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.

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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.

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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

Abstract:
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.”

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China rates now down to 5.31%

Update on the interest rate in China.

In my opinion it has a lot further to go and the disappoint is expected. China is still learning and this gradual approach is fine for now. The millions of savers will be unhappy with every rate cut.

What is interesting is that the FT even get the phrase "social stability" into the journalist "key" first line. Otherwise this article is a good example of padding an article to make it longer than 1 line which was really all that was needed.

China cuts rates further to 5.31% [FT]

China cut interest rates for the fifth time in three months as the government tried to pump money into the economy to restore the high growth rates it considers crucial for social stability.

The benchmark one-year lending rate was cut on Monday by 27 basis points to 5.31 per cent, while the one-year deposit rate was lowered by the same amount to 2.25 per cent.

The People’s Bank of China, the central bank, also reduced the amount of money banks must hold in reserve by cutting the required reserve ratio by 50 basis points, a move that analysts say will release Rmb300bn ($43.8bn) for the banks to lend.

Faced with a much more severe slowdown than anticipated, China’s leaders have moved quickly in recent weeks to shore up crumbling growth, announcing a series of fiscal stimulus initiatives and infrastructure projects.

“Monetary policy is now all about freeing up funds to be lent into government-backed investment projects,” said Stephen Green, head of China research at Standard Chartered.

“For every Rmb1 of central and local government spending, Beijing is hoping for an additional Rmb1 from others and it is the banks that will be expected to provide that financing.”

The government has made employment for millions of recent university graduates and workers laid off from export-intensive industries its top priority and has ordered all levels of government and industry to take all necessary steps to “ensure 8 per cent growth” next year.

GDP growth fell from 11.9 per cent for the whole of last year to 9 per cent in the third quarter and more pessimistic forecasters, such as Royal Bank of Scotland, put growth at 5 per cent for the whole of next year.

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China's Economy: An Historical Perspective

Pacific Economic Review has a series of interesting papers in its most recent issue that consider historical perspectives on Chinese growth.

It is often useful for so called mainstream neoclassical economists to get a broader historical view on China when examining the current situation.

All abstracts and papers can be viewed by clicking below:

Pacific Economic Review

"Transformations of China's Post-1949 Political Economy in an Historical Perspective"

Pacific Economic Review, Vol. 13, Issue 3, pp. 291-307, August 2008

R. BIN WONG

This article lays out three different historical perspectives on China's post-1978 economic reform era. It argues that historical perspectives allow us to apprehend features of the Chinese economy as they are formed in particular moments and contexts at the same time as we can appreciate the ways in which the possibilities conceived and achieved both affirm certain past practices and reject others. Without such vantage points it is more difficult to explain the manner in which China's economy has changed in the past 30 years.


"Born Again: Globalization's Sixteenth Century Origins (Asian/Global Versus European Dynamics)"

Pacific Economic Review, Vol. 13, No. 3, pp. 359-387, August 2008

DENNIS O. FLYNN,
ARTURO GIRÁLDEZ,

Globalization began when all heavily populated land masses began interacting - both directly and indirectly via other land masses - in a sustained manner with deep consequences for all interacting regions. Globalization emerged during the sixteenth century. Dynamism emanating from within China played a pivotal role. Valid hypotheses concerning globalization's emergence must accommodate evidence from numerous disciplinary debates. Discussion of globalization's birth in terms of economic issues alone - for example, O'Rourke and Williamson's price convergence of the 1820s - is doomed. The central role of economic history - including Chinese economic history becomes salient when arguments are formulated in the context of a multidisciplinary, global historical narrative.


"Miracle or Mirage? Foreign Silver, China's Economy and Globalization from the Sixteenth to the Nineteenth Centuries"

Pacific Economic Review, Vol. 13, Issue 3, pp. 320-357, August 2008

KENT DENG, London School of Economics & Political Science (LSE) - Department of Economic History


MingQing China has been seen as positioned at the very centre of the process of early globalization partly due to China's huge appetite for foreign silver for its own commercialization. The findings of this study challenge this view head on by showing that not only did China not import and use nearly as much foreign silver as commonly imagined, silver moved into and also out of China. It served at best as a secondary currency and often worked on a barter basis. The sector which retained the lion's share was the pawnshop for short-term credit mainly for consumption.


"Chinese Economic History in a New Perspective: Focusing on the Late Imperial Rural Economy in Jiangnan"

Pacific Economic Review, Vol. 13, Issue 3, pp. 308-319, August 2008

BOZHONG LI, Tsinghua University

The Eurocentric growth model has been the basic workhorse for numerous Chinese economic historians. This deep seated Eurocentric paradigm is concerned mainly with conterfactuals and tends to ignore past reality. To illustrate the problems of this Eurocentric approach, this paper examines the rural economy of Jiangnan, also known as the Yangzi Delta, during late imperial times. A main characteristic of the villages in the Wuxi county in Jiangnan were the mixture of the ruralurban lifestyle and development. Jiangnan's developmental patterns, in the Song and the Qing dynasty, from the Maoist period (pre-1979) to post-1979 development, contrast sharply with the predictions of the Western development models.


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"Graduate employment in China": Premier reassures

With an increasing middle class, the number of Chinese students going overseas to study continues to grow with the US, UK and Australia picking up a large percentage of these students.

However, studying abroad is costly. To make this very large investment in human capital requires high expectations of future income.

Graduate employment prospects are therefore crucial. From what I can gather the pecking order for the top jobs goes something like:

1. TOP Chinese university graduate (top 10 Universities or so)
2. Top UK or US University (added bonus of improved English)
3. Middle ranking Chinese Universities
4. Other overseas Universities
4. Lower ranked Chinese Universities

Anyone who can add more detail to this list or contradict my intuitive feel for this please comment below.

Given the importance of graduate jobs it is perhaps no surprise that the premier seeks to reassure current graduates. This is an important issue although his other concern, return migration from the city to the villages, is arguably more important in terms of country stability.

A list of MSc Economics courses can be found in the left hand column of this blog. The education lable provides University and Economics course rankings.

I will post soon on the results of the recent research exercise in the UK and how this should influence one's choice of postgraduate programme.

Premier reassures university students on jobs amid financial crisis [People's Daily Online]

Chinese Premier Wen Jiabao has pledged to university student that the government would seek to provide more jobs for graduates and "put the issue of graduate employment first."

"Your difficulties are my difficulties, and if you are worried, I am more worried than you," Wen told the students at the Beijing University of Aeronautics and Astronautics.

Wen made the remarks in a surprise visit on Saturday afternoon after attending the closing ceremony a year-long exchange program between Chinese and Japanese young people together with former Japanese Prime Minister Fukuda Yasuo.

He said the country is in a difficult period as the global financial crisis has continued affecting the country's real economy. The government has begun measures to sustain the economy, such as the four-trillion-yuan stimulus package and interests cuts.

"We are considering taking more measures at proper time. But currently we are most concerned about two issues, migrant workers returning home and employment for graduates," Wen said.

The financial crisis and China's slowing economic growth has forced 4 million migrant workers to return to their rural homes, according to a report from the Chinese Academy of Social Sciences.

The report also said as of the end of this year, 1.5 million graduates are likely to have failed to find jobs, and the country could see an ever tougher employment situation in 2009 as there will be about 6.1 million seeking jobs.

"We are also studying a package to guarantee jobs for graduates and it will kick in soon", Wen said. "The government will encourage major enterprises to increase recruits from graduates, seek more jobs in grassroots, offer opportunities of further study and skill training."

Scientific research projects conducted by companies, institutions and universities should recruit graduates, and companies must not lay off graduates even if times are hard, he added.

Wen reiterated "confidence", saying it is much more important than gold and currency.

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Greed, peasants and the seeds of unrest in rural China

The last thing China needs when it requires the mystical 8% growth just to provide jobs for those entering the labour market, is a global recession.

That is what it has got and China is ill-prepared despite having a record surplus. Growth predictions are now as low as 5% - this is still great by Western standards but spells trouble.

The source of a lot a recent rural unrest has its roots in greed, real estate and corruption.

At its most basic this is a simple story of capitalism in a developing country. A story that the Chinese peasants need to learn all over again. Things are almost certain to get worse before they get better.

Reuters reports.

Fruits Of Reform Can Be Bitter In Chinese Countryside [PlanetArk]

BAIJIAN, China - China's vast brown plains gave birth to the reforms that transformed the nation three decades ago, and yet now Xibaijian village is one of many battlegrounds here where peasant unrest shadows that success.

The heart of this metamorphosis has been the hard-worked land, guarded by farmers as a source of food and security but coveted by officials and developers as a source of fast wealth.

Farmers in this dusty village, straddled by coal mines in Anyang county in central China, have become actors in a broader struggle over who wins and loses from economic transformation.

To many farmers here, the answer is simple. They spoke of thugs hired by businessmen and officials, battles over land, and officials snatching wealth to salt away in Beijing real estate.

"The government lets crime gangs and middlemen make all the money, and the gangs and middlemen then pay off the government," said Yang Wudong, a farmer and trader who helped organise recent protests against lost land and corruption.

"Ordinary people's living standards have risen, but the appetite of the gangs and officials has also grown. If we earn more, they want more."

China's ruling Communist Party this month marks 30 years since economic reforms officially began in 1978 with policies announced in October meant to give farmers a safer stake in the farmland that Deng Xiaoping and successor leaders let them lease, though not own outright.

The new policies are intended to give farmers greater scope to lease out their land, still legally under "collective" ownership -- effectively state control -- and higher returns when they give up land.

But days spent around Xibaijian, 540 km (335 miles) southwest of Beijing, show the strains of rural China have much to do with the untethered powers of officials. As China's economic growth slows, those tensions may multiply and erode the stock of political capital built up by its leaders.

"Down here on the ground there's so much corruption that all those laws and speeches are ignored," said Zhou Buopian, a rake-thin 57-year-old farmer picking stubble from his field.

"They'll steal what they want anyway ... They're not elected, they're chosen from above, and they know it."

"MONEY AND POWER CHASE EACH OTHER'S TAILS"

Anyang county is strewn with remnants of China's most ancient dynasties and with the woes of Henan province, crowded with 65 million of the nation's 750 million farmers and their families.

Henan has long been one of China's most troubled regions and is home to many rural petitioners who trek to Beijing seeking justice.

But Anyang's cotton and wheat fields are also increasingly criss-crossed by sealed roads, expanding towns and mines and industry -- engines of the growth that has spilt from the country's big cities to its towns and villages.

In Xibaijian, crumbling mud-brick homes of the some 5,000 residents have been giving way to the smarter concrete-and-tile ones, often paid for from work in nearby mines and coke plants.

Most citizens say that growth is thanks to the economic reforms backed from the late 1970s by Deng Xiaoping.

Those reforms took off in the rural heartland where, weary of the failings of Mao Zedong's collective communes, Deng tolerated and then encouraged farmers to divide up fields into holdings leased by farmers from villages.

As the focus of reform shifted to the cities, however, so did much of the growth, and since the 1990s the gulf between urban rich and rural poor has widened.

Since 2003, President Hu Jintao and Premier Wen Jiabao have sought to ease this imbalance and spread more growth, welfare and opportunity to farmers. Their government abolished agricultural taxes, hated by farmers as a tool for extortionate fees.

But if Xibaijian residents have enjoyed some of the fruits of China's breathless growth, many are far from content. The place has been rife with discord and claims of official corruption.

Last year there was a burst of protests over land seizures for coal mines and plants, according to villagers and accounts on the Chinese internet.

A government sign near the village warns of punishment for those who pool money for petitioners to travel to Beijing.

Some locals nonetheless went to the capital earlier this year carrying a red banner that declared, "Premier Wen, save us people of Anyang," said Zhou Yonglin, a farmer and businessman who has helped organise the protests.

Such protests are common across the country.

"Chinese society, including rural society, is experiencing massive changes," said Wu Yi, an expert on rural development at Central China Normal University in Wuhan.

"Farmers' aspirations and expectations are growing, but often the government and how it behaves has not caught up, so farmers turn to central leaders to save them."

Squatting in the back of a village store, the protesters Zhou Yonglin and Yang Wudong offered their own explanation of this paradox of growth with discontent.

"When society was poor, there were not so many problems with corruption, because there was nothing much to steal," said Zhou.

Yang nodded in agreement. "Money and power always chase each other's tail," he said. "Who can tell the difference between them anymore?"

"DON'T COME AND TAKE OUR KIDS"

Tensions peaked in Xibaijian last year, when locals fought with thugs they said were hired to seize a patch of land that investors eyed to expand adjacent coal mines.

In the first big confrontation, dozens of men were repelled by villagers. But the second time, villagers said, police watched as the thugs roughed up men and women who were blocking the dirt road leading to the disputed land.

Officials in Anyang County and Xibaijian would not talk about the conflict on the record. Zhang Zhide, a silver-haired 72-year-old, said her leg and back were injured in one of the struggles. Now she is confined to her bed.

"We don't dare demand anything more," she said. "Just as long as they don't come and take our kids."

But not all China's farmers are so resigned. In Xibaijian, protesters have organised a petition they said collected the red thumb prints of 5,000 locals denouncing official corruption.

China's restive farmers increasingly see themselves as citizens with rights, rather than subjects of unaccountable power, wrote Yu Jianrong, a well-known researcher on protest at the Chinese Academy of Social Sciences.

"If these problems aren't resolved, they will certainly affect China's rural modernisation and China's social stability and development," he wrote in a recent report.

In Xibaijian, some believe broader change is needed to solve their complaints, said Zhou Buopian, the farmer. Tougher land protection rules alone will not solve problems, he said.

"There should be rule of law so these crime gangs are eradicated," he said. "Then democratic elections to choose our leading cadres. Then Xibaijian will get better."

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