Monday, 26 January 2009

IMF infighting over Chinese currency valuation

The last couple of days have seen the gloves come off over the valuation of the renminbi. The US threw the first glove less punch followed by retaliation by the Chinese.

So what do the IMF think? They are busy punching each other at the moment.

This story has a lot further to run. My belief is that the currency is undervalued and will remain so. The Chinese government will not sacrifice jobs on the alter of better US-China relations at least not without much greater pressure from the rest of the world including the IMF.

IMF in discord over renminbi [FT]

The International Monetary Fund is caught in a stand-off between members over whether to label China’s currency as “fundamentally misaligned”, a politically explosive move that could stoke global tension over economic imbalances.

The issue is so controversial the IMF’s executive board has not discussed the Chinese economy since 2006, in spite of rules saying it should regularly assess member economies.

The decision touches directly on one of the most divisive issues among governments worldwide: the extent to which huge current account deficits and surpluses and artificially managed exchange rates have contributed to the financial crisis. Washington has long pressed Beijing to let the renminbi rise.

The present dilemma comes after a decision by the IMF in 2007 to step up surveillance of its member countries’ exchange rates, under heavy pressure from the US. Tim Geithner, President Barack Obama’s designate as Treasury secretary, has said that China was “manipulating” its currency and promised that all diplomatic avenues would be pursued to make Beijing change course. The IMF is almost certainly one such avenue.

Eswar Prasad, professor of trade policy at Cornell University and former head of the IMF’s China division, said IMF economists had concluded China’s exchange rate was “fundamentally misaligned”, defined as creating “a risk of disruptive adjustment”, but that it was not deliberately manipulating it to gain a trade advantage.

But he said the IMF’s management, led by Dominique Strauss-Kahn, the managing director, decided not to bring the issue to the fund’s executive board and start a “special consultation” with China on currencies because of disagreements among member countries.

“The board has now not had a discussion on China since 2006,” Prof Prasad told the FT. “If it can’t even have consultations with its members, this is a very serious issue. To some extent I suspect this is why [Tim] Geithner has decided to draw a line in the sand.”

Fred Bergsten, director of the Peterson Institute think-tank in Washington, said: “The IMF’s idea of starting a special consultation seems to have collapsed. The MD [managing director] has backed off.”

Both the IMF and a spokesman for the Chinese embassy in Washington declined to comment.

The IMF’s decision to focus on exchange rates in 2007 proved deeply controversial. At the IMF’s annual meetings last October Raghuram Rajan, the IMF’s former chief economist, now at the University of Chicago, said the focus on exchange rates from 2007 was “an unmitigated disaster”.

Because China is not borrowing from the IMF and seems unlikely to do so in the near future, the fund has no direct instruments to force Beijing to change policy and allow the renminbi to appreciate. But for the IMF to designate its currency as “fundamentally misaligned” – which it defines as creating “a risk of disruptive adjustment” – would undoubtedly strengthen Washington’s hand in its campaign for a freer-floating renminbi.

China hit back again over the weekend at Mr Geithner’s comments, with the central bank rejecting the accusation that China “manipulates” its currency and warning on the risks of protectionism.

“These comments are not only out of keeping with the facts, even more so they are misleading in analysing the causes of the financial crisis,” Su Ning, a deputy governor of the People’s Bank of China, was quoted as saying by the Xinhua news agency. “The international community. . . must avoid exploiting different excuses for renewing or encouraging trade protectionism, because these are of no help in withstanding the financial crisis.”


Friday, 23 January 2009

China statistics - to believe or not to believe?

I have stated on numerous occasions that I do not trust the statistics coming out of China and for good reason.

It appears other economists share my skepticism. So is China in recession or not? To get 2 quarters of NEGATIVE growth would be required. This would be pushing it but I suspect we are not far off.

Economists treat statistics from Beijing with caution [FT]

Beijing boasted bright blue skies yesterday, but for the nation's economists the outlook is not quite so clear.

When the Chinese economy was growing at more than 10 per cent a year, few people stopped to question the official numbers. The soaring tower blocks and acres of new factories made the story real. Yet now that analysts are scrambling to work out just how quickly the economy is slowing, the holes in the official statistics are looming larger.

China said yesterday the economy expanded 6.8 per cent in the fourth quarter of 2008 compared with the same period the year before, the lowest rate in seven years. However, the raft of figures out yesterday did little to clarify just how long the slowdown would last and left some economists complaining the official numbers were flawed.

"China is now the third largest economy in the world but we have no reliable data on consumption or housing," says Ben Simpfendorfer, RBS economist. "It is difficult to get an accurate view of two of the main growth drivers over the last decade."

The government, which has set a target of 8 per cent growth this year, admitted the economy had cooled rapidly but said there were already tentative signs the worst might be over.

Industrial production rose by 5.7 per cent in December, a modest improvement on November, and retail sales growth remained high at 19 per cent. The surge in new bank lending at the end of last year has been interpreted by some as a sign the government's fiscal and monetary stimulus plans are beginning to work.

Ma Jiantang, head of the National Bureau of Statistics, aimed for a poetic touch to describe the positive signs. It was not yet clear if they were sustainable, he said, but they could be "like sunshine in a cold winter, light at the break of a dark dawn and sparks that can turn into a roaring fire".

Yet there are plenty of indications of a more prolonged slowdown. Imports dropped sharply in November and December, including of machinery which suggests weak investment in manufacturing. And although there have been signs that housing transactions are increasing, the large volume of unsold new properties in many cities could hold back new investment this year.

"Developers will be very cautious about getting new construction going again," says Joan Wang, head of research at the Beijing office of Savills, the property services group.

Economists also caution against reading too much into some of the data. China releases gross domestic product figures on a year-on-year basis, but does not provide data from one quarter to another. After stripping out seasonal adjustments, some economists tentatively estimated the economy barely grew at all from the third to the fourth quarters and could even have declined.

The official figures for house prices are believed by some to understate both past increases and current decreases in prices. Moreover, the retail sales figures, which appear to indicate buoyant consumer demand, are treated with caution, because they include some government purchases and wholesale buying.

"Retail sales number should not be trusted," says Arthur Kroeber, editor of China Economic Quarterly. The headline numbers last year grew much faster than urban incomes, which he says is "implausible", especially given the apparent slowdown in consumer spending on items such as car.


China Crisis goes Mainstream

Whilst I have been banging on about the unfolding crisis in China only now has the mainstream press sat up and taken notice.

The FT as always leads from the front with quality articles on the subject. In fact, the number of column inches in today's paper shows that they have taken up the challenge with gusto.

Here are some links to the juicy bits. Regular readers will be aware of most of these issues or ready. The trigger for these articles comes from the confirmation of a rapid fall in growth that has been clear from the anecdotal evidence for months.

Asian Financial Crisis Deepens [FT]

Asia’s largest economies showed stark new evidence on Thursday of contagion from the global financial crisis as China reported its slowest growth in seven years and Japan’s central bank admitted it faces two years of contraction and deflation.


China said its economy expanded by 6.8 per cent in the fourth quarter compared to the same period the year before, confirming the rapid cooling that has seen the rate of growth fall by nearly half over the past 12 months. For the year as a whole, the economy grew 9 per cent, down from the revised 13 per cent growth rate in 2007.


Fearing social unrest if the economy slows too quickly, China has unveiled a huge fiscal spending plan and has significantly eased monetary policy.

One essential aspect of any recovery is the need for Asian countries to use their large surpluses to lessen the damage. This does appear to be happening but Asia and the West must not reply on Asian consumers to increase spending to save us. In all likelihood saving rates will be flat or even rise in this recession.

Only by spending can Asia save itself [FT]


China, a country that has become accustomed to double-digit growth, may now be flirting with contraction. Indicators such as electricity usage suggest a sudden, juddering slowdown. Even the imaginative massaging of China’s official state statisticians has not been able to hide a slowdown in their analyses.

These nations cannot simply wait for the crisis to end. As long as they are built to export, they will siphon off whatever demand the deficit countries can whip up. This helps keep their customers in crisis. It is in Asia’s interests that it should correct its imbalances by increasing consumption at home. This should not be a bitter pill for the region to swallow, especially when the alternative is a prolonged world recession.

The key issue I have tried to highlight in previous posts is China's reliance on trade which I believe is far more important than commentators seem to suggest. The domestic market is simply not developed enough to take up the slack. This appears only now to be sinking in (and China's economy with it).

Region pays dear for its dependence on trade flow [FT]


China appears to be giving the matter due attention. It is also suffering an external shock, compounded by the consequences of overly successful efforts at cooling an economy that was rampaging along at 13 per cent only a year ago. By the fourth quarter of last year, growth had fallen back sharply to an annualised 6.8 per cent.

Beijing has changed tack rapidly. It is now promising to spray $586bn through stimulus measures. In response, bank lending surged in the fourth quarter, raising hopes that public funds are seeping into the real economy. Authorities in both Washington and London must be watching enviously. As Andy Rothman, China strategist at CLSA Asia-Pacific Markets, says, new bank lending has been engineered by "the world's most liquid financial institution, the Chinese Communist party". Even retail sales have held up, rising more than 20 per cent last year.

Amazingly, some policymakers in Beijing are now worried that provincial and municipal leaders may use the stimulus package as cover to pour their own money into pet projects. The concern is that, in six months or so, authorities may have the headache of tackling inflation once again. That may be the most optimistic thing anybody has said in months.


Thursday, 22 January 2009

Property price crash in China

As with the stockmarket, the bubble in property prices was over blown and is now deflating. The stockmarket went first and could still fall further. The property market appeared to be remarkably resilient.

The reason? In my opinion, the Chinese are still getting used to capitalism and saw property as an investment and a relatively safe investment. As with shares, the majority of investors have never seen a falling market. Pressures to sell have not come anywhere near peaking (yet).

It will take longer but a much larger fall in likely. However, as always we must come back to the Chinese government. IF the government wants to support property prices it could probably do so if it throws enough money at the problem.

The FT reports on this topic today:

Chinese office market has all but dried up [FT]


Still, most pundits say the biggest unknown remains how far China and other Asian governments will go to revive the property market.

A month ago, Beijing announced that it would cut taxes, make it easier for property developers to obtain credit and reduce the lock-up period for home sales, during which owners are unable to sell without paying stiff taxes.

The measures come after repeated interest rate cuts and the launch of a broader Rmb4,000bn economic stimulus package.

Meanwhile, labour and raw material shortages are also disappearing. Ng Ooi Hooi, an executive overseeing the construction of Tianjin Eco-City, a new town that will be home to 350,000 residents, says that building costs there have dropped 40 per cent from a year ago.

“There will probably be adjustments to our project but nothing fundamental,” he says. “Costs are really down and hopefully the [market] situation will have turned around by the time we are finished.”


Wednesday, 21 January 2009

How China can hit 8% according to "All Roads"

The big "8%" question and how China can reach it if it tries hard enough is covered in a two part post over at "all roads lead to China".

There Are Many Ways China Can Hit 8% Growth - Part 1 [All roads lead to China]

Last Monday I was invited back onto CNBC to discuss the current economic atmosphere, and China’s prospects for 2009.

It was another large topic to cover in 6 minutes, and as always, I felt like I left a few things untied at the end and wanted to take a minute to further explain some of my thoughts.

Will China hit 8% growth?

With my initial comment being correct “There are many ways to hit it (8%), the question is whether or not they will hit it in the right way”. It is a question I wished more time on as I think was perhaps the most important question of the interview.

There Are Many Ways China Can Hit 8% Growth - Part 2 [All roads lead to China]

The story continues.

These two posts are worth reading in full.


China kicks Germany in the economic rankings

CNN reports on China moving past Germany in the economic rankings.

China passes Germany in economic rankings [CNN]

China has become the world's third-largest economy, surpassing Germany and closing rapidly on Japan, according to government and World Bank figures.

The Chinese government revised its growth figures for 2007 from 11.9 percent to 13 percent this week, bringing its estimated gross domestic product to $3.4 trillion -- about 3 percent larger than Germany's $3.3 trillion for the same year, based on World Bank estimates. Beijing is expected to release its 2008 GDP figures next week.

Although the world's top economies, the United States and Japan, are in recession, the most pessimistic estimates for China's growth in upcoming years runs about 5 percent. That could allow China's GDP to overtake Japan's, currently $4.3 trillion, within a few years.

The U.S. economy, the world's largest, was about $13.8 trillion in 2007.

The World Bank's estimate of China's economic growth is about 7.5 percent. But China has seen a sharp decline in exports in November and December as other major economies struggle, and the bank's analysts say rates below 6 percent could worsen the rest of the world's slump. Video Watch how China was able to overtake Germany

And Michael Santoro, author of the 2008 book "China 2020," said China will have other problems to overcome if it is to maintain its rapid expansion.

"It's no longer sufficient for China to become a manufacturer of sneakers or toys and the like," Santoro said. "Now they're looking to become players in the area of pharmaceuticals and foods and other high value-added products, where safety and quality are important characteristics for improving in the global economy."

China recently announced a $600 billion economic stimulus package, and its State Council on Wednesday laid out a new plan to boost its steel and auto industries -- including about $1.5 billion to develop alternative-fuel vehicles.


China as a Christmas tree?

Sometimes the title of a paper is enough to generate a blog post. This one is particularly eye catching. I suspect a translation malfunction.

The content of this unpublished paper concerns an important topic - China does need to be fully engaged in the global fight against climate change. Whilst China is the largest emitter of CO2 it will also suffer some of the largest negative impacts so it has every incentive to work with the West to come up with a solution.

Is it fair to treat China as a Christmas tree to hang everybody’s complaints? putting its own energy saving into perspective

Zhang, ZhongXiang (2008)


China has been the world’s second largest carbon emitter for years. Recent studies show that China had overtaken the U.S. as the world’s largest emitter in 2007. This has put China on the spotlight, just at a time when the world community starts negotiating a post-Kyoto climate regime under the Bali Roadmap. China seems to become such a Christmas tree on which everybody can hang his/her complaints. This paper will first discuss whether such a critics is fair by examining China’s own efforts towards energy saving, the widespread use of renewable energy and participation in clean development mechanism. Next, the paper puts carbon reductions of China’s unilateral actions into perspective by examining whether the estimated greenhouse gas emission reduction from meeting the country’s national energy saving goal is achieved from China’s unilateral actions or mainly with support from the clean development mechanism projects. Then the paper discusses how far developing country commitments can go in an immediate post-2012 climate regime, thus pointing out the direction and focus of future international climate negotiations. Finally, emphasizing that China needs to act as a large and responsible developing country and take due responsibilities and to set a good example to the majority of developing countries, the paper articulates what can be expected from China to illustrate that China can be a good partner in combating global climate change.


Tuesday, 20 January 2009

The young men of China

There was an interesting comment on this blog a couple of days ago by Aimee.

She wrote:

"In terms of rising political unrest, I think this might have been inevitable regardless of the economic downturn. With an incredibly large population of young men who are uneducated and cannot find jobs or wives (guang gen), demands for an alternative were bound to happen."

As economists I think we are often guilty of missing the effect of non-economic factors.

China's population is large. But it always has been. There have always been large numbers of young men - are their relatively more now? Is the shortage of wives a relatively new phenomenon resulting from the unequal birth rates between boys and girls and just how unequal is it? Surely there are relatively "less" uneducated young men as the education system improves?

These questions deserve more attention especially in the context of possible political unrest.


Chinese growth falls from "very high" to just "high" but at what cost?

As economists we are paid to be gloomy and this blog on China is no exception as regular readers will know. It is good to see that the Finanical Times has jumped on the bandwagon.

Readers will have been expecting these figures. The only issue from my perspective is how much the Chinese government will spend to maintain growth at above 6%? I suspect it will be a lot. Yesterday's post on "rising unemployment" demonstrates how actively the Chinese government is involved in managing the economy.

What today's FT article highlights, and is something I have been interested in for some time, is the extent to which FDI into China was really just "hot money" looking for high currency returns hidden under the guise of FDI. This would explain why actual FDI is so much lower than "planned FDI" in all the official statistics.

China’s hard landing [FT]

Ouch. It may not be a recession in technical terms, but China’s data dump this week is expected to show a pretty hard landing occurred in the fourth quarter. Private sector economists reckon economic growth decelerated to about 6-7.5 per cent on
a year-on-year basis, or about half 2007’s 13 per cent rate.
Compared with the third quarter, on a seasonally adjusted annualised basis, output probably contracted.

The one-time engine of global economic growth has been spluttering as a result of dented global demand for exports and over-zealous tightening policy at home. A hard
landing, like recession, adds new fear to the mix. With shares and real estate worth sharply less, unemployment rising and deflation round the corner, companies and
households are already reluctant spenders
; household savings deposits rose by more than 20 per cent in the year to November. Foreign hot money, too, has turned tail as currency appreciation abated. Opacity on foreign exchange reserves makes it ifficult to draw watertight conclusions, but reserve accumulation last month heavily undershot the sum of the trade surplus and foreign direct investment. Further adjusting for estimated valuation and other changes, Stone & McCarthy Research Associates estimate that unexplained residual outflows totalled about $120bn-$140bn in the fourth quarter.

For bulls, this is all part and parcel of being a paid-up member of the global economy: growth and liquidity cycles wax and wane. Last month’s loan numbers were reassuringly robust, showing a 19 per cent year-on-year increase in local currency lending (flattered by a low base) and the upswing should see investment return to form. That looks overly optimistic given other data points. The sharp deceleration in industrial production, which by November was already running at one-third early 2008 levels and likely fell further last month, hardly sets the case for corporate investment. Persistent over-capacity underlines the point. China’s days of double-digit growth are probably over.


HSBC and its China bank stakes

HSBC is in trouble. Its share price is down from over 800p in October 2008 to around 500p today with a market capitalisation of around £60.8bn.

The cause of a lot of its current problems was the disastrous purchase HFC - a US sub-prime lender that has sucked in cash (billions) and shows little sign of surviving. Despite this HSBC is clinging on to this investment.

It appears to have a similar attitude to its Chinese investments in Bank of Communications and insurer Ping An.

This is commendable and I suspect this is a good long term strategy. Indeed I would argue that HSBC should offload its US assets and buy more in China at current prices.

The decision by HSBC to keep the faith in its Chinese assets led to the following quote from a Bank of China spokesman. This blog post is inspired by this quote:

"We will not forget partners who sent charcoal in snowy weather and those who extracted the firewood from under the cauldron".

To get "cauldron" into a modern business paper such as the FT is impressive. I just have to work out which role HSBC is playing in relation to this quote. One imagines that they are pleased with HSBC for staying put and not selling off existing Chinese assets.

For now I think this is the right decision.

HSBC’s dead leg [FT]

HSBC dares to be different. Selling stakes in Shanghai-based Bank of Communications or insurer Ping An, currently registering almost $10bn of unrealised gains, could go a long way to resolving nagging doubts as to the bank’s capital adequacy. But the bank is staying put, to the delight of one lyrical Bank of China spokesman: “We will not forget partners who sent us charcoal in snowy weather and those who extracted the firewood from under the cauldron.”

The principled stance is commendable. But HSBC’s show of faith in China underlines the incongruity of its continued commitment to HFC, its US consumer finance business. The recent refurbishment of HFC’s Illinois headquarters – kitted out in the group livery – suggests that management is in no mood to sever ties with a business it bought six years ago.

Why not? This is what normally happens when investments turn out to be stinkers. HFC will have racked up losses of over $13bn by the end of next year – on top of the $15bn purchase price and $4.4bn of capital injections so far, Goldman Sachs estimates. More capital is probably on the way to pay down HFC debt, and cover realised losses as mortgage customers mail HSBC their housekeys. Whether HSBC needs more capital at the group level is the wrong question. What matters is that this dead leg has dragged it into the mire. HSBC’s share price has fallen by a quarter in the last month, almost rubbing out its premium to the sector. Knight Vinke, the dogged shareholder activist, says that most of the radical options for HFC – walking away, a debt restructuring, a spin-off with equity dowry – have been dismissed by management on the basis of a recovery in 2009, now unlikely, and by reference to the potential, but far from certain, danger of doing serious damage to the bank’s reputation. Management needs to come up with more compelling reasons for continuing to shovel in capital.


Monday, 19 January 2009

Unemployment just keeps on rising

Unemployment in China is a BIG problem and getting bigger. The implications are serious and getting more serious by the day.

Apologies for a lack of posts - academia gets busy at times. I should be back on the China Economics case now.

While the West suffers and our banks collapse we should not take our eyes off China. If China internally combusts we have not begun to see the extent of the turmoil. Yet again we see the magical "8% growth" mentioned.

The article is worth reading in full. I provide a couple of insightful paragraphs.

As China's Jobless Numbers Mount, Protests Grow Bolder [Washington Post]

As a global recession takes hold and China's economy continues to slow, growing legions of unemployed workers are becoming increasingly bold in expressing their unhappiness -- expanding a debate over how to protect the Chinese economy into long-fought disputes over other issues such as freedom of expression and equality before the law.

During most of the past two decades, concerns about China's human rights record have been overshadowed by the speed of its economic development and growing political influence in the world.

But as the economic crisis has grown, so, too, have challenges -- both small and large -- to the state's power.


Labor rights activist Li Qiang said China's economic problems have put the spotlight on social issues that have long existed -- such as the growing gap between the urban rich and the rural poor and the fight for worker rights -- but were played down by the government during the recent boom.

"The crisis in the West is purely economic. But in China it's a huge political problem," said Li, director of the New York-based China Labor Watch.

The ripple effects of the sharp economic downturn are growing: Crime is rising, as are labor strikes by taxi drivers, teachers, factory workers and even investors unhappy that their stock market holdings are now 70 percent off their peak.

Although Chinese authorities have been able to quickly disband the recent protests, there is concern that a single national-level event, if mishandled by authorities, could lead to a serious political crisis.


Unemployment is now estimated to be at its highest levels since the Communist Party took over in 1949. Job creation and preservation has become a top priority of China's leaders, who are acutely aware of the role a deteriorating economy played in the 1989 Tiananmen Square protests.

Economists say that if the growth of China's gross domestic product dips below 8 percent -- a healthy rate in most countries -- it would be a disaster here. The reason is that the demand for jobs would far outpace China's ability to create them.

Estimates by government research agencies for urban jobless top 18 million, or 9 percent of the workforce -- a rate unimaginably high to those who remember the guaranteed cradle-to-grave employment during Mao's time. This figure doesn't include the growing number of jobless among the 160 million migrant workers who are mostly employed in factories. The rural unemployment rate could be as high as 20 percent. In addition, 1 million college graduates are not expected to be able to find jobs this year.

China's social security minister, Yin Weimin, has said that the employment situation in China is "critical," with people fighting for jobs that don't exist. This year as many as 24 million people will be competing for as few as 8 million newly created jobs.


To combat unemployment, the Chinese government in recent weeks has reinstituted controls that in some ways turn back the clock to the "iron rice bowl" era that China has tried so hard to leave behind during 30 years of economic reforms.

Among the most radical measures is an order by some provinces and cities that prohibits companies from laying off workers without the explicit permission of the government. Other local governments are offering a subsidy of about $1,500 for every worker hired who had not already had a job elsewhere, and seed money for start-ups that will employ a certain number of people. The central government for its part has purchased millions of tons of cotton, soybeans, sugar and other products to prevent companies from experiencing financial problems that would lead to a reduction in their workforces.

And as part of its massive $586 billion stimulus plan -- roughly 15 percent of its GDP -- China has embarked on several dubious public works projects.

A $3 billion metro rail system linking the southern manufacturing cities of Guangzhou, Dongguan and Shenzhen, for instance, has been criticized as a waste of money because there are already four railway lines linking the cities and the trains often run empty. Ditto a $4.5 billion highway connecting the Sichuan province cities of Chengdu, Zigong and Luzhou, because there are already highways from Chengdu to Zigong and from Zigong to Luzhou.

A bridge running from just outside Shanghai to a textile manufacturing center on the other side of a bay was also resurrected to create construction jobs. For years, its designers had been unable to get the $2 billion they needed to build it because its route would mostly duplicate that of another massive bridge that was already under construction.

That changed in November when at least six of the biggest employers at the other end of the bridge, in Shaoxing, went out of business. Even though there is less need because of the closures, blueprints for the second bridge were dusted off and, almost overnight, workers broke ground. The project is expected to employ about 250,000 people and indirectly provide jobs for 300,000 more.

The article finishes on a rather depressing note:

With job prospects bleak, that money can't last long. As a result, Tong said, the mood is desperate: "Workers are always threatening to jump from the buildings and commit suicide."


Tuesday, 6 January 2009

Will Chinese growth REALLY hit 8%?

This blog has consistently stated that GDP may well come in below the crucial 7.5-8% level and have expressed concern on the impact this would have on the wider political economy.

I would place myself on the more dismal than usual side of the dismal profession that is economics. Perhaps I have been overly doom-laden on the costs of recession on China?

The alternative of course is that these predictions are over estimates or dare I said "made up". It appears to be a coincidence that we are hitting 8% so closely. If there is one thing I have learnt and that is to have grave doubts about Chinese data. I just do not believe these predictions.

China central bank sees GDP up 8% [FT]

SHANGHAI/BEIJING, Jan 6 - China’s economy will probably grow by about 8 per cent this year, the central bank’s research bureau forecast on Tuesday, the latest in a string of relatively optimistic estimates.

Some analysts have predicted a much sharper slowdown for the world’s fourth-largest economy, to as little as 5 per cent, as factory output growth grinds to a halt and exports shrink from their year-earlier levels.

However, government officials and researchers have centred around the view that China can engineer growth of about 8 per cent this year -- the pace officially targeted by Beijing as what it considers necessary to create enough new jobs.

The research bureau of the People’s Bank of China (PBOC) added its voice to that consensus, saying in a report that they expect a relatively modest slowdown from their estimate of 9.3 per cent growth for all of 2008. The economy expanded by 9.9 per cent from a year earlier in the first nine months of 2008.

The researchers also estimated that consumer prices would rise by less than 3 per cent in 2009, after an estimated increase of 6 per cent in 2008.

Writing in the official Shanghai Securities News, the team, led by Zhang Jianhua, head of the PBOC’s research bureau, cautioned that the risks of deflation were on the rise, fuelled in part by weakness in property investment and overseas demand.

”To effectively counter the risk of rapidly accelerating deflation, the key is to fully implement all manner of policies to expand domestic demand and support growth, and to speed up reform of pricing of basic goods,” they wrote, saying that the report represented their own views, not the central bank’s.

Some private investment banks have also said that they do not expect growth to slow as sharply as many others think it will.

Yiping Huang with Citigroup in Hong Kong said in a research note on Monday that the economy would probably grow by about 8.2 per cent in 2009, as industrial output rebounded sharply from the second quarter.

”We believe in the government’s ability to achieve its growth target,” Huang wrote


Internet content crackdown continues

Google continues to get a pounding in China as do many other content providers as China renews its attacks.

If the sole aim is to remove porn then there can be few complaints (except from the billion or so that would undoubtedly access said material).

ChinaEconomicsblog will remain "vulgar" free although I believe we might still be blocked by the great firewall of China.

China cracks down on internet content [FT]

China’s government has accused the country’s leading internet search engines and web portals, including Google, of threatening public morals by carrying pornographic and vulgar content.

While Beijing regularly launches web censorship campaigns, the new crackdown is the first in which the government has targeted heavyweight companies such as Google and Baidu, the local rival that leads the Chinese search market. During the last campaign about a year ago, the authorities listed only small and little-known websites as responsible for spreading unhealthy content.

The 19 internet sites cited by the government on Monday included Sina, Sohu, Tencent and NetEase, among the country’s biggest web portals and each run by overseas listed companies, and blog hosting websites and discussion forums such as Tianya.

The move comes as the political leadership faces a raft of challenges, many of them organised through the internet.

Government censors are currently busy blocking reporting and debate about Charter 08, an appeal for democratic reform which has attracted signatures from hundreds of prominent intellectuals. Other forms of dissent, such as the voicing of demands for compensation in China’s poisoned milk scandal, have also been organised through the internet.

The government on Monday directed its criticism strictly at content that could be damaging to children or young people.

Search results on the pages of Google and Baidu had “large amounts of pornographic links [and] after notification from the complaint centre, the site did not take effective countermeasures”, the State Council Information Office said in a joint statement with other agencies distributed through official media.

People familiar with the internet industry in China said the move would serve as a powerful reminder of the self-censorship the authorities expect from internet portals.

Cai Mingzhao, a senior official at the SCIO, said that some websites had exploited legal loopholes and warned of stern punishment.

Late last year, state media attacked Baidu and later also other search engines for carrying links to unlicensed pharmaceutical websites. “Looking back, that was the first signal of a tougher tone in dealing with internet companies,” said one internet executive.

Nevertheless, the websites pilloried by the government censors were caught by surprise on Monday. A manager at Sohu said, ”We find this extremely strange and are still figuring out what exactly happened.”

Chen Tong, editor-in-chief at Sina, China’s leading news portal, said there was no point in being surprised about the crackdown. “Ensuring that your content is OK is a content provider’s responsibility in the first place,” he said.

Neither Baidu nor Google responded to requests for comment.

On Chinese blogging sites, pictures of scantily clad girls can often be seen along one side of the screen or in pop up windows. These were still appearing on Sina and other blog hosting pages on Monday.

China has the world’s largest number of internet users, some 390m according to the government’s last count.


Crisis hits 2/3s of Beijing residents

Some newspaper articles are pretty pointless. This one is a good example of one of those articles.

We know there is a global recession, we know jobs are being lost and we know this will impact all sectors of society.

The headline in the People's Daily Online that "69.6% of Beijing residents affected by financial crisis" is just stating the obvious. In fact I am surprised the figure is so low. What do the other 30% do?

It turns out they are teachers. Teachers just need to wait until falling tax revenues leads to cuts to the education budget and the laying off (or hiring freeze) for teachers. That is probably a year or so away. It is just a matter of time.

69.6% of Beijing residents affected by financial crisis [Peoples Daily Online]

69.6% of the respondents said they were "directly affected" by the financial crisis, according to a specialized survey of over 2,000 respondents in 18 districts and counties in Beijing released by the Beijing Social Facts and Public Opinion Survey Center.

Those who believed that they were "severely" affected account for 15.7% of respondents. Of which, the percentage of respondents who chose this option was highest in the 41 to 50-year-old age group, reaching 22.2%.

Moreover, the survey shows that those who were least affected by the financial crisis were teachers, and those who were affected the most were "self-employed/freelance workers."

Among the 186 "self-employed/freelance workers" surveyed, 22.6% believed the crisis had a "major impact" on their lives.

Among households with incomes less than 10,000 yuan per month, the lower the income of the household the greater the impact they felt from the financial crisis.

Over 70% of households with incomes below 2,000 yuan per month believed that they were affected by the crisis.

Among the 55 households with incomes between 9,000 to 9,999 yuan per month, 32 households felt that they were affected by the financial crisis; they were the least affected group of all the households surveyed.

The survey also shows, in 2008, the salaries of 54.9% of the respondents remained basically unchanged, while over 26% experienced a drop in income.

Salaries of civil servants were the most stable, with 50 civil servants surveyed and 42 of them saying that their salaries basically did not change.

Meanwhile the "management in enterprises and public institutions" group shows the largest elasticity; of 250 respondents, 64 were given raises and 65 had their salaries cut.


China revs up the car industry

The US government is not the only one that is looking to bail out its domestic car industry. Not surprisingly, and a lot more easily, China is following suit.

The reason is jobs but also to ensure the survival of local car manufacturers who with this support may survive where overseas competitors fail leaving a greater market share for the survivors if and when the global economy picks up again.

As with the US the importance of the car industry strategically and economically is not to be underestimated. The loss of domestic car makers can dent national pride although the UK is an excellent example of the benefits of letting the domestic car makers die. The UK has one of the most productive car manufacturing sectors in the world at the moment. The reason is that it is mainly German and Japanese owned. However, the jobs still exist and I suspect many of the shareholders of the parent companies are UK pension funds so what is the problem?

The US especially could learn from the UK. China should also be careful not to prop up inefficient loss makers. The fact that there are 45 domestic car makers suggests consolidation is essential - the fact 45 have survived so long is indicative of inefficiencies in the system whether it is related to government red tape or bad management.

I agree with the comments below - despite Chinese government support car sales could still contract dramatically. There is still a long way to go in this global recession.

China in push to prop up local carmakers [FT]

The Chinese government plans to support the car industry, the second-largest in the world, with the aim of ensuring sales growth of about 10 per cent in 2009.

The move is part of the continuing effort to stimulate the economy and shield the country from the effects of the global economic crisis.

The State Council, China’s cabinet, is expected soon to announce cuts in car purchase taxes and incentives for the development of clean fuel cars, to help support the flagging local car market, according to the official Shanghai Securities Journal.

After years of double-digit growth, Chinese passenger car sales fell 12 per cent year on year in November as consumer worries about economic growth sapped demand. Figures for December are expected next week.

The proposed sales tax cut on smaller vehicles could help carmakers such as Geely, one of the largest Chinese car companies. Geely said Monday it expects to boost sales 25 per cent this year as it introduces new models.

Government bodies will be required to buy cars developed by domestic carmakers when making fleet purchases, and Beijing will encourage further consolidation in the domestic car industry, the newspaper said. China has 45 carmakers compared with 15 in the US, the world’s largest car market.

Premier Wen Jiabao said last week that Beijing had developed plans to help the automobile and steel sectors.

Yao Hongguang, Shenzhen-based analyst at United Securities, said: “With such a basket of stimulus policies, sales growth in the car market this year can reach 10 per cent, still much lower than the compound growth rate of 15-20 per cent over the past five years.”

But JD Power, the leading automotive consultancy, said it was still predicting flat or slightly lower passenger car sales in 2009, at 5.8m units.

This is based on the assumption that the global economy will stabilise in the first quarter of this year, and that China’s economic stimulus policies offset negative pressures from overseas – neither of which are guaranteed to happen.

JD Power said in a December report that there was a 40 per cent chance the Chinese market could fall by 10 to 12 per cent, in spite of government efforts to support the market.

Beijing also took steps to support the local metals industry, announcing that it will allow tax-free imports of copper, nickel and cobalt concentrate, provided the finished products are exported, according to a statement on the Ministry of Commerce website.

“This is a stimulus initiative to help local smelters survive the financial winter,” said Wang Feng of Everbright Securities in Shanghai.


Monday, 5 January 2009

China and the Hotel California Effect in Banking

ChinaEconomicsBlog is back after the Christmas break with a topic that has interested me for a while.

This is what I call the "Hotel California Effect" named after a paper by Holger Gorg a few years ago. Respect for sticking with the title even in the face of referees who did not understand what the title even meant.

This was the original paper:

Fancy a Stay at the 'Hotel California'? Foreign Direct Investment, Taxation and Firing Costs

Holger Gorg
University of Nottingham - School of Economics; Institute for the Study of Labor (IZA)

December 2002

IZA Discussion Paper No. 665

This paper looks at the trade off between investment incentives and exit costs for the location of foreign direct investment (FDI). This issue does not appear to have been tackled in much detail in the literature. The analysis considers the effect of profit taxation (as a measure of investment incentives) and an index of hiring and firing costs (proxying exit costs) on the location of US outward FDI in 33 host countries. The results suggest that US FDI, in particular in manufacturing is negatively affected by the level of profit taxation and exit costs. Hence, if countries want to attract FDI it may not suffice that incentives are provided in order to ease the entry of multinationals. Instead, it also appears to be important that exit costs are at a level attractive to multinationals. In other words, multinationals may not check into an attractive looking Hotel California type host country if it is difficult to leave.

Keywords: Foreign Direct Investment, Exit Costs, Firing Costs, Investment Incentives, Taxation

JEL Classifications: F23, H25, J65
Working Paper Series

For those still confused there are lyrics in the Eagles classic song of the same name (the final 3 lines) that read:

We are programmed to receive.
You can checkout any time you like,
But you can never leave!

To me this reminds me of the Chinese FDI policy. China has done very well managing to attract FDI from all over the world. Yet China has not been tested on how easily that FDI is allowed to leave.

The FT cover this issue in today's paper.

As an economist with a good knowledge of China it was clear that the massive investments by UK and US banks in Chinese banks would be high risk to say the least. If these investments were made with a 30-40 year outlook then fine and indeed on paper there have been short term profits from China's stock market boom. The question, as we know from the current crisis, is whether these assets can be sold at the perceived market price.

Routes out of China will be difficult to negotiate [FT]

Last week UBS became the first overseas bank to offload its stake in a Chinese bank in a move expected to trigger a wave of divestments.

Foreign financial institutions including Goldman Sachs, Citigroup, HSBC, TPG, Temasek, Allianz and Royal Bank of Scotland own stakes in leading Chinese lenders worth tens of billions of dollars.

These holdings were mostly acquired in 2005 and 2006 when Beijing was keen to import western capital and expertise to help reform its moribund banking sector.

Many in Beijing and elsewhere are now asking whether the likes of RBS will be tempted to sell out and book handsome profits in order to help repair balance sheets strained by the financial turmoil.

As some of the foreign banks position themselves for possible divestments, many are also wondering what happened to all the talk about “strategic partnerships” and “risk management assistance” that accompanied the original investments.

“The foreign banks promised little and have delivered even less [to their Chinese partners],” according to one person who was deeply involved in negotiations between foreign investors and Chinese banks. “But the Chinese side didn’t really know what to ask for and were more focused on getting deals done as a precursor to very lucrative IPOs.”

At least four other people involved in foreign investments in Chinese banks have said that, although there was interest at one level of the government in introducing western management practices and risk controls, the foreign investors were mainly brought in to provide window dressing for initial public offerings.

With names such as Goldman Sachs, Bank of America and RBS on their share registers, Bank of China, China Construction Bank, Industrial and Commercial Bank of China and Bank of Communications that were technically bankrupt a few years earlier were able to achieve higher valuations when selling shares in Hong Kong and Shanghai.

UBS was considered to be in a slightly different category from the banks that signed up for “strategic partnerships” because its $500m investment in BoC was always considered a financial investment – a “pay to play” commitment that helped it to win a lucrative mandate to advise on the $10bn Hong Kong listing of Bank of China in June 2006.

Last week, UBS decided that the 1.3 per cent stake was no longer core to its strategy and sold it – for $835m – as soon as a three-year lock-in period expired.

UBS stressed that it was “committed” to its relationship with BoC and to its other mainland businesses.

But dealmakers say that any foreign institution mulling a stake sale will have to weigh carefully the potential downside, at a time when Beijing is trying to garner support for its largest banks.

Bank of America last month cancelled a plan to sell more than $3bn worth of its shares in CCB after being told by senior government and banking officials that Beijing was unhappy with the timing of the sale, according to people familiar with the matter.

The cancellation has raised concern among other banks which, like BofA, invested in Chinese banks as “strategic partners” that they will not be able to sell down shares.

“The Chinese stock market is in a terrible situation right now and if all the big foreign investors are running away from the banks then that would hurt confidence even more and the government would not be keen to see that happen,” said Wu Yonggang, an analyst with Guotai Junan, a Chinese brokerage.

Stake sales will also be limited by the need to find buyers for the shares.

“Banks round the world are reviewing non-core holdings and many will no doubt decide to sell their Chinese bank stakes,” says one banker in Hong Kong. “But these share sales can not all come at the same time as they will not be digested by the market.”