Stockmarket off 20% since its peak

The bubble had to burst - whilst I got the final size of the bubble wrong its eventual bursting remained inevitable and whilst large profits were made on the way up those mug punters who bought for the first time at the peak are already nursing loses of up to 20%.

Shares trading on a PE of 46 are still way overvalued. China has specific issues relating to asset allocation and the choices available then may limit the fall but this should not detract from the overvaluation and small investors move in a herd it may be hard to reverse this downward trend in a hurry.

The question is whether a large deflation will have knock on effects across global stock markets.

Chinese stocks face biggest monthly drop since 1995 [China Post]

SHANGHAI -- Chinese stocks are poised for their steepest monthly decline in more than 12 years as the government deflates a bubble that caused prices to quadruple in a year.

The Shanghai Composite Index has fallen 16 percent in November, the most since February 1995, when Bloomberg started keeping records of the benchmark. Shares in the index trade at an average 46 times earnings, according to data compiled by Bloomberg. The MSCI Asia Pacific Index and the Standard & Poor's 500 Index are valued at 18 times.

While this year's rally turned Beijing-based PetroChina Co. into the biggest company by market value and made Industrial & Commercial Bank of China Ltd. the largest bank, five interest rate increases by the People's Bank of China and higher taxes on trading shares sent the index down 18 percent from its Oct. 16 record. The past five times the Shanghai Composite Index dropped 20 percent or more from a high, losses deepened to an average 35 percent before recovering, Bloomberg data show.

"The risk facing the stock market is considerable now, as the government is trying to squeeze an asset bubble," said Zhang Ling, who manages the equivalent of US$1.1 billion with ICBC Credit Suisse Asset Management Co. in Beijing.

U.S. billionaire Warren Buffett said last month investors should be "cautious" about China's stock market. Six months ago, Li Ka-shing, China's richest man, said it "must be a bubble."

The decline in China compares with a 21 percent decrease in Japan's Topix index from its February record to Nov. 22, the first of the world's 10 biggest stock markets to enter a bear market since the summer's U.S. subprime-mortgage collapse. A 20 percent drop within 12 months is considered by traders as the start of a bear market.

The two-year-old CSI 300 Index, which tracks shares on the Shanghai and Shenzhen exchanges, fell 21 percent from its Oct. 16 peak through Wednesday, and rose 4.2 percent Thursday. It's still the world's best-performing national index of the 90 benchmarks followed by Bloomberg.

"It's far too early to talk about a prolonged bear market as domestic demand is still strong," said Leo Gao, who helps manage the equivalent of US$2.3 billion at APS Asset Management Ltd. in Shanghai. "We could see a rebound when banks get their fresh quota of loans in the new year."

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EU-China Summit

The EU and China have shared interests in a large number of areas - exchange rates, climate change, commodity prices to name just three.

The current US political aggression towards China gives the EU a window of opportunity to take a more conciliatory approach. This will not be easy, but as Sakozy has shown (previous article), China can benefit greatly from closer ties and cooperation with Europe.

Given our interest in education, this is an interesting statistic.

More than 100,000 Chinese students studied at European universities in 2003 and 2004; there were 60,000 at US universities in the same years.

The UK and Europe should build on this strength and increase Europe's lead over the US. This means looking carefully at visa costs and access to higher education.

Stumbling towards mutual understanding [FT]

Whether it is commodity prices or exchange rates, nuclear non-proliferation or climate change, the European Union and China are discovering that there is virtually no economic topic or international security issue these days on which their interests do not intersect – and sometimes collide.

In the 32 years since China and the then European Economic Community established diplomatic ties, the Beijing-Brussels relationship has evolved from a one-dimensional, trade-based affair into a complex partnership that combines growing interdependence with various points of friction and residual misgivings.

From a European perspect­ive, a sense of awe at the rapid expansion of China’s global economic power is matched by uncertainty over how Beijing will cope with the domestic consequences of growth and shoulder its ever greater international responsibilities.

“Even if the EU assumes that China will remain a success story, it is not clear what kind of power it will become,” says Charles Grant, director of the Centre for European Reform, a think-tank.

“Europeans will hope that China takes its place in the multilateral sort of world that they would prefer. But China may not want a rules-based international system with strong multilateral institutions.”

There is no fundamental conflict of interest between the EU and China, and the EU has been China’s biggest foreign trade partner since 2004. Each would like to put the partnership on a solid strategic foundation rather than lurch into rivalry.

But with the EU’s trade deficit with China growing by €2bn ($2.97bn) a week, economic tensions threaten to become serious. Other misunderstandings persist, deriving in the final analysis from the two sides’ different political systems and cultures.

While both embrace economic pluralism, the EU sees itself as a bloc of 27 democracies with a commitment to human rights and the rule of law, quite distinct from China, with its one-party state and communist ideology.

But a more subtle difference is China’s emphasis on the integrity and sovereignty of the nation state, which contrasts with the pride that many EU member states take in having diluted their own sovereignty in favour of European reconciliation and co-operation after the past century’s two world wars.

“China sees sovereignty and non-interference in domestic affairs pretty much as non-negotiable, whereas the EU thinks its success is built on pooling sovereignty and going beyond the principle of the nation state,” one European diplomat says.

This difference of outlook explains why the European leaders who are visiting China this week intend to tread carefully when they talk about the need for a revaluation of the renminbi or more effective Chinese action to protect intellectual property rights.

“What we are aiming for is structured macroeconomic dialogue with China, because we don’t have one yet,” Jean-Claude Juncker, chairman of the eurozone’s finance ministers’ group, said last week. “We will be explaining why the Chinese economic leaders should perhaps change tack. We will make sure we are very explicit this time round.”

Mr Juncker and the eurozone’s two other highest-level officials – Joaquín Almunia, the EU’s monetary affairs commissioner, and Jean-Claude Trichet, the European Central Bank president – will set out the case that it is in China’s own interests to permit a stronger renminbi, boost domestic demand and reduce the huge savings levels in the banking system.

“I don’t think we should be lecturing them on how to grow economically, but surely it is they, not we, who are saying they need a different balance in their growth model. That’s not an idea that we came up with. They came up with this idea,” Mr Almunia told a European parliament hearing last Wednesday.

“China has constantly increased its foreign reserves. That is the backdrop to the dialogue, which we trust will be fruitful, and which we trust will also take place on a regular basis. We are not going to solve all the problems on a one-off trip. That would be unrealistic.”

EU officials acknowledge the eurozone leaders’ visit and the EU-China summit on Wednewsday will be test cases of how much progress Europe is making in speaking to China with a single voice.

Leaders of individual EU member states, especially France, Germany and the UK, have long made a habit of promoting their own political and commercial relationships with the Chinese at the expense of a common position.

Like Russia and the US, China sometimes seems ­frustrated with the internecine squabbles and convoluted decision-making procedures that often constitute EU policymaking. Slowly, however, Europeans and Chinese appear to be learning more about each other. More than 100,000 Chinese students studied at European universities in 2003 and 2004; there were 60,000 at US universities in the same years.

Sarkozy in $30bn trade deal

A rejuvenated French economy under Sarkozy seem keen to expand their sphere of influence. It is good news that France is becoming more active in China as Europe seeks to counter US influence in the region.

The airbus contract is particularly welcome and, given the dollar-Euro exchange rate, a good time to sign as the Airbus finds it harder to compete on price with Boeing.

Sarkozy nets US$30 bil. in trade deals with China [China Post]

BEIJING -- French President Nicolas Sarkozy on Monday oversaw the signing of about US$30 billion in aviation, nuclear and other deals in what he described as an unprecedented day of trade with China.

The two major agreements announced on the second day of Sarkozy's visit to China were contracts for European aerospace giant Airbus to deliver 160 aircraft and French firm Areva to build two nuclear reactors.

Sarkozy said the value of all the deals, signed after he met Chinese President Hu Jintao in the Great Hall of the People, was worth about 20 billion euros (US$29.6 billion).

"The total amount of these contracts has never been matched before," Sarkozy told Hu shortly before the official signing ceremony, according to an AFP journalist there.

"I want to thank President Hu for his personal involvement," he said afterwards.

The most lucrative contract was for Airbus to deliver 110 A320s and 50 A330s in a deal a spokesman for the European firm said was worth US$17.4 billion, based on the list price.

Airbus spokesman Robin Tao said the agreement was its biggest ever in dollar terms with China, which has the world's fastest-growing aviation market.

Areva said its agreements to build two third-generation nuclear reactors for China Guangdong Nuclear Power Corporation (CGNPC) in southern China was worth eight billion euros (US$11.9 billion) and was also historic.

Those deals also included the delivery of uranium from three African mines controlled by Areva and a joint venture to market the third-generation technology in China.

"It's a record. In the history of the civilian nuclear industry, there's never been a deal of this magnitude," Areva chief executive Anne Lauvergeon said.

With China seeking to rapidly build up its nuclear power industry, the deal was important for Areva after losing out in July to U.S.-based Westinghouse Electric in a bid to build four other nuclear reactors.

Other deals announced on Monday included a 750-million-euro telecommunication contract between Alcatel of France and China Mobile, and oneworth 80 million euros for Eurocopter to provide China with 10 helicopters.

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The trade deficit that is growing at €15m an hour

It is no longer just the US who are keen to bash China over its growing trade deficits at every opportunity.

Today's FT reports on Peter Mandelson's warning to China that it is prepared to use good old "anti-dumping" measures to "defend" itself against Chinese exports.

The statistic trotted out in the article is that the EU's trade deficit with China is growing at 15million Euros an hour. That is a good statistic and does sound impressively scary.

The hook is that Peter Mandelson is happy with Chinese exports and is spinning this as a demand for freer trade. Leaving the exchange rate issue aside (which we have covered many times before) one of the criticisms is that China is putting limits on market access for foreign countries. This argument does have legs.

However, Mandelson is also keen to explain that he sees the current growth in the trade deficit as "unsustainable". What does that really mean?

The EU also has issues over intellectual property rights, fake goods and cumbersome bureaucratic procedures.

It is a sign of China's coming of age that it is no longer appears to be allowed to play the "still developing" card. It seems the patience of China's trade partners is beginning to wear thin and they are gearing up to play hard.

Make no mistake, China can ill-afford to become embroiled in a trade war with the EU and the US. For all its hard line rhetoric it still has to create millions of jobs in the manufacturing sector a year and it needs markets to sell these products.

Finally, I do not really understand what Peter is talking about in this paragraph.

Mr Mandelson said Chinese leaders needed to act to reduce non-tariff barriers, regulation and discrimination against European companies, saying that "when we pin them to the actions, they respond in terms of trade fairs and investment promotion". He added: "I don't want takeaways or overnight presentational devices. I want real sustained action to remedy the problems."

Is he talking about fast food? What is an overnight presentational device? I am lost.

Mandelson warns China on trade gap[FT]

Peter Mandelson, the European Union trade commissioner, warned China yesterday that the EU could be forced to use anti-dumping measures to defend itself against Chinese exports if Beijing failed to help cut an "unsustainable" trade deficit growing by €15m an hour.

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EU frustrations with Chinese limits on market access for foreign companies, and an exchange-rate policy seen as undervaluing the renminbi, have been fuelled by the growth of its trade deficit with China to €86bn ($128bn, £62bn) in the first seven months of the year.

"Europe is becoming more open to China, but I can't sustain that unless China shows the same openness to us," Mr Mandelson told the Financial Times. He pointed out that he would come under increasing pressure to take tougher action if Beijing did not move to clear market barriers.

"During the six days that I spent in China, the trade deficit will grow by over €2bn, or €15m an hour," he said. "That is what I call unsustainable. There are real issues of market access, legal protection, as well as the other issues we are dealing with - like counterfeiting and export of fake goods."

Mr Mandelson's call to China reflects frustration among European companies at what they see as Beijing's failure to act on a host of long-standing complaints.

Mr Mandelson said Chinese leaders needed to act to reduce non-tariff barriers, regulation and discrimination against European companies, saying that "when we pin them to the actions, they respond in terms of trade fairs and investment promotion". He added: "I don't want takeaways or overnight presentational devices. I want real sustained action to remedy the problems."

He made clear that a Chinese failure to deliver change could force Brussels to resort to trade defence measures, such as anti-dumping duties or - in extreme circumstances- complaints to the World Trade Organisation.

China should also "manage its currency better", both for its own economic good and to address the widening trade gap.

A survey of EU companies by the European Chamber in Beijing yesterday highlighted corporate dissatisfaction with China's lack of transparency, its record on intellectual property protection and its cumbersome bureaucratic procedures.

"The investment climate is unfortunately not getting better," said Jörg Wuttke, the chamber's president. Intellectual property rights protection remained a problem for 66 per cent of responding companies, despite Beijing's promises to address the issue, he added.

Despite such complaints, 61 per cent of European companies in China reported being profitable and 73 per cent were optimistic about future growth, the chamber survey found.

The summit comes shortly after Germany's finance minister cancelled a trip to Beijing after his counterpart refused to see him in apparent protest over a meeting between Angela Merkel, the German chancellor, and the Dalai Lama, the exiled Tibetan spiritual leader.

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China Environmental Round-up 21/11/2007

There is no doubt that China has serious environmental problems. It is also true that environmental degradation is limiting Chinese growth with the problem promising to get worse.

In this post I merely emphasise the importance of the environment by providing links from just 1 days PlanetArk news to illustrate the size and importance of the problem. Note again, this is just one days environmental news for China that has managed to make the mainstream news reports.

China's Energy Saving Efforts Gather Pace in Q3

BEIJING - China's efforts to cut the energy it uses to generate each dollar of national income, a key pillar of Beijing's argument that it is tackling carbon emissions, gathered pace in the third quarter, government sources said.

China Takes Pollution Fight to Threatened Villages

BEIJING - Pollution in China's vast countryside is threatening health, water and arable land, the government said on Wednesday, vowing to stop toxic industries shifting pollution to villages.

China Three Gorges Landslide Kills One, Two Missing

BEIJING - A landslide near China's huge Three Gorges Dam trapped four workers, killing one, state media reported, as officials announced efforts to counter environmental fallout from the controversial project.

China Coal Fire Put Out After More Than 50 Years

BEIJING - An underground coal fire in remote northwest China that has raged unchecked for more than 50 years has finally been put out, state media reported on Wednesday.

More than 12.43 million tonnes of coal had been consumed in the fire and an estimated 651 million tonnes saved at the Terak field in Urumqi, capital of Xinjiang autonomous region, the Coalfield Fire Fighting Project Office was quoted as saying.

China to Hold Asia Climate Change Meeting in 2008

SINGAPORE - China will hold a meeting in Beijing next year for Asian countries to discuss climate change, as it faces the risk of more droughts and floods and seeks common ground on a potential successor to the UN Kyoto Protocol.

India, China Sign Deal to Stabilise Greenhouse Gases

SINGAPORE - Leaders of Asian countries, including top polluters India and China, on Wednesday signed an agreement that aims to stabilise greenhouses gas emissions.

You have to be a genius to read China Economics Blog

This is amusing.

You enter your blog address and it tells you the reading level of the blog.

Interestingly, Joshua Gans over at CoreEcon gets a "High School" rating.

The implications are as follows:

1. Only clever people read this blog (is that so bad?)
2. I could get more readers if I simplified the language (is that so good?)

Opinions?

The China Fantasy

The "China Fantasy" by james Mann is currently causing a stir in the corridors of power.

The book covers old ground but puts forward a strong argument. The conclusions should also surprise no one and I am surprised that it appears to have caused such a fuss. I doubt the American public really feel victims of a fraud over the handling of US-Chinese relations.

The issue of democracy in China as a result of increased trade and FDI was naive - the question is whether anyone really believed it in the first place.

New book on China raises a storm [International Herald Tribune]

Indeed, a recent book, which argues that on human rights grounds, American policy toward China has been both a failure and a fraud, is making a considerable stir among China policy makers and scholars in the United States.

The book is "The China Fantasy" by James Mann, a former correspondent in Beijing for The Los Angeles Times and now author in residence at the Johns Hopkins School for Advanced International Studies.

Mann's thesis, adamantly rejected by many, though not all, experts on China, is that the American policy of what is called "engagement," pursued with some fits and starts by every administration since Richard Nixon's in the 1970s, has not delivered on its main promise, which was Chinese democratization.

When, for example, the Clinton administration ended linkage between trade benefits for China and progress in human rights, the argument to skeptical members of Congress held that delinkage would lead to more economic growth, more economic growth to the emergence of a middle class and the emergence of a middle class to real political reform.

Andrew Nathan, a China expert at Columbia University who supports the Mann thesis, put it this way in an interview: "The strategy of engagement has been incredibly successful in supporting the stability and prosperity of China and allowing the regime to survive as an authoritarian, repressive regime, but the American people are not being told that that is the strategy."

According to Nathan, everybody involved in the debate would be perfectly delighted if China were to turn into a stable democracy, but in the meantime policy makers are actually pretty happy with the regime in China that they have.

"That's because they know who to call in Beijing and who to talk to about problems like currency, trade, North Korea and Taiwan," he said. "There's somebody in charge and they're basically pretty cooperative with us."

In many respects Mann's book reprises an argument that has been raging among China policy makers and experts since Nixon restored relations with China in 1972.

The questions have always been: How much should the United States publicly criticize China for its numerous, egregious human rights violations and how much does the human rights goal have to be accommodated to China's power and importance?

But because Mann's book accuses China policy makers of a kind of broken promise, it seems to have generated an especially angry response on the Internet and in such specialty journals as The China Quarterly, which published a lengthy exchange between Mann and David Lampton, a leading figure on China who is also at the School for Advanced International Studies.

Mann also touches what may be a sore point in stressing that, with a few exceptions - Nathan one of the most prominent among them - China scholars and policy makers have tended to be rather silent on Chinese human rights abuses, though many of them say that they bring these matters up forcefully with Chinese officials in private.

And this, in turn, has long been part of a complicated debate about how to apportion priorities on China. Administration after administration has come to power in Washington pledged to be tougher on China only to retreat once it needed China's cooperation on other matters.

The China specialists' retort to Mann builds on two elements, one of which is the need for that cooperation. The bilateral relationship faces tough times, some of them say, not least on trade where the ever-growing deficit is bound to lead to calls in the United States for sanctions.

In addition, some China experts are concerned over the trend toward what has come to be called "strategic hedging" on China, building relations with countries on China's periphery as a way of containing what conservatives in the Bush administration regard as a looming military threat from China, a threat that a lot of experts (including Mann) believe to be largely imaginary.

On human rights in particular, some China scholars criticize Mann for concentrating so much on political reform that he has failed to appreciate the enormous beneficial changes that have occurred in China over the past decade, where a middle class of perhaps 200 million to 300 million people has come into existence enjoying a degree of personal autonomy that would have been unthinkable 15 or so years ago.

"Jim's image of China is stuck in the Tiananmen crackdown period," said David Shambaugh, a China scholar at George Washington University. "He thinks China today is the same as China in 1990."

Among Lampton's arguments is that Mann overestimates the centrality of the United States to political developments in China, that if democracy takes hold there it will be because of developments in China itself, not because of pressures from outside.

"The Chinese middle class is not now a wedge pushing for democratization," Lampton said. "In the short run they may be more afraid of the underclass than of the elite, and the middle class is key.

"I think we should be supportive of underlying economic developments that will build a middle class, but there are limits to what U.S. policy can accomplish," Lampton said. "Jim seems to be more implicitly optimistic that if U.S. policy were different, there would be a Chinese reality more to our liking."