Wednesday 22 April 2009

Does booming car sales equal trouble ahead?

So why exactly are Chinese car manufacturers enjoying booming sales? Does the average Chinese citizen realise that growth is only 6.1%?

The big question is where is the money coming from to buy these cars? Please don't tell me it is cheap credit from banks with massive amounts of bad loans.

Perhaps LEX can help me out:

Cars in China [FT]

Isn’t it great when a plan comes together? A few months ago Beijing was fretting about an apparent collapse in demand for cars. Muted sales data – passenger cars fell 35 per cent between March and August – suggested that China would be lucky to get anywhere near its target of shifting 10m vehicles in 2009. Some blunt instruments later – tax cuts and subsidies for smaller vehicles – and cars are flying off forecourts. With 2.7m new vehicles shifted in the first quarter (up 4 per cent year-on-year), China has zoomed past the US (2.2m, down 38 per cent) as the world’s largest market. At that rate, Beijing will beat its 2009 target by early December. No wonder this week’s Shanghai auto show is more festive than similar events in the west, which are being scaled back or canned.

But delegates should keep some champagne on ice. Carmakers are not necessarily looking at better profits: minivans mean mini-margins. Sales of vehicles with bigger engines are falling, as they are everywhere else. This year’s overall pick-up in sales is almost certainly linked to rampant credit growth, which the banking regulator last week said it intends to tame. And the industry still has structural demand problems. Take cars: sales growth averaged about 40 per cent a year in the six years to 2008, when annual growth slipped to 7 per cent. Even with the punchy start, 2009 is set for about 5 per cent, estimates Citi. For a country with third-world penetration – 32 cars per 1,000 people in 2007 (compared to 800 in the US) – that kind of growth is hardly spectacular.

Chinese savings rates are among the world’s highest, implying huge potential for consumption to rise. But as Morgan Stanley points out, given off-book liabilities such as retirement, healthcare and education, the average consumer is practically in negative equity. Despite inducements from Beijing, households may continue to prioritise these invisible debts over a new set of wheels.


Monday 20 April 2009

Quality of University and Wages

One of the primary reasons of this blog was to encourage Chinese students to pick "HIGH QUALITY" Universities to study in.

The cost of UG and PG education is very high and mistakes can be very costly. The right hand column lists Economics courses and excellent Universities. For any subject though you cannot go far wrong with that list of Universities.

But why does quality matter? The following paper sheds light on the cold fact that high quality University = higher wages (with the gap rising over time).

The conclusions are exactly as I would expect.

"University Quality and Graduate Wages in the UK"

IZA Discussion Paper No. 4043
IFTIKHAR HUSSAIN, LLM (London School of Economics), London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP), University of Oxford
SANDRA MCNALLY, London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP), Institute for the Study of Labor (IZA)
SHQIPONJA TELHAJ, London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP), University of Sussex

We examine the links between various measures of university quality and graduate earnings in the United Kingdom. We explore the implications of using different measures of quality and combining them into an aggregate measure. Our findings suggest a positive return to university quality with an average earnings differential of about 6 percent for a one standard deviation rise in university quality. However, the relationship between university quality and wages is highly non-linear, with a much higher return at the top of the distribution. There is some indication that returns may be increasing over time.


China's growth sneaks over the 6% level

At last confirmation that China's growth is lower than many expected. The 8% figure was never realistic. Why it takes so long for analysts to catch on to what is happening on the ground never ceases to amaze me.

So has China bottomed out? Whilst the FT might think so I believe the answer is no. The figures on energy use and profits tell the story. First, profits fall THEN firms start failing and firing. We are not even at the real firing stage yet. Firms try and struggle on and some will survive but many more must collapse first.

Whilst the pace of decline might slow, it is still a decline. More worrying, whilst bank loans have gone up a lot of these will be very BAD LOANS. This will just make things worse in the long term.

Beijing struggles to prop up growth [FT]

China’s economy grew at an annual rate of 6.1 per cent in the first quarter – its slowest pace since quarterly gross domestic product data was first published in 1992 – as Beijing struggled to prop up activity in the face of the global crisis.

The increase was down from 10.6 per cent growth in the same period a year earlier and 9 per cent for the whole of 2008 but aggressive government stimulus measures begun in the fourth quarter last year have started to yield signs of recovery.

The figure was “indeed quite an achievement” against the background of the worsening global crisis and recession in many of the developed economies that China relies on to buy its exports, said Li Xiaochao, spokesman for the National Bureau of Statistics.

Industrial production growth accelerated 8.3 per cent in March and 5.1 per cent in the first quarter from a year earlier, according to Mr Li.

But aggregate profits at large Chinese enterprises fell 37.3 per cent in the first two months from a year earlier and industrial use of electricity – which is usually closely correlated to industrial production – actually fell 8.38 per cent in the first quarter from a year earlier according to the China Electricity Council.

Mr Li said he had no explanation for the discrepancy between falling power consumption and rising industrial production but insisted that both figures were accurate and the issue required “further study”.

Rapid cooling in the Chinese economy has been led by a collapse in exports and private sector investment. This has prompted the government to fast-track infrastructure projects and spending programmes, and order state-run banks to open the credit taps to flood the system with liquidity.

Although there is still little evidence of new private sector investment, the government’s efforts have led to a rebound in investment figures and show signs of stimulating wider demand in the economy.

Sun Mingchun, an economist at Nomura Securities, said economic data released on Thursday “showed that the economy has gained significant momentum since February”.

Fixed asset investment, which accounted for more than 40 per cent of GDP in 2008, showed a marked acceleration in March, rising 28.8 per cent in the first quarter, 4.2 percentage points higher than growth in the same period last year.

The bulk of the increase came from government-supported infrastructure projects.

The decline in Chinese exports decelerated in March, with exports falling 17.1 per cent from a year earlier, compared with a 25.7 per cent decline in February, leading some analysts to predict a stabilisation in trade. Others said further weakness in external demand was the main risk.


"Blue Ocean Strategy" and China

Some comments from blog readers are interesting. One such comment linked to a comment from a NY Wang on "Blue Ocean Strategy".

Sometimes it is useful for economists to look at the anecdotal evidence.

This article is interesting from two perspectives. First, the rapid rate of job losses amongst financial traders in Hong Kong and secondly, the use of the term "blue ocean strategy".

I must admit to not being fully aware of what this strategy actually is.

Here is a definition for those equally perplexed.

What is a BLUE OCEAN STRATEGY? The authors explain it by comparing it to a red ocean strategy (traditional strategic thinking):
1. DO NOT compete in existing market space. INSTEAD you should create uncontested market space.
2. DO NOT beat the competition. INSTEAD you should make the competition irrelevant.
3. DO NOT exploit existing demand. INSTEAD you should create and capture new demand.
4. DO NOT make the value/cost trade-off. INSTEAD you should break the value/cost trade-off.
5. DO NOT align the whole system of a company's activities with its strategic choice of differentiation or low cost. INSTEAD you should align the whole system of a company's activities in pursuit of both differentiation and low cost.

So how does NY Wang link this to China?

China: Banking Jobs for Blue Ocean Strategists?

If you are a "Blue Ocean Strategy" person, should you try to find a banking job in the Greater China region?

The obvious answer is yes. The power of China can be felt in the G20. Everyone seems to be waiting for China's $2 trillion foreign exchange reserves. The Asian Development Bank pegs China’s GDP growth at 7%*. Some economists predict that China will enjoy 8% GDP growth in 2009**.

However, I sent 10 emails to friends working in investment banks in Hong Kong last December. 5 out of these 10 emails bounced back. Yes, you are right. That is the worst sign you can imagine during a worsening market. Then I visited Hong Kong by myself to check out what was happening. Guess what? Among the 5 people whose email boxes worked fine two weeks before I left, two lost their jobs the same week that I visited them.

That does not sound right. The Chinese market seems to be booming. Investment banks are supposed to expand in the most promising markets. They should be hiring instead of firing people. What is the reason behind this?

During the downturn, investment banks tend to protect their roots first. They are not only protecting their headquarters in the States and Europe but also protecting their people. Accordingly, they are trying to cut costs by "re-engineering" the "outskirt" regions such as Hong Kong.

They are losing their market share in the Greater China region, one of the sexiest markets of the future, whilst some investment banks such as Nomura, CICC, CITIC are gaining market shares. But if your head dies - you die. It makes sense to protect your head first (US/Europe) instead of your hands (HK).

In the long-term, emerging markets will still be great places to go. However, in the short-term, if you would like to be an investment banker, most hiring is still in the developed markets.

What do I believe that blue-ocean strategists should do? Watch this space …

If everything now clear?

Sometimes it si easier to be an economist. All this business school speak is just common sense dressed up with catchy phrases that only a small group of other "management speakers" actually understand.


Sunday 19 April 2009

Does the US believe China is manipulating it's currency or not?

Does the new Obama regime believe that China is manipulating it's currency or not? The US seems to be retreating. This retreat is almost certainly politically motivated. I would be very surprised if the US government did not believe some manipulation had gone on either in the past or in the present.

It is hard to believe that the yuan is not currently undervalued although it is also true that there are bigger problems out there that need to be addressed. Obama is picking his battles well and this is one he does not want to get into yet.

The final paragraph is telling. It is all politics and little to do with economics.

US retreats from yuan manipulation claims [FT]

The Obama administration on Wednesday rowed back from claims that China is manipulating its currency, declining to cite Beijing in a closely watched report to Congress.

The move avoids a confrontation with Beijing at a moment when world leaders are trying to present a united front against the economic crisis. It implicitly recognises China’s efforts to help stabilise the world economy by avoiding competitive devaluation and boosting domestic demand.

“The Chinese have shown great commitment to playing a stabilising role in the system,” a senior Treasury official told reporters.

Analysts said the decision not to cite China nonetheless represented a retreat by President Barack Obama – who suggested China was a currency manipulator on the campaign trail – and by Treasury Secretary Tim Geithner, who reiterated the charge on January 22 during his confirmation process.

Mr Geithner then submitted a written statement to Congress that said: “President Obama - backed by the conclusions of a broad range of economists – believes that China is manipulating its currency.”

In a statement on Wednesday, Mr Geithner said the US still believed China’s yuan was undervalued, but cited four reasons for the decision not to name China as a currency manipulator in the report. China, Mr Geithner said, had “taken steps to enhance exchange rate flexibility.” It allowed its currency to appreciate slightly against the dollar as the crisis intensified and other emerging market currencies fell. It accumulated fewer reserves in the fourth quarter of 2008 and had “enacted a large fiscal stimulus” that would help rebalance demand.

Analysts said these trends were already in train on January 22. At that point, China had allowed its currency to appreciate relative to other emerging economies, had released the figures showing slower fourth-quarter reserve accumulation and had announced its $579bn stimulus.

US officials said developments since January 22 strengthened these trends, with China reaffirming its commitment to currency flexibility, holding to its currency stance, accumulating still fewer reserves in the first quarter of this year and reinforcing its stimulus measures.

Reaction in Congress - where the heat appears to have gone out of the issue - was muted. The Financial Services Forum, a financial sector lobby group, said the decision not to cite China in the report was “the prudent call.”

Several business groups endorsed the decision, though some manufacturing groups complained. Calman Cohen, president of the Emergency Committee for American Trade, a business lobby group, said: ”The Obama administration has time to work on this issue.”

Bill Reinsch, president of the National Foreign Trade Council, said ”the moderate Democrats in Congress came to a conclusion some time ago that it is not in anyone’s interest to rock that particular boat just at the moment.”


Stimulus crackdown - what is really going on in China?

A series of articles in the Times on Friday touch on a number of points that I have been concerned about for a while.

Nowadays all newspapers seem hell bent on talking about the "green shoots" of recovery. The cynic in me wonders whether these are placed stories with the press and government attempting to talk us out of recession via the usual "confidence is key" mantra.

I happen to believe things have a lot further to fall yet before we bottom out. All the "macro" models are churning out 2010 recovery stories but remember, these models are based on hundreds on assumptions and imputed numbers. However, in the new world they are guessing even more than they previously did. Ignore.

To this end, the Times has a good article on Friday that gets closer to the truth and also shows how the stimulus package in China, whilst big, is potentially built on sand and is building larger problems for the future.

The fact that the Chinese regulators recognise the problem is good news.

The other issue that this article touches on is whether we can believe Chinese data. I have posted on this before and it is the case that some data is more trustworthy that others.

What is interesting here is to compare oil demand against the GDP figures. See the end of the article.

Chinese regulator may crack down on banks to prevent $585bn stimulus fuelling speculation [Times]

China’s financial regulator may be poised to crack down on bank lending practices to try to prevent money from the Government’s $585 billion (£392 billion) stimulus package being used to fuel stock and property speculation.

Expectation of such a move comes as the Government yesterday revealed that China’s economy expanded at only 6.1 per cent in the first quarter of this year – the most anaemic phase of growth since quarterly records began more than 15 years ago.

A sharp fall in exports, rising unemployment and the closure of tens of thousands of factories were behind the drop in GDP growth, although several analysts said that the figures could indicate the low-water mark for what is now the world’s third-biggest economy, behind the US and Japan.

Wensheng Peng, Barclays Capital’s chief of China research, said: “We are seeing a significant rebound in the underlying momentum of growth.”

He added that a huge 88 per cent rise in newly started projects over the January-to-March quarter was a leading indicator that private spending may now increase much further.

The Government’s numbers nevertheless showed that, for the second consecutive quarter, growth in China has remained well below 8 per cent – a level identified by many observers as the “danger line” for Beijing as it tries to calm unrest among tens of millions of newly unemployed migrant workers.

The poor GDP figures were accompanied by other readings from the economy suggesting that the path to recovery may already be clearing and that Beijing may yet make good on its pledge that China will be the first leading economy to recover from the global downturn.

Andy Rothman, chief China economist for CLSA, the broker, said that there were especially encouraging signs on employment, with the proportion of companies reporting staff cuts falling to 10 per cent for March, from 14 per cent for February. Mr Rothman, in a note to investors, said: “The peak period of layoffs – primarily migrant workers in export processing and construction – has passed.”

Driving the optimism of some analysts is the sense that Beijing’s immense stimulus plan may be starting to work its intended magic.

Qu Hongbin, an economist for HSBC, said that the November stimulus package had begun to take effect sooner than many had expected and that economic growth would be lifted back above the critical 8 per cent mark in the second half of this year.

The package, which involved expansive promises of infrastructure projects, cuts in export taxes and ordering the banks to open the lending taps wide, has already had a dramatic effect on Shanghai-listed stocks.

The index has soared to an eight-month high, although that may now have triggered alarms in Beijing, where there are rising fears that the flood of liquidity may have side-effects. Analysts said yesterday that the cascade of state money could itself produce asset bubbles and other risks. Wang Tao, of UBS, said that careful policy steps were needed to reduce the risk of “massive resource misallocation, asset bubbles and damage to the banking system”.

China’s banks, it was revealed this week, lent more between January and March than they did in all of 2007. Spending on real estate development was also on the rise in the first quarter, growing by 4.1 per cent and up substantially from the 1 per cent gain logged between January and February.

Others said yesterday that the signs of recovery were only tentative, and that significant risks remain as the global economy struggles to right itself.

Although China is in much better shape than many other countries – particularly in Asia – the rapid fall in its growth rates provided more bearish observers with evidence of the nation’s vulnerability to the global economy and to the spending slump by American and European consumers.

One closely watched gauge of the Chinese economy, given many analysts’ scepticism over the accuracy of official statistics, is power consumption; the numbers cannot be manipulated as easily as official data and power consumption closely tracks the true pace of industrial activity. In the first ten days of April, Chinese media said yesterday, the decline in electricity consumption accelerated – a possible sign that deeper cuts in industrial production and further factory closures may be around the corner.

On a national level, power running through the grids was down 3.57 per cent compared with the same period a year earlier, a considerably larger drop than the average 2.0 per cent decline throughout March.

Some analysts use power data as an early indicator of economic activity, and have cautioned against viewing the improvement in the employment picture in March as a sign that demand has started to recover.


Monday 13 April 2009

The Chinese credit crunch

Coface, one of the world’s biggest credit insurers, make a good point in today's FT.

Whilst the world seems to have paused for breath on the way to global meltdown the cracks are beginning to show before the next step down.

With the massive fall in exports, the inability of Chinese companies to pay suppliers was always going to happen. Only now are we getting the details.

So what are the implications? My belief is that credit management in China has been very poor in the past and that these bad decisions could lead to a chain reaction of failure across the supply chain.

This is not a time to be buying Chinese stocks.

Fears rise on China groups’ payments [FT]

A rapid deterioration in the ability of Chinese companies to honour payments to their suppliers as a result of the economic crisis is significantly increasing the risk of doing business in China, according to Coface, one of the world’s biggest credit insurers.

Xavier Farcot, who heads the French insurer’s underwriting and claims business in China, said the cost of insuring against customers defaulting on payments in domestic trade had risen by 30 per cent since the financial crisis, even for the best customers who have not made any claims previously.

“It is a reflection of the change in the overall risk environment [of selling to Chinese buyers],” said Mr Farcot.

Chinese companies, particularly in the export-oriented technology and electronics manufacturing sectors, faced a liquidity crunch at the end of last year as China’s exports plummeted. Many of them were also unable to access bank loans to tide them over the tough times, especially if they were small to medium-sized private businesses, said Mr Farcot.

Even though Chinese banks, unlike their western counterparts, have ample liquidity, “they are accustomed to lending to large state-owned enterprises rather than small companies who often do not have large resources or equity”, he said.

This cash crunch forced many Chinese companies to turn to their suppliers for credit, thus forcing the pain up the supply chain.

Nearly 90 per cent of Chinese suppliers are extending credit to their domestic customers on more than half of their sales, compared to just 70 per cent a year ago, according to Coface’s annual survey of the country’s corporate credit management practices.

This was bad credit management, said Mr Farcot. “Now is not the time to extend credit, it is time to restrict it,” he said. Most Chinese suppliers, however, have never experienced such a downturn.

“A lot of these companies never had to deal with the problem of not getting paid, because sales had always been increasing,” he said, “There’s not enough financial resource, not enough management.”

As well as customers demanding longer payment terms, the vast majority of Chinese suppliers said they had increasing problems with overdue payments last year. A quarter of them said accounts that were overdue by more than half a year now made up more than 2 per cent of their sales, which “is usually the threshold above which you start running into problems”, Mr Farcot said.


Thursday 9 April 2009

China Economics Blog in at number 2

I like blog rankings where China Economics Blog does well. The recent Bankling blog provides just such a ranking.

Ranking posts are a cheap way of getting extra hits and any good SEO blog has this as a top tip for getting known. Even so, we are happy to play along.

Here is the first section that includes China Economics Blog. Interestingly, the author of the post says that some blogs are serious and others humerus with no middle ground. Surely China Economics Blog is somewhere in the middle? Hmm, the last two posts of mine do place me on the serious side I admit.

Top 50 Economics Blogs [Bankling]

International Perspectives

Some of the economics blogs listed below are humorous and some are dead serious. Some are both. Very little middle ground.

1. Atlantic Blog: Thoughts on politics, economics and culture by William Sjostrom, an American economist in Ireland.
2. China Economics Blog: A place to find news about important issues for China’s economy including economic growth.
3. David Smith: This economics editor for the Sunday Times, London, hashes out his view on this blog.
4. Econlog: Also known as the Library of Economics and Liberty, this blog focuses on using topical books and the news to illustrate economic principles.
5. Economic Dreams - Economic Nightmares: Dave Iverson is an economist who loves nature. On this blog he tracks geopolitics and international finance.
6. Economics Roundtable: A compilation of opinions drawn from a wider variety of economics blogs than you may have thought possible. Your host is Professor William R. Parke of the University of North Carolina, Chapel Hill.
7. Heavy Lifting: One economist’s astute perspective on global economic issues.
8. Mises Economics Blog: Founded in 1982, the Mises Institute serves as the world’s leader provider of educational materials about the Austrian School of economics and libertarian political and social theory.
9. Organizations and Markets: Professors Nicolai J. Foss and Peter G. Klein created this blog in 2006 with a focus on organizational economics, strategic management, entrepreneurship, innovation, the economics of institutions, and the history, philosophy, and sociology of science. While academic, it also is global.
10. Stumbling and Mumbling: By all accounts an “extremist, not a fanatic,” this anonymous British blogger shines a different light upon economic topics.
11. The Adam Smith Institute Blog: The Adam Smith Institute is the UK’s leading politically independent and non-profit innovator of free-market economic and social policies.
12. The Austrian Economists: Discussion and expansion on public policy and ideological importance of the Austrian School of Economics.
13. Truck and Barter: Commentary on international economic issues, with a take where “sympathy and hedonism collide.”
14. VOXEU: Research-based policy analysis and commentary from leading economists. They are partnering with the UK government to collect global perspectives on the G20.

Tuesday 7 April 2009

"Growing Like China"

Another interesting paper although this one costs money to access to. I wonder how much the CEPR make from this unimpressive policy which restricts the flow of research ideas.

"Growing Like China"

CEPR Discussion Paper No. DP7149

ZHENG MICHAEL SONG, School of Economics, Fudan University
KJETIL STORESLETTEN, Stockholm University - Institute for International Economic Studies (IIES), University of Oslo - Department of Economics, Centre for Economic Policy Research (CEPR)
FABRIZIO ZILIBOTTI, Stockholm University - Institute for International Economic Studies (IIES), Centre for Economic Policy Research (CEPR), CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

This paper constructs a growth model that is consistent with salient features of the Chinese growth experience since 1992: high output growth, sustained returns on capital investments, extensive reallocation within the manufacturing sector, falling labor share and accumulation of a large foreign surplus. The theory makes only minimal deviations from a neoclassical growth model. Its building blocks are financial imperfections and reallocation among firms with heterogeneous productivity. Some firms use more productive technologies than others, but low-productivity firms survive because of better access to credit markets. Due to the financial imperfections, high-productivity firms - which are run by entrepreneurs - must be financed out of internal savings. If these savings are sufficiently large, the high-productivity sector outgrows the low-productivity sector, and attracts an increasing employment share. During the transition, low wage growth sustains the return to capital. The downsizing of the financially integrated sector forces a growing share of domestic savings to be invested in foreign assets, generating a foreign surplus. We test some auxiliary implications of the theory and find robust empirical support.


"China's Integration with the World: Development as a Process of Learning and Industrial Upgrading"

China's Integration with the World: Development as a Process of Learning and Industrial Upgrading"

World Bank Policy Research Working Paper No. 4799

JUSTIN Y. LIN, Peking University - China Center for Economic Research
YAN WANG, The World Bank

The process of development is full of uncertainties, especially if it is a process of transition from a planned economy to a market oriented one. Because of uncertainties and country specificity, development must be a process of learning, selective adaptation, and industrial upgrading. This paper attempts to distill lessons from China's reform and opening up process, and investigate the underlying reasons behind China's success in trade expansion and economic growth. From its beginnings with home-grown and second-best institutions, China has embarked on a long journey of reform, experimentation, and learning by doing. It is moving from a comparative advantage-defying strategy to a comparative advantage-following strategy. The country is catching up quickly through augmenting its factor endowments and upgrading industries; but this has been only partially successful. Although China is facing several difficult challenges - including rising inequality, an industrial structure that is overly capital and energy intensive, and related environmental degradation - it is better positioned to tackle them now than it was 30 years ago. This paper reviews the drivers behind China's learning and trade integration and provides both positive and negative lessons for developing countries with diverse natural endowments, especially those in Sub-Saharan Africa.