turned off "to save electricity," says Su Caifang, deputy director general of the Guangdong Foreign Affairs Office, who notes that the province has suffered greatly in recent months because of the global downturn. "We're still very export-dependent, especially on America," says Su, who notes that 40 percent of the region's exports go to the U.S.


It's an honest admission that undercuts all the talk about an emerging middle-class Chinese consumer poised to take the place of Wal-Mart moms. Chinese incomes are about one tenth of those in America, and total consumer spending was about $1.7 trillion in 2007, compared with $12 trillion in the U.S. Local officials in the Pearl River Delta say they are now traveling inland to Hunan or Sichuan province to sell to their own countrymen the consumer electronics, jewelry, and shoes they once sent abroad. Yet local sales are a drop in the bucket compared with exports. There's a growing sense that the U.S. market will take years to rebound—while the Chinese market will take a long time to reach critical mass. "Even before the financial crisis, we knew we needed to move beyond the U.S. market," says Allan S.K. Lam, vice general manager of Hua Jian Group, a shoe manufacturer that makes much of what you see in stores like Nine West, Kenneth Cole, and Coach. "But it's going to take at least five years, perhaps even eight years, to develop the Chinese domestic market in an important way."

What's more, Chinese consumers have been playing a less important role in the economy in recent years. Private consumption has been steadily declining for some time, going from more than 60 percent of GDP in 1968 to 36 percent of GDP in 2008, a trend that defies the typical image of China's booming middle class. The biggest reason for this is increasing worry over the country's lack of a social safety net (pensions are rare; medical care means money down at the door). But freedom may play a role: a recent Carnegie Endowment study looking at political freedom and consumption found that countries that became less free over the last 20 years, like China, Iran, and Venezuela, had a significant drop in consumption.

The retreat of the Chinese shopper worries people like Stephen Roach, chairman of Morgan Stanley Asia, who says consumption needs to reach 50 percent of GDP for China to really move beyond the export model. "There's no paradigm shift," says Roach, adding that state investment could rise from 40 percent of GDP to 45 percent by the end of this year, levels "we've never seen." Even when Japan was rebuilding after World War II, its investments reached only 34 percent of GDP. And while Japan was generating double-digit growth with that cash, Chinese leaders admit they will be lucky to hit the 7 to 8 percent target this year. Locals in Guangdong say the view from the ground is less optimistic than the official projections. "I've talked to a number of factory owners in the area, and they tell me if they can't get more orders in six weeks they may go out of business," says Ding Li, director of the Center for Regional and Corporate Competitiveness Research at the Guangdong Academy of Social Sciences.

Of course, the government can always intervene. Just look what it's done in Shenzhen, a Pearl River Delta city that, if the market had run its course, might be in just as bad shape as neighboring Dongguan, where by some estimates one out of every 10 factories is now shuttered. Shenzhen, a mere 97 kilometers away, is a vision of how government support can remake a city. Thirty years ago it was a paddy field. Then Deng Xiaoping decided to turn it into a manufacturing base, which today has an economy nearly half the size of its older and more glamorous neighbor Hong Kong. Most recently the government decided to place China's version of the NASDAQ there, spurring more new development. Many of the bourgeois trappings found in Shenzhen today—hyper-air-conditioned shopping malls, mock-Disney weekend resorts and nonsmoking coffee bars—were built by OCT (Overseas China Town), one of the earliest central-government-owned real-estate operations. Since 1985 the company has developed $8.7 billion worth of real estate. Still, many public spaces are conspicuously empty. On one recent evening, a vast California-style shopping mall filled with Chinese versions of upscale Western brands (Aqua-scu-tum, Hugo Boss) attracted only a smattering of visitors.

Still, Beijing builds on. A new state-owned luxury condo development called Portofino works improbably to bring la dolce vita to south China, with cobbled streets, broad piazzas, and a terra-cotta clock tower that chimes on the hour. A government representative claims 80 percent occupancy, and says that the $30,000-to-$50,000 flats in the development are selling to upwardly mobile, well-educated Chinese, many of them returning expats who see better job opportunities here than in the West. Yet the fake piazzas are deserted, and the majority of the comments on the message board of the local French-pastry shop are in English. While officials won't comment, it seems likely that a number of the properties are owned by or leased to Westerners.

China's heavily centralized state has spent its way to recovery before—during the Asian financial crisis of 1997–98, and also after the bursting of the dotcom bubble in 2001. But in both hose cases, government money was a stopgap, meant to buy time while the global economy (and exports) recovered. This time is different. The U.S. and, to a lesser extent, Europe are on the road to recovery. Yet exports are not coming back, which means that jobs for the 20 million Chinese migrant workers already laid off may not come back either. In fact, UBS bank estimates that the ranks of the unemployed may grow by another 15 million this year, as the export dip plays itself out. This doesn't necessarily translate into seething social discontent, as is often written. The migrants will be going back to their villages with a lot more than they left with. But in the mid- to long term, it raises pressure on China to find a new model. "I just don't see it happening," says Roach. "That's why I'm worried about another dip in growth next year."

Optimists point to Beijing's power of the purse. "The Chinese Communist Party is now the world's most liquid financial institution; there are no fiscal constraints," says Andy Rothman, a respected China bull at CLSA in Shanghai, who predicts 7 to 9 percent growth next year. Most economists agree that autocracy has its advantages in the midst of a credit crunch, since there are no political or legal obstacles to spending. As an executive at one of China's largest state-owned banks puts it, "The government told us to lend—so we did!" Yet already there are concerns about where all the new capital is going. Moody's and other ratings agencies are worried about a future rise in bad loans in China, given the explosion in bank lending. And since much of the new lending has gone to business, rather than consumers, it may be recycled among enterprises without trickling down more broadly to the consumer level, where it's most needed. While consumer-spending growth figures look high, even bulls like Rothman say the numbers are inflated to more than double the true level because government purchases at retail shops are included in the figures.

China has begun to create a social safety net, which would give people more confidence to spend instead of save, if it were not so full of holes. A few months back Beijing passed a $127 billion national health-insurance plan, to be delivered over three years. That's less than 50 bucks a head in China—"just puny," says Roach. Meanwhile, China's social-security fund has only $82 billion under management, less than $100 per worker. Economists believe the numbers should be doubled immediately, and China could afford to do it. Yet Beijing has been talking about tightening social safety nets since 2006, with little action. Even Chinese are skeptical about Premier Wen Jiabao's boast to deliver universal health care by 2011.

Of course, increasing affluence would also help encourage consumer spending—the per capita GDP in China is still only $2,000. But that would necessitate moving up from cheap, polluting industries to global Chinese brands. Right now most Chinese exports are merely assembled in China, rather than designed and branded there, which means most of the profit, and the big salaries, goes to foreign partners. Throughout Guangdong, where many exporters are based, officials and factory bosses claim to be working toward designing and producing more sophisticated finished goods, but the statistics tell a different story. Some 60 percent of production in the region is still low-end component assembly. And until China becomes an advanced export power it will remain a backward consumer society, where any green shoots are pushed up by the state.

China's ships idle but Shanghai port charges ahead

AFP - Sunday, June 28

SHANGHAI (AFP) - - The scene where Shanghai's river meets the sea is a snapshot of China's battle against the financial crisis -- as well as the site of the port the country hopes can set the stage for the next boom.

Empty container ships -- victims of China's export collapse -- line the river banks in Shanghai's port.

Meanwhile, bulk carriers laden with raw materials -- a bet on demand rebounding -- wait at sea because ports cannot unload them fast enough.

"Just look at the Huangpu River," a shipping company dispatcher said, referring to the waterway that cuts through Shanghai. "There used to be a few ships anchored on the river but now you can see anchored ships everywhere."

"Charter rates are so low now we would rather anchor the ships and save the cost of crew and fuel," the dispatcher for state-run Shanghai Puhai Shipping Co. said on condition of anonymity because he was not allowed to speak to reporters.

World shipping prices in the past week were down about 68 percent from a historic peak in May last year, according to the Baltic Exchange Dry Index, which gauges international dry bulk good shipping prices.

Low shipping rates combined with weak commodity prices sparked a Chinese buying spree of iron ore and other commodities that has led to jams of bulk carrier traffic at Chinese ports.

But that has not offset volume lost due to seven straight months of plummeting exports, which were down 26.4 percent year-on-year in May.

The volume handled at Shanghai's port was down 15 percent in the first five months of 2009 after nearly a decade of 20 percent annual growth, Shanghai International Port Group Vice President Huang Xin said this past week.

"This is the first time Shanghai's shipping container business declined since it went into full-scale operation (20 years ago), it shows how deeply the financial crisis has affected the real economy," Huang told a maritime conference in Shanghai.

Chinese shipbuilders fared even worse, with orders plunging 96 percent to 1.18 million deadweight tons in the first five months of the year compared to the same period last year, according to government figures.

"This will be the worst year ever for the container port industry in terms of volume decline," Truong Bui, a consultant at Drewery Maritime Services said. "China's container traffic will not recover until 2011."

Despite the plunge in shipping demand, Shanghai -- already the world's busiest port by total cargo volume -- is charging ahead with plans initiated during boom times to more than double its capacity.

China's cabinet set ambitions for Shanghai even higher in April, declaring it would move up the value chain and become a full-service world-class shipping centre by 2020.

But building the infrastructure will be easier than developing the service side of that equation, Xu Jianqun, Shanghai's Construction and Transport Commission Secretary General, warned.

"We lack the related 'software' in terms of ship financing, reinsurance for ships and arbitration," Xu told the same conference. "This leaves Shanghai lagging behind other developed port cities in the world."

The centrepiece of its expansion will be the Yangshan Deepwater Port, which connects to the mainland via a 32.5-kilometre (20-mile) bridge.

Shanghai also plans to build the world's biggest shipbuilding yard on its northern Changxing island and put in place rail lines to better link the port to industrial powerhouse regions, Xu said.

On the services side, the Bank of Communications, part-owned by HSBC and China's fifth-largest bank, announced last month plans to create a ship financing division.

Some argue the need for the extra capacity is debatable but Torben Skaanild, chief executive of the Baltic and International Maritime Council, said Shanghai's moves come as the shipping industry faces a historic shift.

"The timing is probably absolutely perfect. There has been a shift in ship-owning towards the East and Asia," Skaanild said. "But there will be stiff competition because Hong Kong, Singapore, Japan and Korea are not going to let Shanghai stand alone."

China's banks are an accident waiting to happen to every one of usFitch Ratings has been warning for some time that China's lenders are wading into dangerous water

By Ambrose Evans-Pritchard
Published: 5:38PM BST 28 Jun 2009

China's banks are veering out of control. The half-reformed economy of the People's Republic cannot absorb the $1,000bn (£600bn) blitz of new lending issued since December.

Money is leaking instead into Shanghai's stock casino, or being used to keep bankrupt builders on life support. It is doing very little to help lift the world economy out of slump.

Fitch Ratings has been warning for some time that China's lenders are wading into dangerous waters, but its latest report is even grimmer than bears had suspected.

"With much of the world immersed in crisis, China appears to be one of the few countries where the financial system continues to function largely without a glitch, but Fitch is growing increasingly wary," it said.

"Future losses on stimulus could turn out to be larger than expected, and it is unclear what share the central and/or local governments ultimately will be willing or able to bear."

Note the phrase "able to bear". Fitch's "macro-prudential risk" indicator for China threatens to jump from category 1 (safe) to category 3 (Iceland, et al). This is a surprise to me but Michael Pettis from Beijing University says China's public debt may be as high as 50pc-70pc of GDP when "correctly counted".

The regime is so hellbent on meeting its growth target of 8pc that it has given banks an implicit guarantee for what Fitch calls a "massive lending spree".

Bank exposure to corporate debt has reached $4,200bn. It is rising at a 30pc rate, even as profits contract at a 35pc rate.

Fitch traces the 2009 bubble to the central bank's decision to cut interest on reserves to 0.72pc. Bankers responded to this "margin squeeze" by ramping up the volume of lending instead. Over half the new debt is short-term. Roll-over risk is rocketing. China's monetary stimulus since November is arguably more extreme than the post-Lehman printing of the US Federal Reserve, though less obvious to the untrained eye.

Under the Taylor Rule, US policy remains tight (for the US). China's policy is loose (for China). New loans doubled in May from a year earlier, almost entirely to companies.

China's Banking Regulatory Commission fired a warning shot last week. "The top priority at the moment is to stop explosive lending. Banks should carefully monitor the process of credit approval and allocation, and make sure that loans flow into the real economy," it said.

Unfortunately, 40pc of the "real economy" consists of exports, mostly to the US and Europe, the consequence of a mercantilist export model that has qcrashed and burned. Chinese exports were down 26pc in May.

World trade may be stabilizing at last after contracting at faster rate than during the early Great Depression. But it will not rebound fast in a world where the US savings rate has risen to a 15-year high of 6.9pc. A trade policy based on the assumption that debtors in the Anglosphere and Europe's Club Med can ruin themselves for ever is absurd.

Andy Xie, a Sino-bear and commentator for Caijing, said Western analysts are in for a rude shock if they think that China's surging demand for raw materials implies genuine recovery.

Commodity speculators have been using cheap credit to play the arbitrage spread between futures and spot on the oil markets. They have even found ways to trade lumber to iron ore by sheer scale of leverage. "They've made everything open to speculation," he said.

Mr Xie thinks the spring recovery is an inventory spike, to be followed a double-dip downturn into next year as stimulus wears off.

Reformers know what must be done to boost consumption. China needs a welfare revolution. But creating a social security net takes time, and right now Beijing is facing a social crisis as 20m jobless workers retreat to the rural hinterland.

So the regime is resorting to hazardous methods to keep excess factories humming: issuing a "Buy China" decree: using a plethora of export subsidies; holding down the price of coke, bauxite, zinc and other resources to lower production costs (prompting a complaint from America and Europe); and suppressing the yuan, again.

Protectionism is a risky game for a country that lives off global trade and runs a surplus near 10pc of GDP. Mr Pettis said he fears China is nearing its "Smoot-Hawley moment", repeating the US tariff blunder of 1930 that brought the world crashing down on Washington's head.

Two facts stand out about China's green shoots. While the Shanghai composite index is up 70pc since November, Chinese imports are down 25pc from a year ago. China is still draining real stimulus from the global economy.

If the world's biggest surplus state ($400bn) is too structurally deformed to help offset the demand shock as Western debtors retrench, we are trapped in a long deflation slump.

China's growth in doubt with lenders on a bender

David Uren, Economics correspondent | June 29, 2009

Article from:  The Australian

THE strength of China's economy is seen by the the Reserve Bank and international institutions as the biggest source of hope for the Australian economy, but its growth may be less secure than they think.

The OECD raised its forecast for China's growth from 6.3 to 7.7 per cent in its economic outlook last week, while the World Bank lifted its forecast from 6.5 to 7.2 per cent.

Both the Reserve Bank and Treasury believe the global downturn will bring but a brief hiatus to China's growth, with the greater momentum of hundreds of millions of peasants entering the market economy carrying its economy forward.

They contend that rising productivity and living standards will repeat the pattern seen in the 60s in Japan and in the 70s in Taiwan and Korea, but on an incomparably greater scale. Australia's privileged position as China's preferred supplier of resources meant that it would hold on to most of the gains it had made from rising commodity prices, with its terms of trade permanently higher than the long-term average experienced from the mid-1950s until around 2004.

Treasury secretary Ken Henry made this point in a presentation last week, noting that Chinese demand for Australian iron ore and coal would keep our terms of trade strong.

"That means that terms of trade will be supportive of strong income growth in Australia in the next growth cycle," he said.

Certainly, Chinese demand for Australian resources has been behind the miraculous growth in our export volumes this year during the deepest trade slump since the 1930s.

However, new credit growth figures from China last week point to the potential instability of its recent economic performance. Bank lending in the first six months of this year is expected to reach almost 7trillion yuan, equivalent to $1.2 trillion, which would be more than double the growth of last year. In the first quarter, credit was growing at 300 per cent.

It is, as Standard Chartered China analyst Stephen Green put it, the most effective monetary easing in the world, leaving the bond purchases by the Federal Reserve Bank and the Bank of England in the shade.

"While many Chinese friends ask us anxiously about the US printing money, we wonder if those worries might not be better focused at home," he says.

After the first quarter's rapid growth, China's Banking Regulatory Commission instructed banks to slow their lending, and to ensure that loans were not used for speculative purposes. It repeated that warning last week. However, it is clear that the money is pouring into asset markets.

The Shanghai stockmarket is trading at 12-month highs, having risen by 71 per cent this year. Real estate turnover has surged and business investment, principally related to the stimulus package, is rising at rates in excess of 30 per cent.

Some of the credit boom is going into commodity markets. "The current surge in commodity prices is being fuelled by China's demand for speculative inventory," respected economist Andy Xie comments in a Chinese business magazine, Caijing.

He argues that bank loans have been so cheap that commodity distributors started arbitraging the difference between spot and futures prices.

"Now that price curves have flattened for most commodities, these imports are now based on speculation that prices will increase," he says, suggesting it is a bubble destined to implode.

Macquarie Bank has also questioned the sustainability of China's commodity purchases, given its stocks and production.

Besides the implications for inflation and bad debts, it is unlikely that a debt explosion can provide the footing for sustainable growth.

The World Bank's endorsement of China's growth prospects was hedged. It estimates that of the 7.2 per cent growth it forecasts this year, around 6 per cent will be a direct product of the government's stimulus package, which leaves the rest of the economy very anaemic.

It said there were limits to the role the stimulus could play, as government-influenced spending represented only a third of domestic demand in China. On its own, it was unlikely to lead to a rapid, broad-based recovery, given the global environment and the weakness of investment in China's market economy.

It noted that the focus of the stimulus package was investment and was doing little to fire domestic consumption. Apart from commodity exporters, it was doing little to stimulate the regional economy.

"It is too early to say that there is a sustained recovery in China. The policy stimulus allows China to continue to grow in this weak global setting. Nonetheless, there is a limit to how much and how long China's growth can diverge from global growth, given that China's real economy is relatively integrated in the world economy," the World Bank said.

That really goes to the nub of the problem. The OECD, in its economic outlook last week, maintained that China was in the vanguard of the global recovery, followed by India, Brazil and Russia, with the US and Japan picking up next while Europe lagged, tailed by countries like Estonia and Ireland. Australia is a winner from such a scenario, latching on to China's lead.

"Decoupling turned out to be a mirage on the way into the recession. But on the way out, it looks as if recovery will take hold in a staggered manner across countries," OECD acting chief economist Jorgen Elmeskov wrote.

But decoupling is likely to prove just as illusory on the way out. The OECD argued that the different levels of stimulus spending and the varying health of banking systems would shape the recovery. However, the world is too interconnected.

China cannot be expected to drag the US and Europe from their economic slough. Nor can China go off on a growth spurt all on its own. The US is a $US14 trillion economy, while Europe is about $US12 trillion -- combined they are about six times the size of China. The risk is that rather than proving a catalyst for recovery, stimulus spending in China, Australia and elsewhere is just a palliative that will leave economies in no better health and nursing huge debts.

China’s Economic Polarization Will Intensify Social Conflicts
Central News Agency Jun 28, 2009
According to the Hong Kong-based newspaper Wenweipo, at the Eleventh Chinese National Political Consultative Conference Standing Committee meeting in June, Political Consultative Commission member Cai Jiming said that a report conducted by Chinese authorities stated that a mere 0.4 percent of the people in China controlled 70 percent of the country's wealth.

The level of concentration is higher than that of the United States. Cai also said that such concentration would result in a distorted consumer pattern in the market place.

Mainland Chinese experts believe that in mature economies such as Japan and Australia, about 5 percent of the households control 50–60 percent of the country's wealth.

Another report shows that by the end of March 2006, 27,310 people in China had over 50 million yuan (US$7.3 million) in assets each; 3,220 people had more than 100 million yuan (US$14.6 million) in assets. Of the latter group, 91 percent or 2,932 were children of government officials. Altogether, they owned more than 2.045 trillion yuan. Most of the wealth was obtained thanks to their families’ ties to the Chinese Communist Party's power.

This report received much attention, for as the Chinese public becomes aware of the great wealth polarization, social conflicts may intensify. On the one hand, the global economic recession resulted in increased unemployment in China; many are barely getting by. On the other hand, according to the Chinese-language version of Forbes Magazine, from June 2009, China has become the most-favored luxury goods market in the world.

A single-family house can cost as much as 380 million yuan (US$52 million). A yacht can cost 140 million yuan (US$19 million). A car can cost 43 million yuan (US$5.9 million). A luxury watch can cost 18 million yuan (US$2.5 million). There is great enthusiasm in China's market for these luxury products.

Dean Zhou Xiaohong of the Social Studies Institute at Nanjing University said, "In China, income polarization hurts not only those at the bottom, but also the middle class." 

Zhou said that between 1994 and 2004, at least 7.7 million small businesses closed. The environment for small businesses and entrepreneurs is worsening. The spread of social classes is "M" shaped, indicating a weak middle-class. The high concentration of wealth in the very upper class means that other social classes will continue to weaken.


China Shows Signs of Asset Bubbles: Researcher
By: Reuters | 28 Jun 2009 | 11:20 PM ET
China is showing signs of asset price bubbles as a surge in new lending pushes up prices in the stock and real estate markets, the official Shanghai Securities News quoted a government think tank official as saying.

Wei Jianing, a senior researcher at the State Council Development & Research Centre, was quoted as saying that nearly half of China's newly created liquidity has been circulating in the financial system instead of flowing into the real economy to support growth, thus pushing up asset prices.

"There have already appeared some new early indications of asset price bubbles in China," Wei was quoted as telling a conference.

The newspaper also quoted Cheng Siwei, an influential former Chinese lawmaker, as saying that about 2.4 trillion yuan ($351 billion) of new lending in the first quarter of this year was used for investment purposes, including stock and property investment.

Total new lending in the first quarter was 4.58 trillion yuan.

He said it was impossible to judge at the present time, however, whether a bubble had already developed in the stock and property markets.

Cheng predicted that China's economic growth could meet the government's target of 8 percent this year and would reach 9 percent in 2011, a sustainable rate of growth, the newspaper said.

In order to boost domestic consumption, China should increase workers' wages, improve individuals' returns on asset investment, strengthen social safety networks and increase consumer lending, the article quoted Cheng as saying.

Chinese Paper Warns Of Risks In Lending Surge

Separately, the People's Daily reports that China's torrent of bank credit is pouring too much money into big infrastructure projects and government-backed investments that sometimes have been poorly vetted.

 The People's Daily said the surge in lending has helped shore up growth but has also sowed potential risks that demand closer attention.

It adds to a recent drum-beat of warnings about the potential long-term downside of China's credit-fuelled growth.

"Extraordinary times mean extraordinary means," said the newspaper, noting that new credit in the first half of 2009 is sure to top 6 trillion yuan ($878 billion), more than new credit for any entire year since the founding of the People's Republic of China in 1949.

"However, this torrent of credit also has issues and problems that warrant our attention."

Among the problems, the paper said, is the concentration of credit going to railways, highways, airports and other big government-sponsored undertakings, diverting loan opportunities from the small and medium-sized businesses that generate the most jobs.

The paper adds that banks see loans to government projects as sure bets, and have sometimes become lax in assessing risks and likely returns.

"To win government projects, some banks have even relaxed credit checks, lowering barriers for loans," said the paper.

"Doing this does not seem to have any risks in the short term, but in the longer run, the returns on some government investment projects will not be high and the collection period will be long, so it will be difficult for these projects to ensure adequate cash flows to cover principal and interest."

New lending by Chinese banks is likely to hit 1.2 trillion yuan ($176 billion) in June, the China Securities Journal reported on Friday, even as bank regulators warned about improper loans.

New lending in the first five months totaled 5.84 trillion yuan, easily topping the government's full year minimum target of 5 trillion yuan.


Beware the China bubbleFiled in archive risk by leon on June 29, 2009

Worrying signs are emerging from China with reports that we are seeing the creation of an asset price bubble in that market. There was 4.57 trillion yuan (or about $US670 billion) of new lending pouring into the market but most of that was on speculative assets, not the real economy.

Fitch Ratings now warns that the Chinese banks are an accident waiting to happen. And it will affect all of us.

Fitch warns: "With much of the world immersed in crisis, China appears to be one of the few countries where the financial system continues to function largely without a glitch, but Fitch is growing increasingly wary. Future losses on stimulus could turn out to be larger than expected, and it is unclear what share the central and/or local governments ultimately will be willing or able to bear."

If that's right, China's commodity speculators are just using cheap money to speculate and the spring recovery will be exposed as an inventory spike. That would be followed a big downturn into next year as the stimulus wears off.

The implications for the global economy are massive. Watch this space.
China’s stimulus fuelling stock bubble

Monday, 29 Jun, 2009 | 06:05 PM PST |
SHANGHAI: China risks frittering away its stimulus spending on speculation in stocks and real estate, reports said Monday, citing economists who say surging bank loans risk inflating risky asset bubbles.
The comments by prominent economists came as Shanghai’s benchmark Composite Index hit another high for the year, gaining 1.6 per cent, or 47.10 points, to 2,975.31. The index has gained more than 60 per cent since the beginning of the year.
While recent gains in shares and property prices are a welcome respite for investors, putting funds meant for stimulus projects into speculative investments could undermine the government’s effort to boost growth and reduce the economy’s heavy reliance on exports.
About 20 per cent of bank lending is going into stock speculation, and another 30 per cent or so is going into the property market, state-run newspapers cited Wei Jianing, an economist with a Cabinet-level think tank, as saying.
China’s economic planners have urged banks to issue loans to support the government’s four trillion yuan ($586 billion) stimulus program, aimed at protecting the economy from the global slowdown by pumping money into spending on building airports and other public works.
Wei and other economists told a conference in Beijing that the huge flow of money into shares and property could be fueling risky, unsustainable price increases, China Business News and other reports said.
Through an intermediary, Wei refused requests Monday for comment. The reports said Wei cited estimates based on his research, but noted that his comments were his own personal opinion, not that of the Development Research Center, which is affiliated with China’s State Council, or Cabinet.
State media reports last week said new bank lending in June is estimated to have surged by 1.2 trillion yuan ($175.7 billion).
Added to the 5.8 trillion yuan ($849 billion) in new bank loans in January-May, that would push new lending in the first half of the year to about seven trillion yuan (over $1 trillion).
That is more than the total annual new lending for China for any year.
But warnings against misuse of such funds for other purposes, such as stock speculation, are appearing increasingly frequently in the state-controlled media — including one in Monday’s People’s Daily, mouthpiece of the ruling Communist Party.
‘Extraordinary times call for extraordinary measures,’ said the commentary, which noted that much of the spending, even on construction projects, was unlikely to yield much of a return.
‘However we must at the same time improve the lending structure and guard against risks to ensure that lending supports good quality economic development,’ it said. — AP

Painful dark side to China’s lending surge — Andy Xie

JUNE 29 — China’s credit boom has increased bank lending by more than six trillion yuan (RM2.88 trillion) since December. Many analysts think an economic boom will follow in the second half of the year. They will be disappointed.

Much of this lending has not been used to support tangible projects. It has been channelled into asset markets.

Many boom forecasters think asset market speculation will lead to spending growth via the wealth effect. But creating a bubble to support an economy brings, at best, a few short-term benefits along with a lot of long-term pain. Moreover, some of this speculation is hurting China's economy by driving up asset prices.

The current surge in commodity prices, for example, is being fuelled by China's demand for speculative inventory. Damage to the domestic economy is already significant. If lending doesn't cool soon, this speculative force will transfer even more Chinese cash overseas and trigger long-term stagflation.

Commodity prices have rocketed since March. The Reuters-Jefferies CRB Index has risen by about a third, and several key commodities like oil and copper have doubled in value from this year's lows.

Demand from financial buyers is driving these prices. The weak global economy can't support high commodity prices. Instead, low interest rates and inflation fears are driving money into commodity buying.

But financial demand alone can't support commodity prices. Financial investors can't take physical delivery and must sell maturing futures contracts. This force can lead to a steep price curve over time.

Early this year, the six-month futures price for oil was US$20 (RM70) higher than the spot price. Investors faced huge losses unless spot prices rose. A wide gap between spot and futures prices increased inventory demand as arbitrageurs sought to profit from the difference between warehousing costs and the gap between spot and futures prices. That demand flattened the price curve and limited losses for financial investors. Without inventory demand, financial speculation doesn't work.

For some commodities, warehousing costs are low, limiting net losses for financial buyers. Copper, although 5,000 times less valuable than gold, still has low warehousing costs relative to its value. Some commodities such as lumber and iron ore are bulky, costly to warehouse, and should be less susceptible to financial speculation. Chinese players, however, are changing that formula by leveraging on China's size. They've made everything open to speculation.

There's little doubt that China's bank lending since last December has driven speculative inventory demand for commodities. Chinese banks lend for commodity purchases, allowing the underlying commodities to be used as collateral. The loans are structured like mortgages.

Banks usually have to be extremely cautious about such lending, as commodity prices fluctuate far more than property prices. But Chinese banks are relatively lenient. As an industrialising economy, China's support for industrial activities such as raw material purchases for production is understandable. However, when commodities are bought on speculation, lenders face high risks without benefiting the economy.

The international media has been following reports of record commodity imports by China. The surge is being portrayed as reflecting China's recovering economy. Indeed, the international financial market is portraying China's perceived recovery as a harbinger for global recovery. It is a major factor pushing up stock prices around the world.

But China's imports are mostly for speculative inventories.

The first wave of purchases was to arbitrage the difference between spot and futures prices. That was smart. But now that price curves have flattened for most commodities, these imports are based on speculation that prices will increase. Demand from China's army of speculators is driving up prices, making their expectations self-fulfilling in the short term.

What is happening in the commodity market is glaring proof that China's lending surge is hurting the country. Even more serious is that it is leading Chinese companies away from real business and further towards asset speculation.

The tough economy and easy credit conditions have encouraged many companies to try profiting from asset appreciation. They borrowed money and put it into the stock market. And since China's stock market has risen 70 per cent since last November, many businesses feel vindicated for focusing on the asset market.

Borrowing money for asset market speculation is not restricted to private companies. State-owned enterprises (SOEs) appear to be lending money to private companies at high interest rates.

As the economy weakened late last year, private lenders began demanding money back from distressed private companies. Loans from state-owned enterprises may have kept many private companies from going bankrupt. It has served to re-channel bank lending into cash for individuals and businesses that were in the lending business. This money may have flowed into asset markets.

Some may argue that China has SOEs to lead the economy. However, private companies account for most employment in China, even though SOEs account for a larger portion of gross domestic product. Now, the government is spending huge amounts of money to provide temporary employment for this year's college graduates. If private sector employment doesn't grow, the government may have to spend even more next year. The government is using fiscal stimulus and bank lending to support economic recovery. But the recovery may be a jobless one.

We are seeing a dark side to the lending surge as commodity speculation hurts the economy. More lending may lead to higher commodity prices, threatening stagflation. Cheap loans benefit overseas commodity suppliers, not necessarily the Chinese economy.

Putting money into speculative investments isn't totally irrational. It's better than expanding capacity which, without export customers, would surely lead to losses. But many boom forecasters wrongly assume that recent asset appreciation, fuelled by speculation, signals an end to the economic problems. That's an illusion. The lending surge may have created more problems than it resolved. —

  • June 29, 2009, 2:54 PM ET

$70 Oil, but Where’s the Demand?

Rising oil prices — the great villain of 2008 — are back, but this time markets are cheering.

Oil futures jumped over $71 a barrel this morning, boosting shares of Exxon Mobil and Chevron – and the Dow overall — as investors looked towards the rally in recent months as a bullish sign that demand is returning to an ailing global economy.

Or is it?

Separately today, the Paris-based International Energy Agency slashed its forecast for world oil demand over the next five years, saying that by 2013 global demand will average 87.9 million barrels a day, 3.7% fewer than it expected in December and 7% fewer than it expected last July. The group predicts oil consumption will fall by 3% this year, the sharpest decline in a quarter-century, after averaging about 2% growth annually over the previous decade.

Why all the fuss over oil demand? Because it’s critical to know what’s behind rising oil prices. If it’s demand — if nations like the U.S., China and India are consuming more oil because they’re building infrastructure and powering factories — then indeed higher prices are a bullish sign for global economic growth, even if it means some grumbles at the pump.

But if it’s not demand at play, as the IEA’s outlook seems to suggest, then rising oil prices start to look a lot more sinister — especially because higher oil prices take a chunk out of consumers’ pocketbooks and companies’ earnings, a scenario that unfolded to much dismay last summer, when prices topped out in July at over $145 a barrel.

One possibility is that supply could be too tight; that producers have slashed their output too much. But if that’s the case, it would seem they’d now be eager to pump more oil through their pipelines and cash in on the higher prices (which then helps to stabilize prices at that elusive “equilibrium”).

Or, it could be speculation. It does seem a little odd that global supply and demand would have gyrated enough over the past year to send prices soaring last summer; then crashing; and now rebounding swiftly even as the world economy navigates its worst downturn since the Great Depression. Last summer, Richard S. Eckaus, a professor of economics at the Massachusetts Institute of Technology, published a short, easy-to-read paper with the Center for Energy and Environmental Policy Research titled “The Oil Price Really Is A Speculative Bubble”.

He writes that “there seems to be a preference for the claim that the price increases are the result of basic economic forces: rapid growth in consumption, pushed particularly by the oil appetites of China and India, the depreciation of the U.S. dollar, real supply limitations, current and prospective and the risks of supply disruption, especially in the Middle East.” He briefly explores — and debunks — each of those possibilities, writes that the price of oil is behaving much like any other speculative bubble, and encourages efforts to “break the bubble” given its adverse effect on the economy.

The latter suggestion makes for an interesting debate: if oil price fluctuations are being driven by trading activity rather than supply and demand, should such activity be regulated, prohibited even? Only one thing is certain: the faster and higher prices go, the more plausible the idea will become.

Chinese stimulus cash is inflating new stock market bubble, officials warnHalf of the 5.8 trillion yuan (£522bn) of stimulus loans issued by Chinese banks have flowed into the country's stock and property markets, inflating new bubbles, according to senior Communist officials.

By Malcolm Moore in Shanghai
Published: 10:40AM BST 30 Jun 2009

Under orders from the government, China's banks have flooded the economy with new credit this year, advancing more money in the first six months than the total for 2008.

It is the biggest wave of money since the People's Republic of China was founded in 1949. The loans are part of a stimulus package to spur domestic investment and consumption and help the economy through the financial crisis.

However, a significant proportion has been diverted into shares and property, with the Shanghai Stock Exchange rising 60pc since January.

Several economists believe a large part of the government's 4 trillion yuan state aid package has also failed to reach the "real" economy.

Wei Jianing, an economist at the Development Research Center of the State Council, said 20pc of the new bank loans had reached the stock market, and 30pc had been invested in property.

According to the Chinese state media, Wei said the huge flow of money could fuel further asset bubbles. However, he was careful to note that this was not yet the view of the State Council, China's ministerial cabinet.

“When funds are circulating and swelling inside the financial system, instead of servicing the real economy, we see this as a sign of bubble formation,” said Wei. “Now the rapidly circulating funds can easily boost the stock market and produce new financial bubbles, and lift real estate prices as well.”

Another official, Cheng Siwei, the vice-chairman of the standing committee of the National People's Congress, said around 2.4 trillion yuan of the 4.58 trillion lent in the first three months of the year had been used for "real" investment, while the remainder was used for speculation.

However, Cheng also predicted that the Chinese economy will grow by 8pc this year and by more than 9pc next year.

The lack of supervision over the enormous sums being advanced has started to trouble the Communist Party, which issued a stern commentary through the People's Daily, its official mouthpiece.

"Extraordinary times call for extraordinary measures," said the commentary. "However we must at the same time improve the lending structure and guard against risks to ensure that lending supports good quality economic development".

China's bank regulator has already urged commercial banks to scrutinize borrowers to ensure loans aren't misused.

One factor that might inspire a rout in the market is the 3.2 trillion yuan of shares that will emerge from lock-up periods this year, a 53.1pc increase in value terms on the sum last year, according to the Chinese central bank. The People's Bank of China cautioned that the market would have to be watched closely for any impact.

By Scott Maragioglio, on June 29th, 2009

We saw this interview this morning. Larry Levin is talking about market manipulation by the government and Rick Santelli backs him up. I guess it depends on your idea of “manipulation”, but the injection of liquidity into the capital markets by the government is bad policy if they are targeting asset prices. Targeting asset prices is the Greenspan legacy, which is based on the idea that asset prices affect economic growth in a “reflexive” manner a’la George Soros (read the Alchemy of Finance). The idea of a feedback loop between asset prices and the real economy is valid. The problem is that you have to flush out the system from time to time. A healthy economy cannot be sustained in a permanent state of stimulation. Policy makers are completely unwilling to simply “let go” and allow a truly cathartic event wash over the economy.

How does this effect our trading? The bears can’t seem to figure out why stock prices have remains as buoyant as they are. The answer is simple…liquidity. The government has dumped more money into the system than was spent over the course of World War 2 on an inflation adjusted basis. It’s the biggest “sugar high” in the history of the market and pales in comparison to anything Greenspan ever did. Do you really want to be on the other side of that? Will it ultimately lead to another meltdown? Absolutely, but in the short-term we believe this is a cyclical bull leg within a secular bear market.



June 30th, 2009 by Michael Pettis | Filed under Banks, Fiscal debt and deficits, NPLs.

“China’s overall surge in credit in the first half of 2009,” an article in yesterday’s People’s Daily assures us, “is normal and healthy; however problems still exist in the structure, quality and flow of credit. China should continue to optimize credit structure and guard against potential risks.”
Credible rumors suggest that new loans in June will hit RMB 1.2 trillion or more, as banks rush to inflate their quarterly loan numbers, just as they did in March, on the assumption that any cap in quarterly loan growth will be based on the previous quarter’s numbers. I would argue that new lending in 2009, running at 2 to 3 times the new lending over the same period in 2008, is not at all normal and is very unlikely to be healthy. Here, by the way, is the breakdown for this year and last year (the June number is a rumored projection, so it may change):

New loans

Half year
These are amazing numbers. The People’s Daily article indicates, I think, the schizophrenic attitudes prevalent in China today, with growing nervousness in some circles about the consequences of this explosion in lending riding side by side with a determination to keep it up.
We are going to get 8% growth this year come what may. Since late last year I have been writing about how this everything-but-the-kitchen-sink strategy of throwing everything possible into countering the effect of the global contraction on the Chinese economy might result in higher growth this year and next but will make China’s necessary transition even more difficult and will almost certainly result in much slower growth over the longer term.
I am more certain than ever that this is the correct analysis. The biggest damage is likely to be in the banking sector, which will then create problems in the fiscal accounts. Here is how I see the two greatest risks associated with a sharp rise in NPLs:
1.NPLs are implicitly obligations of the government, whose debt is probably much higher than most of us think and whose commitment to maintaining high levels of growth will result in rising fiscal deficits. In my opinion there is almost no chance that we will not find ourselves worrying about the fiscal position of the government in the next few years. I know this may sound alarming, and it is certainly a little premature, but historical precedents are neither comforting nor forgiving.
2.If NPLs rise sharply, the banks must be protected and recapitalized. Unfortunately this will mean keeping lending rates low, to slow down NPL accumulation, and deposit rates much lower, to maintain banking profitability. As I have discussed many times before, most explicitly in my June 3 entry, low lending rates are one of the most powerful of China’s production subsidies, and low deposit rates, by acting effectively as a significant tax on household income, will significantly constrain consumption growth – basically households will be heavily taxed to protect borrowers and to recapitalize banks, and this cannot help but affect consumer spending. The consequence is that banking policies will be set directly in opposition to the necessary transition that China must make as the US trade deficit continues its long term decline.
Worries about rising NPLs in the banking sector are often brushed off with the claim that the explosion in new lending is implicitly guaranteed by the government so there is nothing to worry about as far as the banks are concerned. Would that were so. Fitch, the ratings agency which seems to be distinguishing itself as the most prudent in its analysis of the banks, has already pointed out that the self-reinforcing relationship between bank credit quality and government credibility, and if government debt is really in the range of 50-70% of GDP, which I suspect it is, I am not sure how much room there is for an explosion in bad debt.
The People’s Daily article also addresses thisissue of government guarantee:
Loans secured for government projects mostly rely on “government credibility” – an invisible guarantee offered by local governments. According to data from the Jiangsu Banking Regulatory Bureau, of the loans issued by Jiangsu’s large banks to finance government platforms at all levels, 57.27 percent rely on public finances to repay debts and 49.13 percent are backed by financial commitment letters issued by local governments.
It is often difficult for banks to obtain prompt, comprehensive and correct information about the future disposable financial resources and implicit liability of local governments. If a local government faces financial difficulty, it will undoubtedly affect the quality of banks’ credit assets.
There is, on other words, a distinction between loans implicitly guaranteed by local government and the central government. Already there has been a lot of talk in various finance circles about the fiscal position of local governments, whose revenue sources have been badly hit – and the more desperate they are the more likely they are to guarantee loans. But I don’t know how real the distinction is. Provinces and municipalities are implicitly or explicitly guaranteed by the central government, and in the case of wide-spread payment difficulties I suspect the central government will have to step in anyway.
On this subject let me make a quick detour into history. Edward Chancellor, in his book Devil Take the Hindmost, makes an interesting comment about the famous English Bank Act of 1844:
Under the terms of the Bank Act (also known as Peel’s act after the Prime Minister) the Bank of England’s discretionary ability to issue notes was restricted to a statutory £14 million above its holdings of bullion. A currency tied firmly to gold, argued the bullionists, would prevent over-speculation by defining the limit of credit and offering no escape for the reckless during a crisis. The belief that the government had legislated away financial crises provided many with a false security in the year ahead.
Aside from (I hope) undermining the inexplicably widely-held belief that financial crises occur only in periods of fiat currency, and were unknown during the gold standard days, the real punch line for me is that within just a couple of years of the Bank Act, England experienced an out-of-control railway bubble whose collapse led to the great financial crisis of 1847. It seems that few things are more dangerous than the belief that governments can eliminate or sharply reduce the risk of financial crisis. The idea that a country’s financial system can act as crazily as it likes as long as the government is willing to protect it from its folly runs not only into the problem of undermining government credibility as bad debts surge, but the very belief almost guarantees that the financial system will act in a crazy way.

Can I prove that the Chinese banks are systematically behaving the way banks always seem to under such liquidity conditions? I can’t, and won’t be able to for a few years, but the anecdotal evidence bears terrible resemblance to the same kinds of anecdotal evidence in previous banking crises. For example, last week the People’s Daily had this article:

Three major Chinese lenders said Tuesday that auditors had discovered irregularities in their lending last year, but added that these findings would not affect their financial results. The Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB) and China CITIC Bank said in separate statements that the National Audit Office (NAO) found some violations of rules in last year’s routine audits. None of the lenders revealed the amount of loans involved in these violations.
…ICBC, China’s largest lender, said in Tuesday’s statement that some of its branches were found to have violated rules in business operations, and some weaknesses in management were also pinpointed.
The bank added it had corrected the violations and had moved to improve risk management and internal controls. The other two lenders said some of their branches had been found to have extended loans against rules or been negligent in supervision over borrowers after the loans were made.
And of course there’s a lot more evidence of credit gaps. Along with a study by a local economist suggesting that an awful lot of new lending was ending up on the gaming tables of Macau (which after all may perhaps be economically more justifiable than further commodity stockpiling), Wei Jianing, a deputy director at the macro-economics department of the Development and Research Center under China’s State Council, worries about money leaking into illegal stock speculation. According to an article in yesterday’s Bloomberg:
Chinese new bank loans worth about an estimated 1.16 trillion yuan ($170 billion) were invested in the stock market in the first five months of this year, China Business News reported, citing a government economist.
That’s 20 percent of the 5.8 trillion yuan loans banks extended in the period, the Shanghai-based newspaper said.
…A further 30 percent of the loans in the first five months may have been used for discounted bill financing, or short-term credits used to fund working capital needs, China Business News said today. These funds may help form a financial bubble, the newspaper cited Wei as saying, adding this is the economist’s personal view.
Stock market speculation is likely to be the least of the worries. At least there is a chance that some of those loans will get repaid. I am not sure this is true of all the other loans being made. In fact I guess I just take it as an iron-clad rule of finance that when bankers are under huge pressure to lend, and especially when there is a perception that someone is willing and able to backstop the risk, every banking system in history has or will behave in exactly the same way.
In that light today’s New York Times had an interesting article on an Argentine private banker who ended up committing fraud at UBS, even after he left to join Chase, with almost laughable ease.
The curious case of Mr. Arbizu, whose career exploded when a Chase customer discovered and reported his crime in May 2007, offers a rare window into this well-shielded world, and raises questions about how carefully some of its largest institutions monitor their bankers.
In telephone and e-mail interviews held in the last eight months, Mr. Arbizu put himself in what he said was the “3 percent of bankers who at some point get confused because of the pressure. We feel like we can take risks that other people don’t even dream to do, and that we can manage that risk — I don’t know why.”
What does this sorry story of fraud have to do with my topic? Perhaps not much, but at the very least it indicates how easy it is even for well-managed banks (ok, stop snickering, UBS is indeed relatively well-managed, but even the best managed banks have never been able to avoid stupid behavior during credit bubbles) to permit, under conditions of rising liquidity and surging financial markets, some very shaky behavior, and I would be utterly shocked if a lot of the same things weren’t occurring in Chinese banks. A lot of analysts like to claim that the credit risk management systems among Chinese banks have improved dramatically. This may very well be true, but it is easily possible for a risk management system to improve from “terrible” to “a little less terrible,” and in the past three weeks I have had conversations with an auditor for one of the Big Four banks and with a foreign advisor who has advised the Chinese government on the setting up of credit risk management systems, and both have totally and without reservation dismissed out of hand the quality of the risk-management systems of Chinese banks.
Under these conditions, and with the amount of what perhaps we can politely call non-credit-related aspects of the lending decision, it is really such an heroic assumption to assume that we are going to see problems in the quality of loan assets? I know it is now very fashionable to dismiss risk management at UBS, Chase and other Western banks, but risk management is still really a lot more experienced and independent at UBS and Chase than at their counterparts here in China.
What makes me worry even more was, paradoxically, the OpEd piece suggesting the opposite by CBRC chairman Liu Minkang, appearing the weekend edition of the Financial Times.
Sometimes the most effective way to address a complex issue is by using basic, simple but useful measures. Practice shows us that traditional tools work, especially considering that financial engineering can malfunction. In recent months we have noticed that many regulators in the rest of the world have also started to embrace this “back to basics” approach.
Much has been written about what triggered the global financial crisis, but in my view it can be attributed to five factors. First of all, the firewall between capital and banking markets was eroded by unsound financial innovations. Second, macro-prudential regulation was neglected. Third, financial institutions had too much leverage and were too opaque. Fourth, incentives for staff at financial institutions were driven by short-term gains, rather than long-term benefits. Fifth, the bail-out put the cart before the horse by pumping in capital and liquidity before cleaning up balance sheets.
There is a long tradition of bankers and regulators waggling their fingers at their fallen brethren in other countries and suggesting that their own practices are much better and should have been more widely copied – just before they find themselves stuck in an even worse quagmire. Although Chinese bankers are probably right to feel annoyed, and just a little pleased, after all the self-important drivel they have had pressed on them by foreign bankers and regulators, still, I would really resist the temptation to hold up China’s system as a model. Like with Japanese bankers in the late 1980s sloughing off Americans and Europeans for their terrible banking practices that were so unlike banking practices in Japan, this is just tempting fate, and Dr. Liu’s five risk factors, and especially the second and the last two, are not exactly foreign to the Chinese banking system.
Before closing, I know I have made a number of references to the 33 A.D. banking crisis in Rome as one of the first recorded cases of a banking panic. I often get questions on it, so let me post here a portion of Chapter 15 from Will Durant’s History of Roman Civilization and of Christianity from their beginnings to AD 325
The famous “panic” of A.D. 33 illustrates the development and complex interdependence of banks and commerce in the Empire. Augustus had coined and spent money lavishly, on the theory that its increased circulation, low interest rates, and rising prices would stimulate business. They did; but as the process could not go on forever, a reaction set in as early as 10 B.C., when this flush minting ceased. Tiberius rebounded to the opposite theory that the most economical economy is the best. He severely limited the governmental expenditures, sharply restricted new issues of currency, and hoarded 2,700,000,000 sesterces in the Treasury.
The resulting dearth of circulating medium was made worse by the drain of money eastward in exchange for luxuries. Prices fell, interest rates rose, creditors foreclosed on debtors, debtors sued usurers, and money-lending almost ceased. The Senate tried to check the export of capital by requiring a high percentage of every senator’s fortune to be invested in Italian land; senators thereupon called in loans and foreclosed mortgages to raise cash, and the crisis rose. When the senator Publius Spinther notified the bank of Balbus and Ollius that he must withdraw 30,000,000 sesterces to comply with the new law, the firm announced its bankruptcy.
At the same time the failure of an Alexandrian firm, Seuthes and Son due to their loss of three ships laden with costly spices and the collapse of the great dyeing concern of Malchus at Tyre, led to rumors that the Roman banking house of Maximus and Vibo would be broken by their extensive loans to these firms. When its depositors began a “run” on this bank it shut its doors, and later on that day a larger bank, of the Brothers Pettius, also suspended payment. Almost simultaneously came news that great banking establishments had failed in Lyons, Carthage, Corinth, and Byzantium. One after another the banks of Rome closed. Money could be borrowed only at rates far above the legal limit. Tiberius finally met the crisis by suspending the land-investment act and distributing 100,000,000 sesterces to the banks, to be lent without interest for three years on the security of realty. Private lenders were thereby constrained to lower their interest rates, money came out of hiding, and confidence slowly re-turned.
This is not totally relevant to China today except to the extent that it indicates how difficult it is for banking systems flush with cash to avoid speculative lending, and how the very fact of their speculative lending then creates the conditions that can bring the whole thing crashing down. There has never been a political or economic system in history that has been able to avoid the consequences of excessive liquidity within the banking system. Even the Romans learned this, and they learned it the hard way, as we always do.

China faces more anti-dumping complaints - EU group

Tue Jun 30, 2009 1:27pm IST

By Kirby Chien

BEIJING (Reuters) - China will face more WTO complaints and anti-dumping accusations as the global recession forces U.S. and European firms to seek relief from intense competition, a European business group said on Tuesday.

China's massive industrial overcapacity, low labour costs and efficient manufacturing support its cheap exports on world markets, threatening profit margins, jobs, and the very existence of some sectors in Europe and the United States.

"I am unfortunately a little more pessimistic because I see so much trade friction going on," Joerg Wuttke, the president of the European Union Chamber of Commerce in China, told reporters.

"Given that economic growth will remain slow in the United States and Europe, there will be more companies speaking up," said Wuttke after a chamber event.

Members of a U.S. trade panel said on Monday that President Barack Obama should impose import duties of up to 55 percent on low-cost Chinese tyres because they are disrupting American markets.

That recommendation came after the U.S. opened its third anti-dumping investigation against Chinese steel imports in 10 days, a move that Beijing said was a shocking sign of trade protectionism.

The root cause of the rising tension is China's exports, which have exploded in the past decade, reaching $1.43 trillion in 2008 from $195 billion in 1999.

"I see more anti-dumping cases on the horizon," said Wuttke. "I see more WTO settlement cases coming up."

Wuttke said that while China had avoided outright protectionist measures -- unlike clear anti-trade steps taken by Indonesia, India and Russia -- there were still many instances of unfair practices that eroded the spirit of fair competition.

More than 54 percent of EU chamber members polled said Beijing "strongly" enforced environmental regulations on foreign firms, but only 7 percent said domestic firms faced the same level of scrutiny.

"The uneven enforcement of environmental laws is like a hidden subsidy for domestic competitors," said Wuttke.

The percentage of chamber members who felt China was implementing changes in the spirit of the World Trade Organization fell to 22 percent this year from 32 percent in 2008. While 56 percent thought China was not acting in the spirit of the WTO.

"This is, of course, not good news," he said.

China has been the biggest target of anti-dumping probes over the last 14 years. In 2008, China was the subject of more than one-third of the 208 anti-dumping investigations worldwide.

Tuesday, June 30, 2009

China Signals End of Stockpiling

Um, how come this story is in the Sydney Morning Herald (as of about 20 hours ago) and not the US/UK business media? This is a pretty major development. Yes, commodities heavy Australia is most affected, but Oz is hardly alone in seeing the ramifications.

While the US dollar is weakening, the Australian dollar has had an amazing run, and the only justification I could fathom for its outperformance (it normally moves with the euro, albeit with more amplitude) was the commodities/China angle. Australia was the only economy to see its exports increase since the global slump took hold.

From the Sydney Morning Herald (hat tip reader Sean):
A record-breaking run run of commodities exports to China that has sustained the Australian economy may be set to end, with Beijing officials and advisers announcing an end to "strategic" stockpiling, and massive iron ore contracts likely to expire today.

A key state planning official has signalled a halt to government buying of copper, aluminium and other high-value metals because prices have risen too high.

"We don't anticipate that the country will continue to build its reserves," said Yu Dongming, the head of the metallurgical department of the National Development and Reform Commission...

Zhang Bin, an economist with the Government's most influential advisers, the Chinese Academy of Social Sciences, warned that Beijing was leaning against Chinese speculative buying of a range of commodities including Australia's most lucrative exports, coal and iron ore.

"The commission is acting to reduce pressure on commodities prices and discourage over-production in heavy industry, including guiding steel production and reducing the building of excess capacity," Dr Zhang told the Herald.

"Too much increase in inventories of commodities is not a good thing because the economy is still not that strong and cannot consume this level of imports of iron ore and coal."...

"I think the risks are weighted to the downside," Mr Rennie said. "If China does slow demand for those key commodities, it is not entirely clear there is another obvious buyer out there."...

"Iron ore imports seem to have started to slow down," said Paul Bartholomew, the Shanghai editor of Steel Business Briefing. "I can't see it bettering the 57 million tonnes … in April."


30 June 2009

Energy & materials stocks make up 25% of the S&P 500.  Without their participation it’s nearly impossible for a sustainable rally.  One of the key contributors to the “sell in May and go away” data is the seasonal trends in commodity related stocks.   Over the last 10 years materials and oil related stocks have averaged 17% gains from October to May.  That seasonal strength adds tremendously to the overall indices.  As I often mention here, much of this is attributable to the strong seasonal demand trends in the oil markets.  Oil demand tends to dip during the fall and early winter before spiking in February and continuing into the July 4th holiday when the summer driving season officially ends.  This trend has clearly continued again this year as oil and gasoline have rallied over 95% since the March bottom:


The strong seasonal trend says you should be selling commodities now, but this isn’t the only evidence that makes me cautious heading into late summer.  David Rosenberg, of Gluskin-Sheff notes some important drivers of the recent commodity rally:

With the U.S. still in recession, what has been fueling the commodity markets have been the revival signs in China, and here, the news has become mixed from a commodity standpoint. We learned that Chinese imports of refined copper hit a record high in May for the fourth month in a row; but domestic supplies were actually put to work in terms of consumption at a much slower rate. In fact, the FT estimates that Chinese copper usage actually fell 3.5% in May even as imports surged 6% MoM (and 25.8% from a year ago). The same holds true for aluminum where consumption fell 1% in May.

Without question, the largest contributor to the recent run-up in commodity prices was China’s stimulus plan.  The IEA data has been unquestionably mixed in recent months (including yesterday’s downgrade of world oil demand) and hasn’t warranted the incredible price moves.   It’s not a stretch to say that China, along with regular seasonal speculation have been the primary drivers of the commodity price climbs.   And we’re now getting signs from China that they have stopped the stockpiling and expect lower prices going forward.  The Sydney Morning Herald notes:

“We don’t anticipate that the country will continue to build its reserves,” said Yu Dongming, the head of the metallurgical department of the National Development and Reform Commission.

Zhang Bin, an economist with the Government’s most influential advisers, the Chinese Academy of Social Sciences, warned that Beijing was leaning against Chinese speculative buying of a range of commodities including Australia’s most lucrative exports, coal and iron ore.

“The commission is acting to reduce pressure on commodities prices and discourage over-production in heavy industry, including guiding steel production and reducing the building of excess capacity,” Dr Zhang told the Herald.

“Too much increase in inventories of commodities is not a good thing because the economy is still not that strong and cannot consume this level of imports of iron ore and coal.”

We’re also seeing signs of inventory accumulation as firms begin to ride the back of higher prices and add supply to the markets.  Francisco Blanch, head of global commodity research at Merrill Lynch notes:

“We expect commodity prices to come off in the short run, in the next two or three months. Oil and some of the metals markets will start to suffer because of large inventory accumulation.”

The trend is your friend until it ends.  The supply demand dynamics, China repositioning and seasonal trends are pointing to an end to this upward trend in commodities.   And that, will likely keep the stock market from going anywhere fast….


Dollar adds little to commodity price moves: John Kemp

Reuters, Tuesday June 30 2009  By John Kemp

LONDON, June 30 (Reuters) - The idea that prices for dollar-denominated commodities should move inversely with changes in the dollar's value is beguiling but wrong.
If commodity prices have been moving more closely in line over the last four years, that is more likely to be accidental, or the result of traders believing the relationship is true -- a belief that becomes self-fulfilling if enough market participants act on it. There is no statistical evidence for a fundamental, causal link.
The belief commodity prices should move inversely with the dollar is a version of the quantity theory of money (MV=PT) and stems from the idea that "money is a veil" [ID:nLP411966]. The basic intuition is that the "real" price of a commodity should be set by physical supply and demand. It should not matter whether it is expressed in dollars, euros or conch shells.
Changes from one currency to another, or in the value of the measuring currency, alter the units, but not the fundamental price. So if the dollar is devalued and worth half as much as before, the price expressed in dollars should double, leaving the "real" price is unchanged. The theory is even supported by a causal mechanism:
* Commodity producers outside the United States and the dollar-zone are assumed to respond to a dollar decline by pushing for higher selling prices to compensate for lost purchasing power and continue to cover their (unchanged) costs for items such as labour and electricity in local currency.
* Consumers are assumed to respond by bringing forward or even increasing purchases of suddenly cheaper raw materials.
The incipient supply decline and demand increase raise selling prices until the whole of the exchange rate change is offset, and the "real" price is back to where it started.
It is a nice theory. Unfortunately there is no real evidence for it.
(1) Most of the marginal demand for commodities such as oil, copper and iron ore comes from China and other emerging markets that have pegged their currencies to the dollar. Their purchasing decisions are unaffected by changes in the exchange rate.
(2) Only a small share of producers' costs is sensitive to exchange rate changes. Mining and oil production is a capital-intensive business. While operating costs (electricity and wages) may be denominated in local currency, they account for only a small share of total expenditure. Most of the borrowing to cover capital costs of exploration, development and infrastructure is done in international markets in dollars.
(3) Most international trade transactions are still invoiced in dollars, even when the United States is not involved as exporter or importer. Commodity producers complain about the loss of purchasing power when the dollar declines versus the euro or the yen, but it is largely notional rather than real, since invoicing prices for other imports are unlikely to change much in most cases.
(4) Correlations between commodity prices and the trade-weighted value of the dollar have varied over time and are simply not stable enough to have much explanatory power. Aluminium prices show a significant negative correlation with the dollar only after 2004. The correlation between oil prices and the dollar was actually positive (i.e. the opposite of what theory would predict) between 1990 and 2003 before turning negative from 2004 onwards.
(5) There is no sign of short-term, causal correlations between changes in commodity prices and changes in the dollar's value over one-day, one-month or even six-month horizons. Correlations are only really evident over periods of 12 months or more.
(6) Correlations with the dollar vary between commodities in ways that appear arbitrary. While most commodities have displayed strong negative correlations with the dollar in the last four years, prior to 2005 there were strong correlations for copper, lead and tin, but weaker ones for aluminium, zinc and oil, with no apparent reason for the difference.
(7) Dollar depreciation does not appear to affect commodity prices equally, even when all items are priced in the currency. Steep rises in the price of crude oil, iron ore and copper during 2005-2008 were not matched by rising prices for autos or computer chips.
(8) Differences in producers' pricing power are necessary and sufficient to explain why some commodity prices rose strongly in 2005-2008 (oil, iron ore, copper) while others did not (aluminium and computer chips). Exchange rate movements add nothing to the analysis. Using Occam's Law (which suggests simpler explanations should be preferred to more complex ones) exchange rate changes should largely be ignored when analysing commodity price movements.
(9) There is simply not enough pricing history to draw meaningful statistical conclusions. That might seem surprising since we have more than 4700 daily data points in the set (1990-2009), more than enough for a meaningful analysis. But the points are not truly independent. The period under examination consists of only one exchange-rate cycle and one commodity price cycle.
To draw strong conclusions we would need to analyse commodity prices over several cycles. Unfortunately, oil futures are only available from the early 1980s and base metals were not traded in dollars until the late 1980s.
While there is no proof of a fundamental link, commodity prices have been moving much closely in line with changes in the dollar's value since 2005.
One explanation is that this is the period which corresponds to the dollar's plunge to historic lows. Casual links (such as producer costs) which had little or no effect at "moderate" levels for the dollar have become much stronger at extreme low levels. In other words, there is a fundamental correlation, but a non-linear one and it has more impact at extreme values.
Another is that all financial markets have become more "integrated" in recent years as a result of globalisation, improvements in financial and communications technology, and the influence of increased wealth management, hedge funds, pension funds and investment banks pursuing similar strategies in formerly separate markets.
The result has been a noticeable increase in correlations across all asset classes. Commodities are simply part of the trend as they have attracted increased interest from investors and increasing trade as financial instruments rather than physical raw materials.
Especially in the run up and aftermath of the banking crisis, all correlations seem to have gone to one, nullifying the hoped-for benefits of diversification and explaining why commodity correlations have risen so high in the last four years.
The last explanation (and consistent with the other two) is that if enough traders behave "as if" there is a link between commodity prices and the dollar, the belief will become self-fulfilling. Such self-fulfilling correlations are too powerful to ignore, and exert a strong influence on the market, until such time as they break down, to be replaced by an alternative proxy for traders to track and use.

Case for recovery without job losses
By Liu Yuanchun (China Daily)
Updated: 2009-06-30 07:54

There is talk among the Chinese public about the increasing unemployment. Since China's economic stimulus plans concentrate mainly on capital-intensive industries rather than labor-intensive ones, the prospect of an "economic recovery without employment" is looming large. This makes unemployment a problem that may not be relieved through economic growth.

Now it is rather difficult to obtain statistics showing the entire picture of unemployment. Based on the employment elasticity and the input-output method, the Renmin University of China estimates that the number of unemployed in the non-agricultural sectors will surge to 36.5 million this year. The new unemployed will mainly consist of migrant workers from rural areas, fresh college graduates, and demobilized soldiers.

Unemployment will directly lead to slippage of consumption, and persistent unemployment will increasingly drag the economy down. The rise in the rate of unemployment will dent people's income and dampen their confidence to spend, making consumption decline. We forecast that the vicious circle of unemployment and consumption slippage will gain momentum in the coming months and threaten the economy with another bout of slump.

According to studies on the history of economic crises, the culprits responsible for the loss of confidence were the persistent surges in unemployment rates.

Today a whiff of optimism is spreading among the people because of the economic stimulus plans and the guidance provided by the media. But persistent unemployment, which may cause decline of incomes, slump in consumption as well as many social problems, might reverse the current overly upbeat mood.

The unemployment rate is tricky. It usually lags behind the GDP figure for one and a half year to two years. Therefore the rise in unemployment rates tends to last for a rather long time even after the GDP growth has been stabilized.

In the circumstances, how shall we deal with the problem of a recovery without jobs? The first thing that needs to be done is to facilitate employment through the economic stimulus policies.

The current economic plans are mainly investment oriented, i.e. raising investments in heavy industries. Since these industries are mostly capital-intensive, they cannot create too much employment.

Hence, it is high time that stimulus packages were made more employment oriented. The local authorities should formulate effective measures and build employment platforms for creating more jobs. The problems of unemployed migrant workers and new graduates require more attention and effort, too. They should seek to achieve the targets announced in the National People's Congress this year: Creating 9 million new jobs in the urban areas and containing the urban registered unemployment rate within 4.6 percent.

Second, studies show that non-State-owned enterprises have higher employment elasticity. Hence, we suggest that the government, when implementing its 4-trillion-yuan ($586 billion) stimulus plans, should offer more help to the medium and small private enterprises and labor-intensive sectors, which are the main contributors to job creation.

In fact, 90 percent of the 4- trillion-yuan stimulus packages are allocated to the State-owned large and medium enterprises. We suggest the government should let both the non-State-owned enterprises and the State-owned ones share the opportunities of economic growth through transparent and open procurement and bidding process. If the non-State-owned firms also benefit from the stimulus packages, employment would get a boost.

The central government should design an incentive mechanism to transform the achievements in economic growth into job creation, and provide more growth opportunities to private firms.

Third, the government should offer unemployment benefits and assist the unemployed in finding new jobs, for preventing the decline of economic confidence.

Hence, the structure of governmental expenditure should be adjusted such as to provide more public funds for unemployment benefits and assistance. The government should change its goal from "raise employment and secure stability" to "strengthen the social safety net and secure stability". In all likelihood, we may have to face a long period of surging unemployment amid the "recovery", and "growth without employment".

The author is a professor of economics with the Renmin University of China


July 1, 2009

Some interesting stats:

"It’s hard to imagine that a US-centric global economy wouldn’t be at risk in the aftermath of a bursting of the US housing bubble. Lacking in internal support from private consumption, the non-US world remains heavily reliant on selling exports to wealth-dependent American consumers. As the United States now comes to grips with the aftershocks of another post-bubble shakeout, so, too, must the rest of the world.

There’s no consumer in the world like the American consumer. In 2005, US personal consumption expenditures totaled $8.7 trillion. At market exchange rates, that was about 20% higher than consumption in Europe, a little more than three times that in Japan, nine times that in China, and fully 17 times consumption levels in India. The comparisons are equally striking when private consumption is expressed as home-currency shares of each economy’s respective GDP - 70% for the US in 2005, 54% in Europe, 57% in Japan, 38% in China, and 64% in India. Putting it another way, one measure of America’s “excess consumption” - defined in this case as the difference between growth in consumer outlays and disposable personal income - was about $210 billion in 2005, or almost half of total consumption in India." 

China’s exports plunge furtherBy John Chan
25 June 2009


The world’s second largest exporter, China, registered a record year-on-year fall in exports of 26.4 percent in May. The result followed similar trends in other export-led Asian economies including Japan, South Korea and Taiwan, indicating continuing weak global demand.


China’s May export figure was worse than the 22.6 percent fall in April and is the seventh consecutive month of decline. The slide of exports is the worst since the data is collected in 1995. Imports also fell 25.2 percent year-on-year in May—a further indication of weakening exports as China imports large amounts of semi-finished goods and components for re-export.


Other Asian exporters have been hit by the recession in the US, Europe and Japan. South Korea and Taiwan saw 25-30 percent annual falls in exports and imports in May and Japanese exports tumbled by 40.9 percent. Overall world trade volume plunged by 17 percent by the end of March, from a peak in 2008, a contraction that is greater than in the same initial period of the Great Depression in 1930s.


Despite these figures, the World Bank this month lifted its 2009 forecast for China’s growth to 7.2 percent, up from the previous 6.5 percent. Most of the growth is attributed to the government large stimulus spending, which will moderate due to the growing budget deficit. “China’s economic growth is unlikely to rebound to a high single digit pace before the world economy recovers to solid growth,” the bank stated. Its latest forecast for the global economy in 2009 is a 2.9 percent contraction, down from a previous negative 1.7 percent.


When China slowed to just 6.1 percent growth in the first quarter, commentators rushed to conclude that the economy had hit bottom and was ready to surge back. Now economists and Chinese officials are more cautious, warning that the recovery is more likely to be slow and unpredictable. Ben Simpfendorfer, a Royal Bank of Scotland economist, warned: “Strong [factory output] result will be hard to sustain in the second half because of still weak exports.”


China’s once vibrant manufacturing export hub, Dongguan, for instance, recorded an unprecedented 2.5 percent economic decline in the first quarter. Guangdong province as a whole, which accounts for 28 percent of China’s exports and 12.5 percent of national Gross Domestic Product, recorded 5.5 percent growth in the first quarter, the slowest in 20 years. The once booming coastal export province of Zhejiang grew at just 3.4 percent, a decline of 8.4 percentage points from the same quarter last year.

Most growth now comes from inland regions, which are using government stimulus spending to build infrastructure. Their cheaper labour is also attracting multinationals that are shifting factories and offices from the coastal areas. Nine of the 11 provinces with double-digit growth rates in the first quarter were western and central provinces.


These imbalances have been covered up in the overall economic data. According to the Bureau of National Statistics on June 11, urban fixed asset investment in the first five months rose 32.9 percent from the same period last year to 5.35 trillion yuan—more than the total for last year. The number of new investment projects jumped by 47 percent in the same period to 123,878. Property investment rose 6.8 percent. Industrial output increased 8.9 percent in May from a year earlier. Retail sales rose 15.2 percent after a rise of 14.8 percent in April.


For economists desperately looking for “green shoots” of recovery, these figures appear to provide the answer. Lu Ting, a Bank of America Merrill Lynch economist told Bloomberg news on June 11: “There is no problem in China achieving its 8 percent economic growth target for this year.”


The statistics are deceptive, however. Bank lending, which has been surging, is now slowing down, due to fears of inflation and large levels of bad loans. New loans in May were 664.5 billion yuan ($97.2 billion), up from 591.8 billion in April—but far below the average 1,520 billion each month in the first quarter. Total lending so far this year has already exceeded the official target of 5,000 billion yuan, creating pressures on prices.


Alistair Chan, an economist with Moody’s, told the Financial Times on June 11: “The surge in bank lending has resulted in a large increase in real estate transactions, possibly of a speculative nature, which may explain the rise in volumes. Fixed asset investment in China continues to increase on the back of state-directed projects... This will help keep the economy growing, but there are increasing concerns about the amount of lending that has been required to fund the projects.”


China’s Shanghai Composite Index has risen by over 50 percent this year, reflecting not so much the strength of the underlying economy, but the large amounts of speculative capital flowing into equity markets. One indication of the underlying weak investment in actual production is foreign direct investment (FDI), which fell 20.4 percent to $34.05 billion in the first five months, compared to the same period last year.


The Australian noted that China’s stockpiling of commodities reflected an uncertain recovery. Australia’s key export to China—iron ore—was the subject of rampant hoarding and speculation. “Port warehouses are full and iron ore that is coming into China at almost double the 30 million tonnes a month that its steel sector is consuming.” Demand of steel for infrastructure had risen, but there was little new demand from manufacturing.


Chairwoman of JP Morgan China equities, Jing Ulrich, insisted: “For China’s nascent economic recovery to be sustainable beyond the short-term, policy makers must take steps to ensure that consumption remains on a firm growth trajectory and that the investment boom does not exacerbate the economy’s structural imbalances.”


However, growing unemployment and declining incomes among rural migrants and urban workers will only lower consumer spending. Since last September, 23 million rural migrant workers have been laid off, mainly in export industries. Clement Chen, the head of the Federation of Hong Kong Industries, told Reuters that many firms in the Pearl River Delta were running below full capacity and were cutting costs. “In the long term they believe that hiring fewer workers and putting in automated machinery, higher production machinery, will basically be their strategy,” he said.


Unemployment will impact heavily on rural areas, where remittances from relatives working in the cities have been vital. Beijing has allocated $3 billion in subsidies for farmers to buy televisions, refrigerators and other electrical appliances, but the idea that impoverished rural areas can substitute for major export markets is a fantasy. For the past 30 years, rural areas have been a vast source of cheap labour. Rural incomes are several times lower than in the cities and are further eroded by heavy taxation.


Consumer confidence is falling, with a survey released by China’s central bank this month showing that 43.3 percent of Chinese households complained that prices were “high and hard to accept,” up sharply from 26.1 percent in the first quarter. The number of households feeling “comfortable” was the lowest since records began in 1999.


The Chinese regime is deeply concerned about the consequences of mass unemployment. The Financial Times on June 12 reported that Beijing had ordered state-owned firms not to lay-off workers, but instead cut wages. Companies must obtain government approval before firing large numbers of workers. “The government fears widespread unemployment could lead to social unrest. But many officials are more fearful of high inflation, which could spark public protests,” the newspaper warned.

Chinese Junk
The problems underlying China’s pathologies.

By John Derbyshire

Is China really a modern country? Can China be a modern country? Paul Midler’s book leaves you wondering.

After studying Chinese at college, Midler lived and worked in mainland China through the 1990s before returning to the U.S.A. to take a business degree. In 2001 he went back to China, setting himself up as a consultant to American importers dealing with Chinese manufacturers. This has given him profound insights into the Chinese way of doing business. In Poorly Made in China he shares those insights. After reading his book, you will find yourself thinking carefully before putting Made in China items into your shopping cart.

Midler identifies the features of China’s production environment that make a joke of all the free-trade slogans. There is, for example, “quality fade.” You cut a deal with a Chinese manufacturer to import beauty lotions in plastic bottles. You give precise specifications for the product and container. The first shipments are fine. Then customers begin to complain that the plastic of the bottles is too thin. You squeeze a bottle, it collapses. It turns out that your manufacturer has quietly adjusted the molds so that less plastic goes into making each bottle. Neither the importer nor his customers has been told of the change.
The reason for this:
Factories did not see an attention to quality as something that would improve their business prospects, but merely as a barrier to increased profitability. Working to achieve higher levels of quality did not make me a friend of the factory, but a pariah.
In this, as in much else, the Chinese are great testers of limits. Just how much “quality fade” can a supplier get away with before the business relationship breaks down? You can be sure they will find out, and stop short a millimeter before the electric fence.

Then there is intellectual-property arbitrage. Under pressure from the advanced nations, the flagrant disregard for intellectual-property rights that was on display in China through the 1980s and 1990s has been brought under some measure of control, but much of it has just gone underground. As Midler writes, “Americans somehow imagined that Chinese factories existed to manufacture merchandise only for the United States, but this was not the view from China at all.”

From the point of view of a Chinese manufacturer, the world is divided into “first” and “second” markets. In the first market — North America, Western Europe, Japan, Australia, and some lesser outposts of legal order — new product designs originate, and the designs are protected by patent, trademark, and copyright laws. By all means go along with that: Get business relationships going with customers in those places. Manufacture according to their designs, observe their laws, give them good deals — even sell to them below cost. Then sell knock-offs of their designs to Latin America and the Middle East, where intellectual-property protection is not so valued. This arbitrage game explains the curious fact that Chinese-made products are often more expensive in the developing world than in the U.S.A. That’s where the profits are made.

The most vexing game to Midler was the one in which Chinese manufacturers relentlessly play off importers against buyers. Everyone is trying to make a profit, of course: the manufacturer from the importer, the importer from the U.S. store chain’s buyers, the store chain from the retail customer. The importer is at the Chinese end of this linkage, negotiating with the Chinese manufacturer, and must bear the brunt of Chinese gamesmanship.

Manufacturers are highly skilled at shifting profit margins from the importers to themselves. If a Chinese factory boss knows any English at all, Midler tells us, it is likely to be the phrase: “Price go up!” Whether the manufacturer’s costs actually have gone up is impossible to ascertain, accounting standards in China being, well, Chinese. Since the importer-buyer deal is fixed under American law, the importer must swallow the manufacturer’s price increases, which happened under Chinese law — which is to say, no law at all.

But then the importer can switch to another manufacturer, right? Not necessarily:
The health and beauty care industry was one that existed in a tight network. Some manufacturers in the industry were even related to one another. Others shared an educational background. . . . Others shared a kinship that was based in part on membership in the Communist Party. And then some had suppliers in common.
How skillful are Chinese manufacturers at gaming the free-trade system? Think three-card monte. One of Midler’s key import contacts in the U.S.A. is a man he calls Bernie. We learn in Chapter 4 that Bernie belongs to the Syrian-Jewish community, the most capable and exclusive of all the world’s “market-dominant minorities.” (They refer to ordinary Jews like Paul Midler rather dismissively as “jay-dubs,” from the consonants in “Jew.”)

Yet with all his savvy and connections, Bernie is outfoxed time and again by the Chinese. He turns the tables on them just once, in Chapter 21, but his advantage is merely temporary. The worldly and confident Jewish diamond dealer in Chapter 15 fares even worse. This would be a mighty King Kong vs. Godzilla clash of market-dominant minorities, except that the Chinese are on their home turf — actually a majority. Outsiders stand no chance.

#ad#With his strong background in Chinese history and culture, Midler is able to identify some of the underlying problems. Many of his vexations echo those voiced by foreigners in China for half a millennium or more: a love of excuse and pretense, the elevation of appearance over substance, admiration for unprincipled cleverness, shame a much stronger sanction than guilt. The old stereotype of the Chinese as chronic gamblers has some foundation in the Chinese psyche, too, as Midler notes:
The impression I got at some of the factories that engaged in quality manipulation schemes is that they did so after growing bored with their more conventional successes. . . . There was a great deal of excitement that came with getting a new business off the ground. These manufacturers were thrilled when they signed up their first major customer, and they got another kick from orders that were especially large. When deal flow leveled out, factory owners looked for other ways in which they could capture that hint of thrill.
All these quirks of national character would be harmlessly amusing in a business environment constrained by impartial law and rational politics, as indeed is the case in Hong Kong and Singapore, and increasingly in Taiwan. In mainland China’s barbarously low level of political and legal development, they express as poisonous pathologies — metaphorically poisonous to a healthy capitalist mentality, but sometimes literally poisonous to the unwary consumer, as we have seen in the recent scandals over toys, baby food, and pet food.

None of this will come right until the current odious dictatorship falls and the Chinese have a system of government worthy of their great talents and civilizational glories. Can we do anything to help? We might have, once. Paul Midler:
During the Clinton administration, when Most Favored Nation status for China was debated in Congress, there was a chance for the United States to hold out for political and economic reform in China, but the opportunity was lost. . . . Improved structural conditions made possible then might have more appropriately set the stage for stability going forward. Instead, American politicians and business leaders rushed headlong into greater levels of interdependency with China, a nation whose reliability is questionable.
Poorly Made in China manages to be both instructive and entertaining, with lessons not only for businesspeople looking to China for profits, but also for our politicians seeking to promote honest trade and U.S. national interests. I wish I could believe that the latter, some of them at least, might pay attention. On past experience, though, that is too much to hope for.
By McLaren and Torchinsky, 10:01 AM on Tue Jun 30 2009, 9,121 views
Want to know how that lead got into your kid's toys? Why brand-name goods come in containers that fall apart. Or how radioactive cookery ended up on store shelves? A new book out by Paul Midler, Poorly Made In China, promises the inside scoop on why products made in China are as shoddy (and often as dangerous) as seemingly possible.
As a former consultant to American importers, Midler has worked on the frontlines of Chinese manufacturing. The National Review describes one of the strategies he covers in the book:
From the point of view of a Chinese manufacturer, the world is divided into "first" and "second" markets. In the first market - North America, Western Europe, Japan, Australia, and some lesser outposts of legal order - new product designs originate, and the designs are protected by patent, trademark, and copyright laws.
Chinese manufacturers want business relationships with customers in these places — so much so that they'll even sometimes sell to them below cost. But then they'll turn around and
...sell knock-offs of their designs to Latin America and the Middle East, where intellectual-property protection is not so valued. This arbitrage game explains the curious fact that Chinese-made products are often more expensive in the developing world than in the U.S.A. That's where the profits are made.


Rotten Foundations Cause Building Collapse in Shanghai
By Stephen Gregory
Epoch Times Staff Jul 1, 2009
The gleaming new construction going up in Shanghai is often taken as a metaphor for the “new China.” But some residents of Shanghai might put a different spin on this common thought.
On June 27 at approximately 5:35 a.m. in Shanghai an almost completed 13-story apartment building that is part of the Lotus Riverside Court development simply toppled over. There was no earthquake or typhoon to cause this. The collapsed building was in one piece, but rested on its side. It looked like a toy a child had pushed over.
One worker died in the collapse.
As is often the case in today’s China, the bloggers are the best sources for what is really happening. Of course, China’s blogosphere is a virtual world filled with all kinds of characters—the noble and the selfless blog right beside the vicious and the corrupt. The regime keeps on retainer at a rate of pennies a blog a huge crew whose job is to push the official viewpoint. And there are the run of the mill fakes, cheats, and con artists.

 But blogging gives the ordinary Chinese citizen a chance at dignity in a system designed to deny him any voice, and a chance to speak to the world, albeit anonymously, the truth he knows, in a system built on lies. Blogging is an act of revenge on corruption and tyranny that the individual otherwise feels powerless to confront.

In the case of the Lotus Riverside Court building collapse, some bloggers posted messages about a report on the Japanese News Network (NYSE:NNN). The messages show screen shots of a TV report in which the chairman of the Japan Structural Consultants Association held a photo of the collapsed building.
According to the bloggers, the chairman said that judging from Japan’s standards, the posts of the building are “too few and too thin.” He is also quoted saying that, in Japan where there are frequent earthquakes, the posts would be around 2 meters (about 6.5 feet) in diameter; but those of the collapse building are about 50-60 centimeters (about 2 feet); in addition, those posts are all hollow, where they should be solid.
Bloggers who had worked in the construction industry explained the collapse at the Lotus Riverside Court by telling tales of putting up buildings with rebar that was far too thin and of using cement that was substandard. 
These stories, of course, were found to be true on May 12 2008, when the Sichuan earthquake leveled school buildings, likely killing thousands of school children (the regime has arrested grieving parents who have tried to make a comprehensive list of the dead, and the true, total death toll of school children remains unknown), while official government buildings survived the earthquake seemingly without a crack in them. The bloggers began referring to the “tofu waste” construction going up in China.
Other bloggers explained how this kind of building can be approved. After the construction begins, the building inspector is taken out for a big meal by the developers. Perhaps at the meal the inspector is slipped a red envelope with a little bit of cash, but the bribe is not the point. The inspector has to know who is behind the building project. The dinner invitation is an “offer he can’t refuse.”
The Lotus Riverside Court is a development of 11 identical buildings, with move-in dates set for next May. The buyers of apartments in the non-collapsed buildings are protesting. They have a lot of money invested in apartments in which they may never live. The apartments sell for about US$2,100 per square meter (3.2 square feet), according to the Associated Press.
The developer claims that there is no problem with any of the other buildings in the complex, but scaffolding has appeared around each of them, apparently for inspectors to work from.
The news today is that measures are being taken against the developer and the contractor. This is always the way in today’s China—when corruption bursts into the open with a spectacular failure, someone is made to pay. But these very public investigations are for show and nothing fundamental changes.
This investigation will doubtless document how the foundations of the Lotus Riverside Court are rotten, but the real foundations of the collapse will not even be looked at.
In China, farmers often keep a separate patch of vegetables grown only for their family—they don’t want to eat the vegetables they ship to the market. Middle class families often import baby formula from relatives overseas—how can they trust that the baby formula labeled as coming from Australia is not in fact made in China?
Everyone in China seeks security. As individuals each seeks what is good for his or her own family. But they do so within a system of lies and corruption that has been built by the Chinese Communist Party. Until that foundation is exposed and replaced, there will be no safe home for the residents of the Lotus Riverside Court, or anyone else in China.

16:48, July 02, 2009

Exclusive: Experts analyze main problems in China's economy
How to improve China's economy

People's Daily recently gathered economic experts' opinions on China's economy to help point out its main problems.

The economic growth rate is relatively low. One explanation is that market demand still depends on foreign economies, but China's major trade partners' economic situations are gloomy, leading to a significantly reduced market demand. The future of foreign trade is unclear, thus the domestic demand must be boosted to compensate.

However, the process of boosting domestic demand is fragile.

Effectively funding an economic stimulus package is the primary problem that local governments are facing. Investment in the manufacturing industry is still lower than normal, and it is difficult to completely transform a production capacity designed to satisfy export demand into one that can satisfy the domestic market. The measure of boosting private investments with government investment has shown no obvious results, and the drive to increase private investment is weak.

The motivation for structural adjustment is also weak. In particular, the internal drive to transform and upgrade the industrial structure is not strong enough. In east coast areas, structural adjustment was forced by the impact of the financial crisis, and at present, it is a long-term adjustment, instead of an adjustment for the current period.

The gap between excessive production and insufficient market demand has widened. The sales of industrial products continue to decline while stockpiles continue to increase. Business revenues and net profits have decreased remarkably. Some industries' losses are extremely severe due to their excessive production capacity while the prices of their products continue to drop.

Invalid injections of capital continue to increase. In particular, the injection of credit has structural problems, and may impose restrictions on future economic growth: the financial environment for small and medium enterprises has not improved; the proportion of credit available for consumers is relatively low; some funds have not been invested in the real economy, decreasing credit support for production and business operation.


06/19/2009 14:02
About 37,000 Chinese dams deemed “unsafe”, some on the verge of collapse
China Daily blames the problem on shoddy construction, unqualified workers and embezzled public funds. Now that the flood season is right around the corner the authorities call for maximum alert to prevent collapses.

Beijing (AsiaNews/Agencies) – In China 37,000 reservoirs (40 per cent of the total) are in potential danger, some just a few years after they were built, the China Daily reported. Shoddy construction, unqualified workers and embezzlement of public funds are at the root of the problem according to the Communist Party’s semi-official mouthpiece.



Once the pride of the state as means to generate clear and cheap energy several dams along the Yellow River in Gansu Province are now in a very bad situation, some on the verge of collapse.

An 80-m long and 20-m high dike built in Yuanxian County in 2006 has developed a breach about 10 meters wide in the middle.

According to nearby villagers, at least five other newly-built dams are in very fragile condition.

As flood season approaches in July, August and September, China's dam safety is coming under heavy pressure and inspections show many of them are not in good condition, Minister of Water Resources Chen Lei said.

Recently work has begun on 3,642 reservoirs to reinforce and another 7,611 need immediate action.

Since 2003 China has invested a total of 83 billion yuan (US$ 12 billion) into dam building and tackling soil erosion.

From 1999 to 2008, a total of 59 dams were breached nationwide, some by torrential rain others because of quality defects.

Alert levels are high this year in Sichuan, which was hit by a devastating earthquake in May of last year, and home to 90 per cent of China’s dams.

What is more, many dams have not even generated the amount of power they were designed for.

In many cases dam construction had a huge negative impact on the environment and on residents.

Entire villages and millions of people were forced to leave, their homes and fields now under water.


Survey shows Chinese mainland had more rich than UK
11:16, July 02, 2009
Mainland China had more rich people than the UK in 2008, rising to fourth position in the world rankings, according to a survey conducted by an institution under Merrill Lynch.

However, some foreign media agencies have said that the excessive centralization of wealth in China is concerning, believing that, with the fastest growth in luxurious goods consumption in the world, the degree of lavish spending by rich Chinese is shocking.

In addition, some analysts have pointed out that although the number of rich Chinese is increasing, wealth distribution across different classes is still unhealthy. There remains a large gap between China's wealth structure and the "olive-shaped society" of a larger middle class prevalent in the West.

By People's Daily Online
Real estate sales up, prices soar
By Hu Yuanyuan in Beijing, Zhou Yan in Shanghai and Zhan Lisheng in Guangzhou (China Daily)
Updated: 2009-07-03 07:33

  The real estate market is quickly turning hot.

On Monday, for instance, a land parcel along Beijing's Guangqu Road was auctioned off for more than 4 billion yuan ($585 million) after fierce bidding among major developers from the mainland and Hong Kong.

The price set a record for a single land parcel in Beijing.

More dramatically, just 15 months ago, this land parcel was withdrawn from a public tender due to a lack of bidders.

"The bidders have gone irrational. A bubble in Beijing's property market is definitely there," said Pan Shiyi, chairman of property giant SOHO China, who was also a bidder that day, after the latest auction.

This "bubble" is being felt in the real estate market in major cities across the country.

In Beijing's Central Business District, residential property appreciated 6.5 percent in the past week alone, according to leading property broker Homelink.

In some established neighborhoods, such as the R&F City, SOHO New Town and the Pingod, demand for second-hand apartments is four times the units available.

"We used to talk about monthly price growth, but recently, it's more about daily change," a broker with Homelink said.

In Shanghai, developers of the luxury Tomson Rivers apartments, known for their price of more than 100,000 yuan per sq m ($14,000), sold 10 units in the first 25 days of June.

Before that, only four had been sold since the project was marketed in 2005.

In Guangzhou, the downtown housing price reached 11,200 yuan per sq m ($1,600) in May, close to the historical high of 11,574 yuan per sq m ($1,700) in October 2007, official statistics indicate.

And the average price of second-hand apartments reached an all-time high of 9,648 yuan per sq m ($1,400) in the same month.

"One thing we are concerned about is whether there is a new bubble being shaped. While people have a strong perception of excessive liquidity and further price growth, the possibility of a bubble is pretty big," said Gu Yunchang, secretary-general of the China Real Estate Association.

The current momentum is in stark contrast to the stagnation the industry suffered a year ago, when government policies to curb overinvestment and market fear of overpricing led to sliding prices and shrinking transactions.

But the global financial woes prompted Chinese policymakers to ease the reins on the real estate industry, a key engine of the country's GDP growth.

Last October, the central bank authorized banks to offer up to a 30 percent discount in mortgage rates to first-time homebuyers.

In May, the central government lowered the requirement on developers' minimum capital fund from 35 percent to 20 percent of the entire investment needed.

Local governments also made other preferential policies, such as waivers of transaction duties. These incentives triggered a robust round of growth in property sales in major cities this spring.

The China Real Estate Index, the country's largest property research institution, said 18,533 apartments were sold in Beijing in April, up 23 percent from a month earlier, while apartment sales in Shanghai increased 8 percent in April.

"Unlike the previous growth, mainly driven by first-time homebuyers, the recent transaction growth is largely buoyed by rising investment sentiment," said Chen Weiye, a researcher at Shanghai Centaline Property Consultants.

While those who already own their own homes feel lucky, the situation has definitely frustrated the "have-nots".

The China Statistics Yearbook 2008 found that the average home price in Beijing was 23 times a local family's average income, compared with the international level of four to six times.

In Guangzhou, a recent online poll by leading portal showed that 78 percent of respondents consider the city's home prices to be far beyond the affordability of ordinary families.

"I just can't understand why our provincial government has issued a string of policies earlier this year to prop up the real estate industry while so many people cannot afford to buy a home," said Yang Anjing, an employee with a consulting firm in Guangzhou.

"To people who haven't bought a home, like me, we really don't know whether we should keep waiting or jump onto the wagon," Yang said.

He is not the only one concerned about the market situation.

In a report on financial stability released last Friday, the central bank said it would "closely monitor price fluctuations in the property market, actively conduct stress tests and impose dynamic evaluations of credit risks related to real property."

Japan still a bridge too far on many fronts
By Feng Zhaokui (China Daily)
Updated: 2009-07-03 07:55

The global economic landscape may see a milestone change this year, for China is widely regarded to replace Japan as the second largest economy in the next few months. But for that to happen China's economy has to grow by 6 to 8 percent, while Japan's has to contract further.

Last year, China's GDP was $4.22 trillion against Japan's $4.84 trillion. And even though China's GDP may overtake Japan's, the two economies have major quantitative and qualitative differences.

The first is the extent to which economic growth has benefited the peoples of the two countries. International Monetary Fund figures show Japan's GDP per capita purchasing power parity was $34,100 last year - 24th in the world - while China's was only $5,962 - 99th in the world.

To evaluate the extent of benefits the two peoples have enjoyed, we have to consider the income gap in the two countries. After World War II, Japan started building an egalitarian society, and once boasted a "society of 100 million middle class", that is, all Japanese believed their incomes had reached the middle-class level. Japan was the first country to provide healthcare for all its citizens, too. An Asian Development Bank survey in 2007 showed that Japan's Gini coefficient was 0.24, the only Asian country below 0.3, while China's was 0.48, considerably higher than the 0.4 alarm line.

The UN Development Programme's Human Development Index (HDI), which combines measures of life expectancy, literacy, educational achievement and per capita GDP, is a more comprehensive indicator than per capita GDP in evaluating the degree of economic and social development, and the quality of people's life. According to the Human Development Report 2007-08, Japan's HDI was 8th in the world, much higher than China's 81st.

Second, China is still far behind Japan in environmental protection. The Japanese enjoy a much better environment than the Chinese. For example, the air quality in most Japanese cities is better than in Chinese cities. About two-thirds of Japan's land area is covered with forests, one of the highest in the world. And Japan's environmental industry has developed rapidly, accounting for $386.2 billion of the $600-billion global market. The US' market is worth $100 billion, and China's, only $20 billion.

In the 1980s, the Chinese admired Japan's dazzling cities, skyscrapers and popularity of home appliances. In the 21st century, they admire its clean environment the most. Pollution in China causes an average annual loss of up to 13 percent of GDP, and has become severe enough to put the health of its people at risk. Sixteen of the world's 20 most polluted cities are in China, and 400 million urban Chinese residents breathe polluted air. A whopping 27.9 percent of China's land area, or 2.67 million sq km, is threatened by desertification and 37 percent, or 3.56 million sq km, by erosion.

The third difference between the two countries is the use of science and technology to boost productivity. Science and technology contribute up to 70 percent of Japanese economic growth, while China's proportion is only 39 percent. Japan spends 3.5 percent of its GDP on research and development, whereas China spends only 1.3 percent. Japan's index of dependence on foreign technology is lower than 30 percent, while China's is higher than 50 percent. Besides, China's labor productivity is one twenty-sixth that of Japan.

Since the 1980s, China has followed in Japan's footsteps to become the new "factory of the world". While as a "world factory" Japan seized the high end of the industrial chain in the international division of labor, China is still at the bottom of that chain.

Furthermore, Japan has contributed three-fourths of the 32 significant new technology products to be commercialized, with the rest coming from the US and Europe.

Four, Japan is still far ahead of China in energy efficiency and resource utilization. Since the 1973 oil crisis, Japan has become one of the top energy-saving countries by developing energy-efficient technology, while China's performance is considered poor. For example, to produce a ton of crude steel, Japan needs 0.6 ton of coal, while China needs 1.5 ton and the US, 1 ton.

Moreover, Japan can produce 980 kg of steel products from 1 ton of crude steel, whereas the US and Chinese average is 700 kg and 600 kg. And Japan's energy consumption to produce 1 unit of GDP is only one-ninth that of China.

The fifth difference can be gauged in terms of gross national product (GNP), which means the values created by people of a country. GNP is different from GDP, which stands for values created by production within the boundary of a country. China has been actively attracting foreign direct investment (FDI), while Japan is reluctant to do so. In fact, Japanese firms are fairly active in investing overseas, and they have been the top FDI investors for the past 15 years. That makes China's GDP higher than its GNP, while it is the opposite in case of Japan.

FDI contributes to 40 percent of China's GDP, and accounts for 20 percent of its economic growth. Overseas firms in China generate 60 percent of its exports. That's why even if China's GDP were to surpass that of Japan, China would still lag behind Japan in economic and social development. It is difficult to say how many years China will take to catch up with Japan's overall development.

But there is a message here. The Chinese government has to make sincere efforts to improve those aspects of society that are not included in GDP, such as the quality of people's life and the environment.

The author is a researcher with the Institute of Japanese Studies under the Chinese Academy of Social Sciences.

(China Daily 07/03/2009 page13)

Transport and Energy: Gloomy Announcements Raise Questions Over Supposed 'Green Shoots' of Recovery
Thursday, July 02, 2009 5:55 AM

(Source: Datamonitor)Declines in the Baltic Dry Index and international air cargo volumes, along with forecasts of weak crude oil demand until 2012, have raised questions over various claims of a quicker-than-expected global economic recovery. Despite the recent rally in the stock market brought on by these claims, these new announcements indicate that a full recovery is still a long way off.

Highlighting the continuing weak global demand for commodities, the Baltic Dry Index (BDI), an index tracking the cost of transporting commodities on international trade routes, fell by 9% for the week ending June 27, 2009, its biggest decline since the week ending April 3, 2009.

In particular, demand for iron ore transporters slumped during this period. China, a major importer of iron ore, has shown a decline of 6.2% in its imports in May. There was a recent surge in imports of industrial metals into the country, which has come on the back of both a large government stimulus package and importers taking advantage of low prices to increase their stock. However, the BDI is likely to decline further as this current surge in China slows, thereby unveiling the real nature of the recovery.

International air cargo has also shown no signs of improving, as year-on-year volumes fell 17.4% in May. Although this is a growth of 3% over April's volumes, the higher level of inventories will slow the pace of recovery. Since the airline industry can only absorb losses for so long, the prospect of rising transport prices after capacity rationalization could potentially dampen any hopes of a faster economic recovery.

Casting further doubt is the forecast from the International Energy Agency (IEA), which states that the consumption of crude oil will not return to 2008 levels until 2012. In a lower GDP scenario that assumes a growth of 3% in the global economy, the IEA forecasts that global oil demand might not reach the peak of 2008 until 2014.

The transportation and energy sectors typically act as good barometers to measure the future direction of the economy in general; for example, sectors such as shipping reflect future levels of production and demand for commodities. Therefore the declines in the BDI and air cargo volumes cast doubt on the various claims of a faster global recovery. It is likely, then, that without further stimulus packages targeting infrastructure sectors with the strongest links to the rest of the economy, global economic recovery could be further away than first thought.

 Not everyone's a fan of China July 3, 2009

Rajiv Jain, managing director for international equities at Vontobel Asset Management in New York, says the notion that Chinese domestic demand is going to rescue the region is fiction.

"Chinese domestic consumption is less than that of the UK," Jain notes. "An increase there isn't going to move the needle."

Worse, it's in China where the greatest overcapacity exists in areas such as steel and cement. China's infrastructure spending program is good at boosting GDP figures by adding capacity, but does nothing to help corporate profitability.

Moreover, Jain is sceptical about the ability of government stimulus programs to ultimately boost corporate earnings.

"We don't trust any government. Why do investors have such confidence in Beijing? Chinese steel companies are being instructed to produce more and not lay off workers, at a time when capacity utilisation rate are at their lowest in 50 years."

Too many investors are mesmerised by the Asian growth story, but Jain calculates that over the long term, Chinese corporate earnings growth rates have been about the same as America's -- but Chinese stocks are priced far more ambitious.

Jain says the past five years were a bubble and have clouded investors' expectations about growth in China and other Asian markets. The argument that Asian corporate balance sheets are strong is fine for bondholders but doesn't equate to earnings growth.


Don't bet on a China-led recovery

William PesekJuly 3, 2009 - 1:26PM

So you think China's 6 per cent growth will power a global recovery. Think again.

Economists, for example, can't put a gloss on how ugly Japan's data are getting. Exports and output are plunging, unemployment is at a 25-year high and those all-important summer bonuses are evaporating. The best we can say is that sentiment among large manufacturers was less gloomy in June than expected.

Where is that smidgen of hope coming from? China, which rarely misses a chance to declare victory over the global recession. Officials in Beijing say stimulus spending and record lending are sparking a recovery in the third-biggest economy.

Export-led Japan would seem perfectly placed to benefit. That is, until you check the evidence. Shipments to Japan's biggest trading partner fell 29.7 per cent in May, more than April's 25.9 per cent. It suggests China's growth isn't helping the rest of Asia very much.

China acted quickly to shield its economy from the global crisis. Manufacturing in May expanded for a fourth month. Central bank governor Zhou Xiaochuan says things may keep improving in the third and fourth quarters.

It's also worth noting that Japanese exports to China are falling less severely than elsewhere. Shipments to the US fell 45.4 per cent in May. Exports to Europe slid by the same amount.

No growth engine

China isn't turning out to be an engine of growth for Asia.

One possible explanation is protectionism, as China works to encourage exports while curbing imports. The country objects to the "Buy American'' provisions in US stimulus efforts, yet it is using similar tactics. Another reason may be that China's revival is more spin than reality.

Either way, talk that China would feed the "green shoots'' dynamic that Federal Reserve chairman Ben Bernanke introduced into Wall Street's lexicon four months ago isn't working out. Nor will the Asia-decoupling theory that's being resurrected.

Yes, Asia is less reliant on the US than it was a decade ago. Its fortunes are still intricately tied to what happens in the $US14 trillion US economy. The longer the US is on its back, the harder it will be for Asia to maintain modest growth.

One reason for a resurgence of the decoupling argument so convincingly debunked last year is actual growth. Even with the US, Europe and Japan mired in recession, economies in China, India, Indonesia, the Philippines and Australia are still expanding. That's impressive given the state of credit markets.

Asia won't close the gap

Fast-forward one year, though. If the US economy is still weak in July 2010, Asia will have a hard time supporting growth from within. At the moment, stimulus efforts are starting from a low base. Over time, government spending and low interest rates may get less traction.

The Asian market won't close the gap. Much of the region's internal trade involves intermediate goods used in the production of other products - many of which go to the US and Europe. A world without growth will force Asia to retool economies toward greater domestic consumption without the cushion of robust demand.

What's more likely is an inward-looking period as opposed to regional cooperation. Groups such as the Association of Southeast Asian Nations talk a lot about linking their combined fortunes and outlooks. Meetings, photo opportunities and communiques don't hide the stark reality that Asian economies compete more with each other than join hands.

'Buy China'

China has been expanding efforts to help exporters with bigger tax benefits, loans from state-owned banks and other steps. Many ``Buy China'' directives are coming from Beijing. And don't expect China to allow the yuan to appreciate much in the second half of 2009, regardless of market pressures.

Such policies suggest China is losing confidence in its 4 trillion-yuan ($US585 billion) stimulus plan. They are also a reminder of the limits to governments' ability to boost growth with public largess alone.

Growth may slip as stimulus spending wanes amid political opposition to a widening fiscal deficit, says Ma Jun, Deutsche Bank's Hong Kong-based China economist. That casts doubts on predictions that Chinese gross domestic product will expand 8 per cent in 2010.

The omnipotent reputation many assign to leaders in Beijing is being challenged. Take this week's internet fiasco. China postponed the deadline for personal-computer makers to include state-backed anti-pornography software on new PCs after US officials and business groups urged it to scrap the rule.

China is normally a model of implementation. The speed with which it builds state-of-the-art airports, high-speed rail lines and Olympic stadiums is impressive by any scale. Its censorship efforts were exactly the opposite: sloppy and ill-considered.

Economic-stimulus efforts appear to be benefiting from greater competence. That may be a boon for 1.3 billion Chinese trying to get a share of the nation's growth. The benefits for those outside China are much more limited.

China Spurs Lending SpreeBy Michael Lelyveld2009-06-29

Political pressures drive China loans.

BOSTON—China's banks have flooded the country with fresh loans to spur recovery, highlighting key differences with market economies like the United States, experts say.

U.S. banks have been slow to resume lending inside the United States at pre-crisis levels, despite a $700-billion assistance package for the financial system passed by Congress last October and a $787-billion stimulus plan passed in February.

In China, the response has been largely the opposite. After the government announced a 4-trillion yuan ($586-billion) stimulus plan last November, China's banks reacted quickly, unleashing a surge of new credits.

In the first quarter, the banks pumped out over 4.5 trillion yuan in financing, nearly as much as the 4.9 trillion in lending for all of last year, according to the People's Bank of China (PBOC). Nearly all the new lending took place even before the National People's Congress voted to approve the stimulus plan in mid-March.

Last week, the official China Daily reported that lending in the first half of the year may reach 6.5 trillion yuan, dwarfing both the stimulus package and the government's 5-trillion yuan loan target for all of 2009.

The wave of loans has been credited for sparking China's 6.1-percent GDP growth in the first quarter. Fixed asset investment rose 28.8 percent to 2.8 trillion yuan ($411 billion) during the period despite the worldwide slump, the National Bureau of Statistics (NBS) said.

Following orders?

But China's state-controlled banks have taken pains to deny they were following orders to underwrite projects even before they received government funding.

On March 17, Bank of China chairman Xiao Gang told China Daily that "no political leader has told his bank to lend as part of the government's stimulus package to cope with the economic crisis."

Xiao argued that "the pressure is only from the market in the form of competition from other banks," since government- approved projects are "potentially the most lucrative."

But the massive response of China's banks has raised questions about their independence and commercial decisions, as well as the nature of the investments and the recovery.

David Bachman, professor of China studies at the University of Washington in Seattle, says China's banks remain tied to the government's initiatives through political power structures including the Communist Party of China (NYSE:CPC).

"Clearly, it seems to me, the message has come down from the party-state that this is what the banks should be doing," Bachman told Radio Free Asia. "Statements to the contrary that these banks are stand-alone--increasingly making decisions on a commercial basis and so on--I think that's simply window dressing."

Policies questioned

China's stimulus has been questioned because much of the spending is directed at state-sponsored construction projects that were blamed for energy waste and pollution during the boom years since 2003.

In a recent analysis, Barry Naughton, professor of Chinese economy at University of California, San Diego, said the package focuses on traditional investment at a time when officials and analysts agree that new policies are needed to spur consumer spending for economic growth.

"The most fundamental criticism is that the stimulus package relies on pumping up investment when the long-run need in the economy is precisely the opposite: to expand household income and consumption, and shift the growth path of the economy to a more consumption-friendly trajectory," Naughton wrote in China Leadership Monitor, a quarterly published by Stanford University's Hoover Institution.

On June 24, China Daily reported that Chinese experts have offered similar criticisms. "The government is paying too much attention to infrastructure construction, but isn't focusing on powering up human capital," said Guan Xinping, director of the social work and social policy department at Nankai University.

Only 9 percent of new lending has gone to households, including farms, while over 90 percent has supported "non-financial" businesses, Naughton said. Aside from the rebuilding of Sichuan province following last year's earthquake, half of all stimulus spending is devoted to transport and power infrastructure projects, according to government data.

In the first five months of the year, investment in railway projects soared 120 percent, the official Xinhua news agency said. Spending and lending have favored state-sector projects rather than private enterprise, said Bachman.

"It's not moving the system in a more reformed direction," he said. "It seems like a very stereotyped Chinese government response, emphasizing the state, emphasizing infrastructure, emphasizing investment."

Bad loans?

The massive lending has temporarily reversed government efforts to curb excessive credit during the economic "overheating" of the boom years. In the past, officials have worried about loose policies and bad loans that have often been linked to corruption.

In April, Liu Mingkang, chairman of the China Banking Regulatory Commission, warned that banks should be on "high alert for the accumulation of hidden risks" during the stimulus period, China Daily said.

But Naughton said the combination of looser credit policies and political push for the stimulus "send a very powerful signal to banks that they are expected to rapidly ramp up lending."

"It also suggests that bank loan officials will not be held accountable for loans they make, so long as they are in support of the investment plan," he said.

In March, Xinhua reported that the PBOC was also moving to legalize the private lending market in order to marshall its resources for the recovery, despite years of trying to rule it out. The report cited estimates that unregulated private lenders are the main source of credit to rural households.

But Bachman said he would not conclude from the turnaround in policies that the government has been insincere about earlier credit crackdowns.

"I think the priorities have simply switched," he said.

Huge gains in Chinese equities markets may make huge risks

Douglas McIntyre
Jul 3rd 2009 at 1:00PM



The Shanghai Composite, the major stock index in China, is up 68 percent this year. The Dow Jones Industrial Average is off 5 percent.

China's economy may still be expanding at a 7 percent rate, but the risks to the growth are considerable. China is relying on a $585 billion stimulus package to prime the pump of consumer spending. The money is also going toward mammoth infrastructure projects. At some point, all of the investment capital runs out.

China is still faced with some real problems. Export demand is way down. With the economies in Japan, the U.S., U.K., and E.U. slow to recover from the recession, that is not likely to change soon. China cannot beat the world economic markets forever. The rest of the world has to start increasing demand for the country's goods.

Big stimulus packages often mean big inflation. A number of economists believe that the money that the Chinese central government is dumping into the system is causing speculation in real estate and stocks. As prices continue to move up sharply, China will have to deal with a bubble in business and residential properties and an equities market that is still rising sharply without concrete economic support.

Unemployment is, by most observations, still high in China, especially in the huge cities that the government has built in the interior of the country to house factories and tap cheap rural labor. After the stimulus money is gone, fast rising GDP and high unemployment never go together. GDP growth will have to give way.


The dangers of political investment

By Hong Chi-chang 洪奇昌

Sunday, Jul 05, 2009, Page 8

Wednesday was an historical day. It was the day the Taiwanese government started processing applications for Chinese investment in Taiwan and, coincidentally, the 12th anniversary of Hong Kong’s official return to China and the beginning of “one country, two systems.”

Only time will tell whether Chinese investment in Taiwan represents an opportunity or a risk. From a business perspective, I welcome sincere foreign direct investment that is in accordance with market principles and mechanisms, and that is not backed by political motives.

It will also be interesting to see whether Taiwan’s industries will be able to move ahead and make themselves stronger, and whether cross-strait industrial cooperation will take off.

However, I am firmly against Chinese investment that is politically motivated, aimed at “unification” and speculative in nature. A look at Hong Kong shows that China employed three methods to implement the “one country, two systems” formula.

First, China actively saved Hong Kong’s stock market on several occasions, for example during the 1997 Asian Financial Crisis and the 2003 SARS epidemic. Second, China took control of and injected capital into Hong Kong’s public utilities and infrastructure. Third, Beijing actively supported capitalists of ethnic Chinese background.

Twelve years after its return to China, not only are Hong Kong’s industries being undermined, it also faces serious problems with economic transformation. In addition, Hong Kong’s social diversity, which once represented a mix of eastern and western cultures, is now becoming more uniform with the “interior.” Hong Kong is no longer the cosmopolitan “pearl of the east” it once was.

Taiwan does not suffer from a lack of funds, and according to data compiled by the Directorate-General of Budget, Accounting and Statistics, it is expected that the excess savings rate this year will reach a six-year high of 9.24 percent, at an all-time high of NT$1.1544 trillion (US$35 billion).

The ruling party has been unable to build public confidence, which has resulted in an unwillingness to invest among the private sector. This in turn has caused a decline in private investment much larger than the overall economic drop off, creating an excess of idle funds. Therefore, the government should try to reinstill confidence into private investors.

The decision to allow Chinese investment into Taiwan was not part of the nine agreements reached between China’s Association for Relations Across the Taiwan Strait Chairman Chen Yunlin (陳雲林) and Straits Exchange Foundation Chairman Chiang Pin-kung (江丙坤) during their three meetings. The decision is in fact a “consensus” reached at their third meeting only two months ago.

I seriously doubt whether the agreements implemented over the past year have passed policy impact assessments. How can the government recklessly implement a “consensus” on allowing Chinese investments in Taiwan, something that will have a huge impact on Taiwan’s industries and economy, simply by referring to “legal authority.”

The ruling party has opened Taiwan to Chinese investment without any form of oversight by non-governmental organizations or broader social debate. Economically, it was a rushed and mistaken decision that will only have short-term benefits with no real long-term gain.

Furthermore, the way the government has allowed manipulation and the formation of bubble markets in the capital and real estate sectors will only see the gap between rich and poor widen further.

Taiwan has always lacked a comprehensive set of economic development strategies and now the government is relying on a Chinese injection of funds without considering ways to really strengthen Taiwan, falling back on the Chinese Nationalist Party’s (NYSE:KMT) old ways of deceiving people into thinking that a bright economic future is waiting just around the corner.

Since July 2004, China’s Ministry of Commerce has released three versions of the Catalogue for the Guidance of Foreign Investment Industries (對外投資國別產業導向目錄). This publication shows clearly how China hopes that Chinese businesses will invest in natural resources like petroleum, mineral resources and raw materials overseas. Does Taiwan possess these resources? Just what is the attraction for Chinese businesses investing in Taiwan?

Given Taiwan’s excess idle funds and savings, attracting a lot of Chinese funds without industrial transformation means that once Chinese investment enters the stock market and the real estate market in a big way, those investments will turn into speculative, short-term hot money that will widen the gap between what is happening on the capital markets and the real economic fundamentals.

In addition, the very first line of a set of guidelines released in May by China’s State Council — information from the Ministry of Commerce and the Taiwan Affairs Office for Chinese businesses doing business in Taiwan (兩部門就大陸企業赴台灣地區投資有關事項發通知) — says these businesses must not harm China’s national security or the goal of unification with Taiwan. The only thing the document doesn’t mention is “one country, two systems.”

The way in which the government follows the political rhetoric of China, gives into its nationalist policies and acts in conjunction with it in a stage show aimed at stealing Taiwan’s sovereignty is extremely worrying.

Wednesday marked the official opening to Chinese investment and will go down as a key day and an important dividing line in the development of cross-strait relations and Taiwanese history. The attitudes and abilities of our leaders will be the main factors that decide whether Chinese investment in Taiwan will be an opportunity or a risk.


Saudi petrochemicals exporters slam China over dumping probe

AFP - Sunday, July 5

RIYADH (AFP) - - Saudi petrochemicals producers said on Saturday they would seek duties on imports from China after Beijing began a dumping probe on petrochemical products from Saudi Arabia and three other countries.

Abdulrahman al-Zamil, chairman of the Council of Saudi Chambers, said China had no grounds to pursue the dumping investigation on imports of methanol and butanediol (BDO) it launched in late June.

"We do not subsidise our exporters" of petrochemicals, he told a news conference.

"This is not fair for two major partners," he said, referring to China and Saudi Arabia's mostly duty-free bilateral trade, which surpassed 40 billion dollars in 2008, according to SABB bank.

Zamil told reporters Saudi exporters feared China would levy punitive tariffs on the two products from Saudi Arabia, Indonesia, Malaysia and New Zealand while a lengthy investigation goes on at the request of several Chinese producers.

"The damage will take place while they are studying it for one, two, even 100 years, " he said.

Methanol and BDO make up between 10 and 15 percent of Saudi Arabia's two billion dollars in annual petrochemicals exports to China, according to Zamil.

He said the group was asking the Saudi government to place tariffs on industrial imports from China in return.

"The Chinese are dumping on our market," he said.

"We want our government ... to apply the same principles, the same customs duties" that the Chinese are placing on Saudi goods, he said.

We need to save more as economic imbalances remain

David Uren, Economics correspondent | July 06, 2009

Article from:  The Australian

THE strength of the Australian housing market and the bounce-back in indicators such as consumer and business confidence give the impression that Australia has dodged the bullet that felled the major advanced economies between September last year and March.

With those economies now showing sufficient evidence of a pulse for leaders at this week's G8 meeting in Italy to declare the worst is over (the likely pitch of their communique), policy makers could be excused for breathing more easily.

However, credit markets remain dysfunctional both globally and, for anyone other than home buyers, in Australia.

The imbalances that caused the crisis in the first place are not being tackled.

In Australia, the biggest imbalance is the use of global capital markets to finance investment in housing, and this is unlikely to be sustainable in a post-crisis world.

If government does nothing to correct this imbalance, it is likely that markets will, through the imposition of higher interest rates.

The latest Reserve Bank credit figures highlight the stressed state of the debt markets. They show that growth in credit to business has collapsed from $143 billion in the year to March 2008, to just $15bn over the past 12 months.

Indeed, since last November, the total debt outstanding to business has fallen by $20bn.

Morgan Stanley chief economist Gerard Minack last week published an analysis of the national financial accounts showing that in the March quarter, the total business call on funds was a paltry $3.7bn.

Aggressive equity raising offset a $15bn fall in loans and debt placements. The banks are being cautious with their capital, anticipating a rise in bad debts. 

Less capital has to be set aside for home lending than for business lending, so the corporate sector is copping the brunt of the credit tightening.

This is particularly acute in the commercial property sector, which is starting to receive greater attention globally as the next focus of financial instability.

Total lending to households is also coming down, more because people are repaying their personal debts more quickly and increasing home loan repayments than because of any tightness on the part of the banks.

Lending to households has roughly halved from a peak level of $116bn in the year to January 2008 to $58bn in the last 12 months.

Until the early 1990s, total business borrowing was around double the level of household debt.

Deregulation and greater competition boosted household access to debt markets and by 1996 it was using as much as business. The level of household debt is now 55 per cent greater than the level of business debt.

Australian households have larger mortgage debts relative to household income -- a ratio of 136.5 per cent -- than any other advanced economy except Britain, which has similar debt levels, according to new figures from the IMF.

In the US, mortgage debts are about 100 per cent of income.

The increased access to debt was used to ramp up housing and land prices.

The banks are keeping the flow of funds to households going.

They are making much greater use of bank deposits, and less use of international capital markets, but about a third of their funding is still coming from capital markets.

The sustainability of this funding mix is one of the International Monetary Fund's biggest concerns about the Australian economy.

Soon the policy response will have to shift from averting disaster to laying the foundations for a sustainable recovery.

The recycling of Asian saving into Western spending was the principal cause of the crisis in the first place.

Rebalancing will require much higher household savings in the West and the development of domestic markets in Asia.

At the moment, most economies -- Australia included -- are showing signs of improvement as companies start to rebuild the inventories they liquidated between September last year and March during the financial tempest.

However, this will fall a long way short of sustainable growth, which requires the free flow of credit, along with the confidence of companies to invest and households to consume.

These points were well expressed last week by the general manager of the Bank for International Settlements, Jaime Caruana, as he launched the institution's annual report.

"The path to a self-sustaining recovery is narrow and fraught with risks. This is true regardless of short-term prospects, even if we take the 'green shoots' of recovery at face value.

"We need to facilitate the necessary adjustments in the financial system and the real economy, while cushioning the impact of those adjustments on growth and employment.

"And we need to ensure that the short-run responses to the crisis do not mortgage the future, paying close attention to sustainability and exit strategies."

Most international commentary has focused on the need to fix the banks, but Caruana said the deep-seated distortions in the financial sector and those in the real economy were "two sides of the same coin".

The finance sector had to shrink, as it had grown too large and accumulated assets of dubious quality.

In many countries, debt and leverage in both the financial and the non-financial sectors had to decline while household savings had to rise, he said.

Industries that depended on exports for their growth and those that relied upon leverage both had to find new production models.

"Economic adjustment is a precondition for a self-sustaining recovery," he said.

The portents are not good. Governments are avoiding hard decisions in the finance sector, preferring to amend accounting standards so that problem assets can be buried rather than wear the taxpayer opprobrium of nationalisation. Industries subject to massive worldwide overcapacity, such as the motor industry, are being cosseted with government protection.

Government stimulus packages supported consumer spending during the worst of the downturn, but no one has turned their mind to how Western economies will achieve the required transition to lower debt-funded consumption and higher savings. Asian leaders have bridled at suggestions they spend more and save less.

The Henry Tax Review gives Australia the opportunity to provide some leadership by making the taxation of housing less generous while improving the concessions available to savers in vehicles other than superannuation.

The taxation of ordinary household savings is higher in Australia than almost anywhere else in the world. Firmer action by APRA to tighten minimum deposit-to-loan ratios for new home buyers would also be a move in the right direction.

What is needed first is for the Rudd government to make it a national priority to boost household savings while reducing leveraged investment in land.

Speeches, Testimony, Papers

US Foreign Economic Policy in the Global Crisis

by Simon Johnson, Peterson Institute for International Economics

Testimony before the Subcommittee on Terrorism, Nonproliferation and Trade, Committee on Foreign Affairs, US House of Representatives
March 12, 2009


  • The world is heading into a severe slump, with declining output in the near term and no clear turnaround in sight. I forecast a contraction of 1 percent in the world economy in 2009 (on a Q4-to-Q4 basis) and no recovery on the horizon, so worldwide 2010 will be at best "flat" relative to 2009. The most likely outcome is not a V-shaped recovery (which is the current official consensus) or a U-shaped recovery (which is closer to the private-sector consensus), but rather an L, in which there is a steep fall and then a struggle to recover. A "lost decade" for the world economy is quite possible.

  • Consumers and businesses virtually everywhere are trying to "rebuild their balance sheets," which means they want to save more and spend less. Lower asset prices mean large holes in public and private pension plans; this further strengthens the incentive to save more now.

  • Governments have only a limited ability to offset this decrease in private demand through fiscal stimulus. Even the most prudent governments in industrialized countries did not run sufficiently countercyclical fiscal policy during the boom and now face balance sheet constraints. In the United States, the budget deficit is approaching a trajectory that is sustainable only if rapid growth returns in 2010. If the recession persists, the government will face a hard choice between the stimulus needed to aid the economy and the austerity needed to ensure fiscal sustainability. State and local governments risk default, and will either receive more assistance or have to cut back further on their spending.

  • The still-forthcoming policy attempts to deal with banking system problems in the United States will be insufficiently forceful. Current indications suggest that the Obama administration is currently unwilling to take on the large banks in anything approaching a decisive manner; the prevailing approach will remain one of "muddling through." Large banks will remain "too big to fail," but without a decisive solution lending will remain anemic.

  • Compounding these problems is a serious test for the eurozone: Financial-market pressure on Greece, Ireland, and Italy is mounting; Portugal and Spain are also likely to be affected. The global financial-sector weakness has become a potential fiscal issue of the first order in these countries. This will lead to another round of bailouts in Europe, this time for weaker sovereigns in the eurozone. As a result, governments will feel the need to attempt precautionary austerity instead of spending on fiscal stimulus.

  • The emerging-markets crisis is deepening, particularly as global trade contracts and there are immediate effects on both corporates and the financial system. Currency collapse and debt default will be averted only by fiscal austerity. The current IMF/EU strategy is to protect creditors fully with programs that do not allow for nominal exchange rate depreciation. This approach increases the degree of contraction and social costs faced by domestic residents, while also making economic recovery more difficult. As Eastern-Central Europe slips into deeper recession, there are severe negative consequences for Western European banks with a high exposure to the region.

  • A rapid return to growth requires more expansionary monetary policy, and in all likelihood this needs to be led by the United States. But the Federal Reserve has not committed itself to this strategy. The European Central Bank still fails to recognize the seriousness of the economic situation. The Bank of England is embarked on a full-fledged antideflation policy, but economic prospects in the United Kingdom still remain dire.

  • The European push to reregulate, which is the focus of the G-20 intergovernmental process (with the next summit set for April 2), could lead to a potentially dangerous procyclical set of policies that can exacerbate the downturn and prolong the recovery. There is currently nothing on the G-20 agenda that will help slow the global decline and start a recovery. The Obama administration will have a hard time bringing its G-20 partners to a more prorecovery policy stance; the push for a fiscal stimulus is at odds with the budget realities in a rapidly slowing Europe.

  • Capital will continue to flow into US government securities, primarily due to a lack of good alternatives around the world. However, the slowing global economy will reduce the current account surpluses of China, Japan, and oil exporters, and this will further push up interest rates on longer-term US government debt.


The Crisis

One of the things I like to keep an eye on is the situation of China’s economy.

Not that I think anything is  wrong  with it. On the contrary, the country is resisting well the international crisis, and China has one of the best governments in the World when it comes to managing the economy. The results of the last 30 years speak for themselves. The Chinese have a strong confidence in their leaders, and this confidence seems to be spreading to the rest of the world, where some are already starting to believe that the Wall of the Han is going to save us all.

That is exactly why I am a bit worried.

Wall at Gansu

The Great Wall of China has always functioned better as a national myth than as a defense system. This picture of the Wall bordering the Gobi desert can give an idea of what remains of the great myths once the barbarians have passed. The basis of my spectacular and sensationalistic theory of  the Great Wall of China are all explained here.  More entries on the topic in the category Crisis Watch, and in my blog in Spanish.

Following that entry, I have received quite a few comments saying that it is idle to issue predictions at this point (which is true), and that anyway the Wall is down and the crisis has already arrived to China (which, at the time of writing, is definitely false). Of course, we are seeing some impact on the exports and the GDP growth statistics have already been reviewed for 2008. Most probably growth will go further down in 09, perhaps around the area of GDP 7.5% per year, which is what Prime Mr. Wen considers sustainable anyway.

But that is not what I mean by the Collapse of the Wall.

Unstable equilibrium

What I have noted from my observations in China is that there are inefficiencies, structural, social, political problems, and too many people living off the fat of the system. Many of these problems come from the prolonged single-party authoritarian regime, and others simply from the fact that the engine has been running for the last 30 years without a stop for repairs. Downcycles also have their function in economy, after all.

All these problems that I am seeing, which I will try to post here once in a while, make me suspect that China is still not the stong, cohesive economy that many want to see in it. And that much of that stability that is attributed to China is but mere illusion, just like the one of the Red Ball on this illustration.

The fact that neither the chinese government nor most of the international experts are announcing a severe crisis in China is far from conforting, as shown in these two front pages.

It might very well be that today, we are here:

22 October 1929

And next week we might be here:

29 October 1929

NOTE: OK, the Onion is not exactly the voice of the experts, and that issue of October 22nd was meant to make fun of the instability in the stock market during the previous month. But nobody at the time could foresee what would happen on 24th to 28th October. And ironically, the irony of the Onion editors went so far that for once in its long history it ended up reflecting a real situation. Isn’t this ironic.

NOTE2: The Chinese official press often reminds me of the Onion.


Bearish on China (July 5th 2009):


With a growing consensus by many observers that massive public borrowing by the U.S. and other major developed economies to fund economic stimulus programs has largely failed to stem the free fall in employment numbers and achieve its primary objective, it appears as the remaining hope of eternal optimists is China. In fact, the most hopeful projections of a return to global economic growth are based almost entirely on the Chinese economy. How ironic that the savior of global capitalism is determined to be the largest Communist state still in existence. Indeed, the latest IMF forecast of a return to modest growth is predicated on the aggregate projected growth of the Chinese economy being sufficient to lift the net global growth figures for 2010.

How realistic is this iconoclast faith in the capacity of China to lift the entire planet out of the doldrums of the Global Economic Crisis? In all probability, about as grounded in reality as U.S. Federal Reserve Chairman Ben Bernanke's gospel of green shoots sprouting from the muck of financial and economic decay.

We live in a surreal universe of economic analogies. Ben Bernanke has become a horticulturalist, preaching the botanical gospel of green shoots. Wall Street cheerleaders have displaced economic modeling with astronomy, peering through an opaque telescopic lens in search of enigmatic glimmers of economic light amid the nocturnal darkness of outer space. Policymakers are reassuring their anxious public by becoming weathermen of financial forecasting, boasting of meteorological evidence that the economic storm clouds are abating. But strangest of all is the collective obsession of the economic establishment in much of the developed world with oriental soothsaying. They are reading tea leaves and breaking apart Chinese fortune cookies in order to fathom what direction China's economic policy is headed, convinced that the old global economic order they are so desperate to revive and preserve depends on decisions being made in Beijing.

The single most important policy decision made by China's ruling circles was to enact an economic stimulus program of their own, totaling nearly $600 billion dollars. At first, desperate American and European economists and investors were fearful that the Chinese deficit-driven response to the Global Economic Crisis was not substantial enough. However, it is now recognized that as a proportion of GDP, China's economic stimulus is by far the largest in the world. It is far larger than the Obama stimulus package, for example, when calculated as a proportion of the total national GDP. Furthermore, the Chinese are executing their response to the synchronized global recession at a much faster pace than just about any other economy, including the United States.

On paper, the Chinese fiscal stimulus package appears to be bearing fruit. Projected growth rates for the Chinese economy in 2009 are currently predicted to exceed 7%. That figure alone is responsible for the overall negative global growth rate being forecasted by the World Bank not appearing even more sombre. No wonder so many policymakers and private financiers are looking gleefully at China's economy as the global restorer of capitalism.

When one looks beyond the manicured statistics, however, there appears a very dangerous side to China's economic stimulus spending that may, in the long-term, make things much worse for China and the overall global economy. The Chinese economy was based on an economic model that is now exposed as fundamentally flawed. Essentially, China functions as the world's factory, while its frugal citizens provided the savings that were transformed into credit that enabled U.S. consumers, in particular, to buy the output of China's assembly plants. The financial tsunami and credit crunch that has afflicted the world has broken that model, reflected in the decline in Chinese exports from a year ago by 30%. In theory, the Chinese stimulus program is supposed to make up for the contraction in exports by boosting domestic demand, so as to arrest the rise in unemployment. However, a different dynamic appears to be underway in China.

As dictated by the authorities in Beijing, staggering amounts of cash are being pumped into the economy. To illustrate the flow of capital being stimulated by China's fiscal policy measures, in the first half of 2009 Chinese banks loaned $1 trillion. By way of comparison, in all of 2008 only $600 billion was provided to borrowers by China's banks and financial institutions. With credit now flowing so free and easy towards Chinese companies, they are responding not by engaging in enhancing production and employment, but in rash speculation. In effect, the corporate sector in China is utilizing the stimulus money being doled out by Beijing to engage in speculation involving commodities, real estate and equities. In fact, Chinese companies are now establishing dedicated departments not focused on the intricacies of marketing, sales, R & D and production, but on the sole task of speculating with the money being literally forced down their throats by China's banks.

Easy credit leading to speculation and asset bubbles seems to be the path China is embarked upon. Where have we seen this before? In the United States, as a result of the Alan Greenspan bubble, when the Fed set interest rates too low, setting the stage for the subprime mortgage collapse in the United States.

As with deficit-driven stimulus spending elsewhere, China's fiscal response to the economic crisis is a stop-gap measure, and cannot be continued indefinitely. What happens when Beijing halts the pump-priming and slows down the printing presses? A strong possibility will be the mother of all asset bubble deflations.

The pundits who believe that China's economic policies are the most important factor in the ultimate outcome of the current Global Economic Crisis may be correct, but in a manner that is an inversion of their hopes. Rather than rescue the global economy, China's debt-induced credit fever may be setting the stage for an asset implosion of such severe intensity, it may be the final stage leading to an irreversible global depression.

July 16, 2009
Beijing Court Convicts Ex-Sinopec Chief of Bribery


HONG KONG —The former chairman of China Petroleum and Chemical Corporation, the oil refining giant better known as Sinopec, was convicted of corruption by a court in Beijing on Wednesday, according to Xinhua, the official news agency.

Chen Tonghai, 60, was given a suspended death sentence for taking $28.7 million in bribes, and Xinhua, citing the court ruling, said “all his political rights were deprived for life and all his personal property confiscated.” He is expected to serve a life term in prison.

Mr. Chen pleaded guilty in the case, paid back the amount of the bribes, and helped prosecutors with other investigations, Xinhua reported.

China continues to be plagued by high-level cases of misconduct involving business leaders, party bosses and government officials.

One year ago, for example, the first reports of children becoming ill from tainted milk began to surface in central China on July 16. By September, it was revealed that some of the country’s leading dairies and milk producers had been adding an industrial chemical, melamine, to infant formula and milk powder. Six infants eventually died, an estimated 300,000 children were sickened and hundreds were hospitalized. Sanlu, the milk company at the center of the scandal, was bankrupted and its chairwoman, Tian Wenhua, was sentenced to life in prison

In another high-profile case, Huang Guangyu, the former chairman of Gome Group, China’s largest consumer electronics retailer, has been under arrest for alleged stock manipulation. By some measures, Mr. Huang, who resigned as the Gome chairman in January, is the wealthiest person in mainland China.

And earlier this week, the Communist Party announced that 14 officials were fired for corruption in the eastern city of Chaohu. The city’s former party secretary was accused of taking $735,000 in bribes for handing out patronage jobs and promotions. Of the 36 people who bribed Mr. Zhou, Xinhua reported, 19 were government officials.

Beijing views public anger over official corruption as a potential threat to the state, and both the government and the party have worked to publicize their periodic anti-corruption campaigns.

It is not always clear, however, whether those caught up in the crackdowns are not also victims of political machinations. Last year, the former party chief of Shanghai, Chen Liangyu, was given a lengthy prison sentence for bribery and fraud, although many analysts believe his downfall was linked to a power struggle involving China’s top leaders.

Earlier this month, four employees of the Anglo-Australian mining giant Rio Tinto were arrested in China amid accusations of bribery, but details of the case remain murky and the arrests appear to be intertwined with highly sensitive negotiations over iron ore pricing.

Mr. Chen’s malfeasance took place from 1999 to 2007, the court said, as he took advantage of his managerial positions at the China Petrochemical Corporation, known as Sinopec Group, and later as deputy chairman and chairman of Sinopec Corp., China’s second-largest oil and gas conglomerate. He received the illegal payments for his help with land transfers and the awarding of contracts, Xinhua said.

Mr. Chen abruptly resigned his chairmanship at Sinopec in June 2007, then was arrested that October and expelled from the Communist Party.

Mr. Chen majored in oil extraction engineering at Northeast Petroleum University, graduating in 1976, and soon turned his career toward politics. He was vice mayor and then mayor of the eastern seaport city of Ningbo, and in 1994 he took a position at the State Development Planning Commission.

Bettina Wassener contributed reporting.