Chinese Economics Thread

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Sept. 25 (Bloomberg) -- Japan, China and other holders of U.S. government debt must quickly reach an agreement to prevent panic sales leading to a global financial collapse, said Yu Yongding, a former adviser to the Chinese central bank.

``We are in the same boat, we must cooperate,'' Yu said in an interview in Beijing on Sept. 23. ``If there's no selling in a panicked way, then China willingly can continue to provide our financial support by continuing to hold U.S. assets.''

An agreement is needed so that no nation rushes to sell, ``causing a collapse,'' Yu said. Japan is the biggest owner of U.S. Treasury bills, holding $593 billion, and China is second with $519 billion. Asian countries together hold half of the $2.67 trillion total held by foreign nations.

China, Japan, South Korea and others should meet soon to seal a deal, said Yu, a former academic member of the central bank's monetary policy committee. The talks should involve finance ministers, central bank governors and even national leaders, he said.

``Whether some kind of agreement between them to continue to hold Treasury bills is viable, I'm not sure,'' said James McCormack, head of sovereign ratings at Fitch Ratings Ltd in Hong Kong. ``It would be unusual. If it became apparent that sovereigns in Asia were selling Treasuries the market would take that quite badly, it's something to be avoided.''

The global credit crisis, triggered by a housing slump in the U.S., has saddled financial companies with more than $520 billion in writedowns and losses, collapsing Bear Stearns Cos. and Lehman Brothers Holdings Inc. in the process. Insurer American International Group Inc. and mortgage giants Fannie Mae and Freddie Mac also were rescued by the government.

`Grave Threats'

U.S. Treasury Secretary Henry Paulson is urging Congress to pass a $700 billion plan to remove devalued assets from the banking system. Federal Reserve Chairman Ben S. Bernanke said Sept. 24 that the U.S. is facing ``grave threats'' to its financial stability.

China's huge holdings of U.S. debt means it must bear a large proportion of the ``burden of sorting things out'' in the U.S., Yu said. China is not in a hurry to dump its U.S. holdings and communication between the two nations every ``couple of days'' is keeping Chinese leaders informed and helping to avoid a potential panic, he added.

``China is very worried about the safety of its assets,'' he said. ``If you want China to keep calm, you must ensure China that its assets are safe.''

Currency Manipulator

Yu said China is helping the U.S. ``in a very big way'' and added that it should get something in return. The U.S. should avoid labeling it an unfair trader and a currency manipulator and not politicize other issues, he said.

``It is not fair that we are doing this in good faith and are prepared to bear serious consequences and you are still labeling China this and that, accusing China of this and that,'' he said. ``China knows what to do. We don't need your intervention.''

The U.S. financial crisis had taught China a lesson and that was: ``Why are we piling up these IOUs if they may default?'' China's economic expansion strategy, which emphasizes export growth that has led to trade surpluses and the accumulation of $1.81 trillion in foreign-exchange reserves, is the main problem, said Yu.

``Our export-growth strategy has run its natural course,'' he said. ``We should change course.''

China should stop intervening in the foreign currency markets and thus allow rapid appreciation of the yuan, he said. While this would cause pain for exporters, China could ease the transition by using its strong fiscal position to aid those who lose their jobs. It also should stimulate domestic demand to offset lower income from overseas sales.

Without yuan appreciation, China will continue to accumulate foreign reserves, which means further accumulating ``IOUs from the U.S.,'' said Yu. ``This is paper and it may default and it will not increase China's national welfare.''

If China doesn't allow the yuan to appreciate and continues to promote export-led growth it will lead to confrontation with the U.S. and Europe, Yu said.

 

[Autumn Child]

Interesting development, economic slowdown or something else?

Coal piling up at harbors on weak demand

Last Updated(Beijing Time):2008-09-28 11:23


China is seeing more and more coal piles up at major transport harbors due to a weakening demand for the fossil fuel.


An official with the Qinhuangdao harbor bureau said Friday, on condition of anonymity, that Qinhuangdao harbor in northern China recorded a coal pileup of 8.44 million tons as of September 16. That is at least 3 million tons more than regular levels. He added, every day for the past two weeks, the surplus of coal has increased by 100,000 tons.

Qinhuangdao harbor is the largest coal transport site in China. Its coal storage acts as a barometer of the coal market across the country.


The official said the harbor was only able to accommodate a coal pileup of 10 million tons.


A surplus of coal at major consumption areas is also increasing. The Guangzhou harbor in southern China had about 2.2 million excess tons of coal as of September 17. That's compared to a storage of 1.7 million tons at the beginning of June.


According to Guangzhou Port Group, trading volume has decreased since July, with a monthly turnover of only 3 million tons. In May and June the group was turning over 4-million-tons.


Coal is also piling up for major coal consumers.


According to Xie Juchen, head of the fuel section of China Electricity Council, coal pileup was 19.62 million tons in July. That's enough to meet a 10-day demand. At the beginning of September, the figure went up to 29.3 million tons, or enough for 15 days, Xie said.


Official data showed nationwide coal supplies in August were at 70.76 million tons. However, coal consumption was at 62.25 million tons, leaving 8.51 million tons to pile up.


Industry observers credited the mounting pileup to less demand.


For one, electricity enterprises used less coal during the Beijing Olympics and Paralympics because production was restricted, said Xie.


In the long term, however, global economic slowdown received the majority of the blame for the country's excess coal.


According to Wang Ling, a coal analyst with the United Metal Web, the slide of the economy squeezed demand for electricity, that from thermal power enterprises in particular.


Besides, Wang said, a relatively cool climate reduced demand for power this summer. He added, abundant rainfalls also ensured easier access to electricity generated by hydro power plants.


According to data provided by the National Bureau of Statistics, China generated 2.323 trillion kw of electricity in the first eight months of this year, a growth of 10.9 percent on the same period of last year.

 

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Chinese growth still at 8 or 9%; US consumer is 'toast, done, finished
David Gow guardian.co.uk,
Thursday October 02 2008 10:32 BST

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"Can you save us? We're here to be rescued!"

That, in a nutshell, was the collective cry of a swarm of American (and European) bankers, auditors, consultants and industrialists that thronged the cavernous halls of the colossal convention centre in Tianjin at the weekend.

While the western delegates at the World Economic Forum's summer conference in the coastal port city that serves as the maritime entry to Beijing were confused, bemused and hyperanxious about the financial crisis and its impact on the global economy, the Chinese were magisterially assured. Certain that they are the new masters of the universe – now or very soon.

Wen Jiabao, the Chinese premier, made plain that his country's economy is not immune from the crisis. But, unlike the US and Europe, which are heading for recession or in it, China had put in place the monetary and regulatory measures to ensure continued growth.

It won't be the 11.9% of last year but still, at 8 or 9% in 2008 and the same in 2009, a boost to global trade. Inflation, which peaked at more than 8% in February, has been brought down to 4.9%. And, if Chinese exports – enjoying a €170bn (£130bn) surplus with the EU alone last year – are already experiencing slower growth and even heading for a decline, Wen promised to continue the shift towards domestic consumption and to open up the economy further.

But will this happen? Will Wen deliver on his oft-repeated promise to reform China's capital markets? As Stephen Roach, Asia chairman of Morgan Stanley, told delegates, Chinese consumer spending is, at around 35% of GDP, less than half that of the US where the "binge" of the last 14 years has come to an end, leaving the US consumer "toast, done, finished". The US, he added gloomily, "will have its version of Japan's lost decade".

There were two striking aspects to the Tianjin discussions among policymakers. First, the Chinese authorities were blunt that it was up to the US to sort out the mess it had created, putting at risk, as Wen told CNN, "the safety and security of Chinese capital". Chinese investments in US and European financial assets have gone sour in the toxic meltdown. So the country's leaders are demanding global co-operation to fix the regulatory framework, with Liu Mingkang, the top banking supervisor, exclaiming with unusual ferocity that American lending practices had been "ridiculous" and demanding a large say in any reforms.

Second, the Europeans figured as virtual bit-part players, vastly outnumbered by the Americans. David Hale, a Chicago-based consultant and economist, told a group of us over drinks: "The Chinese and Americans are drawn to each other; they have a lot in common – entrepreneurial, can-do."

Apart from the serial China-visitor, EU trade commissioner Peter Mandelson, the most prominent European delegate was Tom Enders, chief executive of Airbus. Over the weekend he and Wen formally opened the plane-maker's first non-European final assembly line – in a $600m (£340m) plant on a remote former cabbage field that took less than 15 months to build and is now the most modern in the world.

Enders denies that Airbus is putting all its eggs in the Chinese basket but he and his executive team are investing heavily in the prospect of sustained growth – not just in the economy but in air traffic as consumers grow richer. They expect Chinese airlines to order more than 3,000 new planes in the next 20 years and Airbus to capture more than half of those.

While the new plant involves little technology transfer, Airbus executives don't rule out co-operating more fully with the Chinese in years to come. The authorities are forcing a merger of the country's two main aerospace groups, AVIC I and AVIC II, into a single company and it is already planning a new large jet to compete with its western rivals/allies.

As the country celebrated its 59th communist national day and the first space-walk by its astronauts, one senior Airbus manager told us: "It'll be extremely tough for them to be really competitive with this aircraft but it's the one after that we should be worried about – even if they have so many mountains to climb over the next 30 years."

A senior European diplomat at the opening ceremony ridiculed that timescale. "The Chinese are investing heavily in R&D and moving rapidly up the technological value-chain but we Europeans are in danger of falling behind and failing to invest in research. We could swiftly drop out of the premier league as far as they are concerned."

It was a shuddering thought at the start of a week that saw the toxic contagion of the US financial crisis sweep across the Atlantic like a tsunami to engulf several European banks and force governments to intervene. The same governments that, as I reported last week, thought their financial institutions would remain on the sidelines and their economic model more robust.

How wrong they – and I – were. And, if my diplomat friend's fears are proven right, there could be worse to come in other sectors too.

 

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By Paul Wiseman and Calum MacLeod, USA TODAY


People view models of real estate units in Shaanxi Province. Despite China's wealth of cash, it is not expected to invest in U.S. financial institutions.

BEIJING — Wang Jun has been reading up on the U.S. financial crisis. Books on the subprime mortgage meltdown are hot sellers here in the Chinese capital.

But until recently, Wang, 33, had seen the debacle as a long-distance drama. Now, out house-shopping with his wife, he's worried that Wall Street's woes will force the Chinese government to impose new mortgage regulations and possibly drive the cost of a home beyond his reach. "The crisis seemed so far away," says Wang, who works for a Beijing publishing house. "But sometimes it's so near."

Despite his worries, Wang is sure about one thing: China shouldn't help bail out flailing U.S. banks and investment firms. "I don't think China has the financial power to help America," he says. "We have our own problems. To look after our own business first is the best policy."

Brimming with cash — a world-leading $1.8 trillion in foreign exchange reserves — China looks like a potential white knight for Wall Street's distress. But the Chinese are wary, burned over the past year on investments in U.S. financial firms and caught in the quicksand of a sinking dollar. Few analysts expect China to be a leader rescuing the U.S. financial system.

China's Internet chat rooms are aflame with arguments over whether Chinese money should go to help bail out the titans of U.S. finance. Many Chinese believe the investments would be better made at home, where millions still live in rural poverty despite their country's emergence as an economic powerhouse. "I am worried the crisis could be like dominoes and affect one country after another," says Athena Zhang, 36, a manager at a Beijing clean-energy company. "But China must help itself first before helping the U.S. We must safeguard the Chinese economy first."

Last year, China Investment Corp. (CIC), set up by the government to seek high returns on that foreign reserve nest egg, invested $3 billion for a stake in the Blackstone Group and $5 billion in Morgan Stanley.

So far, both investments have been embarrassing failures, victims of the U.S. financial crisis. "They have been widely criticized internally for the investments they made previously," says Nicholas Lardy, senior fellow at the Peterson Institute for International Economics. "It is not likely that they will make additional strategic investments in U.S. financial institutions."

Past deals make future ones harder

"Previous deals have produced a lot of criticism," says Michael Pettis, a Peking University finance professor and former New York investment banker. "From a psychological point of view, if I was a policymaker, I would not try too hard to lobby for a new investment. I believe there will be reluctance to make a major investment in a U.S. institution."

The value of Chinese acquisitions in the U.S. is down 73% so far this year — to $914 million from $3.4 billion in the first nine months of 2007, according to Thomson Reuters. The 2007 figure was inflated by the Blackstone deal.

In a recent report, the Boston Consulting Group urged caution for any Chinese banks tempted to buy U.S. banks. The consultancy noted that Chinese bankers have little experience negotiating and managing overseas mergers. A low purchase price "should not be the only reason for a deal," Boston Consulting advised.

And the Peterson Institute's Lardy says China's state-owned banks and investment firms couldn't get government "approvals fast enough to be players in the current situation. By the time a recommendation from a potential investor, say CIC, to the State Council or Politburo Standing Committee is considered, the deal has been taken up by another player." He notes that the Blackstone and Morgan Stanley deals occurred before Wall Street firms were under intense pressure to find partners and raise cash quickly.

China could play another role in Wall Street's rescue: buying the Treasury securities the U.S. government will auction off to pay for the $700 billion bailout.

China is already a big investor in the Treasury market. China owned $518.7 billion in Treasury securities on July 31, second only to Japan's $593.4 billion. Investors have been fleeing to the safety of U.S. Treasuries amid the turmoil on Wall Street, driving the prices up and yields down. "Asian investors are rushing into U.S. Treasuries because they have been extremely risk-averse," says Chi Lo, head of investment research at Hong Kong-based Ping An of China Asset Management. "The $700 billion rescue is a new matter."

Europe's bonds a better deal

Lo says Chinese and other Asian investors — governments, banks, firms and individuals — will be reluctant to finance the Treasury bailout plan without higher interest rates as a sweetener. For now, Europe's top-rated bonds look like a better bargain: "U.S. bill and bond yields will have to go up to attract Asian buyers," Lo says. He sees yields on the benchmark 10-year Treasury bond rising to 4.3% from less than 3.7% now.

"Whatever the U.S. is trying to issue would have to be relatively more attractive than what the rest of the world is offering," agrees Joanne Hon, head of Asia research for Thomson Reuters. And a Thomson Reuters survey of 100 market analysts in August — before Wall Street melted down and Treasury announced its rescue plan — was already predicting that 10-year Treasury yields would rise to 4.5% over the next year.
One reason the Chinese will be looking for higher rates: They need insurance against the wobbly dollar. They have been clobbered by the dollar's 9% free fall against the Chinese yuan over the past year, which has shaved about $50 billion off the value of their Treasury holdings.
While the Chinese have been cautious about investing in Wall Street's wreckage, their economic rivals in Japan have not. Japanese firms have already made $26.1 billion worth of acquisitions in the U.S. this year, up nearly fivefold from the same period a year earlier, Thomson Reuters reports. Japan's biggest bank — Mitsubishi UFJ Financial — agreed to buy a 21% stake in Morgan Stanley. The Nomura investment bank bought up the Asian operations of Lehman Bros., which has sought bankruptcy protection.

"The Japanese appetite," Hon says, "is not just for sushi and sashimi."

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[crobato]

9% growth rate is considered slow for China.

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China's currency 'substantially undervalued': IMF

by Staff Writers

Washington (AFP) Oct 8, 2008

China's currency remains "substantially undervalued", the International Monetary Fund said Wednesday, arguing that greater exchange rate flexibility would benefit the Asian giant.
In its half-yearly World Economic Outlook report, the IMF said a more flexible yuan, or renminbi, would help China shift growth momentum towards domestic sources and make its monetary policy more effective.

"In the IMF staff's view, the renminbi remains substantially undervalued relative to medium-term fundamentals," the report said.

The IMF further predicted 9.7 percent economic growth for China in 2008 and 9.3 percent in 2009, down significantly from 11.9 percent in 2007, saying this was "partly because of slowing exports".

Even so, it argued China's heavily export-dependent economy would be better off if it allowed its currency to rise further.

"Progress needs to continue toward appreciation of the renminbi as part of China's broader strategy to shift the sources of growth toward internal demand and to increase the effectiveness of monetary policy," it said.

Chinese policy-makers have said repeatedly they aim for domestic factors, especially consumer spending, to play a bigger role in creating growth.

The IMF also argued in its report that the Chinese government would have greater freedom to carry out monetary policies with a more flexible yuan.

"The authorities have used administrative and prudential measures in an effort to limit credit growth, but allowing greater exchange rate flexibility would increase the room for a more independent monetary policy," it said.

The IMF also argued that a strengthened Chinese currency could aid efforts to address global imbalances such as a large US current account deficit.

In its previous World Economic Outlook report, issued in April, the IMF also called for a stronger yuan.

But in the six months that have passed since then, China's nominal exchange rate has not moved much.

Chinese economists have argued that Beijing cannot afford to let its currency rise too quickly while Chinese exporters -- major employers and therefore politically crucial -- are faced with unprecedented challenges.

Not only are the exporters up against weakening demand from major markets such as the United States, but they also have to cope with rising prices, especially of energy.

China has in the past tended to shrug off IMF calls to loosen restrictions on its exchange rate.

Last year, Vice Finance Minister Li Yong said the Fund should not put too much emphasis on the exact exchange rates of the currencies of member nations.

China moved its currency away from a peg to the US dollar in July 2005, and has since allowed it to strengthen by more than 15 percent against the greenback.

 

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Oct. 14 (Bloomberg) -- China's foreign-exchange reserves rose to a world record $1.906 trillion, helping to strengthen the nation's finances as the credit crisis threatens to trigger a global economic slump.

Currency holdings rose 32.9 percent at the end of September from a year earlier, the People's Bank of China said on its Web site today. The increase of about $97 billion over the quarter was down from a $126.6 billion gain in the previous three months.

China has cut interest rates twice in the past month to stimulate growth as the worst financial crisis since the Great Depression dims the outlook for exports. The world's fourth- biggest economy can still expand 10 percent this year and 9 percent in 2009, central bank Deputy Governor Yi Gang said Oct. 11 in Washington.

``Close to $2 trillion in foreign reserves provides China with a strong foundation and more room to adjust policies to enable it to maintain relatively fast growth,'' said Isaac Meng, senior economist at BNP Paribas SA in Beijing.

The yuan fell to 6.8390 against the dollar as of 5:30 p.m. in Shanghai, from 6.8360 before the data was released.

Smaller increases in the reserves -- down from a record $153.9 billion gain in the first quarter -- suggest money is leaving the country as companies free up cash because of the credit crunch, said Lu Zhengwei, chief economist at Industrial Bank Co. in Shanghai.

`Hot Money'

The increase for September alone was only $21.4 billion even after a record trade surplus added $29.3 billion and figures for foreign direct investment suggested another $6.6 billion entered the country.

China has stalled the yuan's gains against the dollar since mid-July. That step, along with rate cuts and crackdowns on illegal channels for investment, may have stemmed inflows of so- called hot money, or speculative capital, and triggered outflows.

Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong, said $10 billion to $20 billion of that money may be leaving each month.

That contrasts with the estimate of Michael Pettis, a finance professor at Peking University, that more than $200 billion flooded in during the first half.

The nation is at risk of ``massive outflows'' if expectations for yuan appreciation turn around, the central bank warned in a report released in June.

`Petering Out'

``Hot money inflows have petered out on slower yuan rises and a perceived economic slowdown,'' said Dwyfor Evans, a strategist with State Street Global Markets in Hong Kong. ``The next issue is: how aggressive will the authorities be in easing rates? There's scope for them to be a lot more active.''

Standard & Poor's cited the currency reserves and the nation's ``strong fiscal position'' when it upgraded China's long-term debt rating to A+, the fifth-highest grade, on July 31.

China is grappling with how best to manage the reserves, forecast by the International Monetary Fund to reach $2.2 trillion by the end of December and $2.7 trillion by the end of 2009. Diversifying away from U.S. Treasury bills has brought losses.

China Investment Corp., the nation's sovereign wealth fund, put money into Morgan Stanley and Blackstone Group LP before their stocks plunged. It also may have as much as $5.4 billion frozen in a U.S. money-market account that suspended withdrawals last month.

Currency Fluctuations

Besides inflows of cash, the value of the reserves is affected by returns on investments and currency fluctuations.

The yuan remains Asia's best performer against the dollar this year, rising 7 percent. The nation's key one-year lending and deposit rates are 6.93 percent and 3.87 percent. Economic growth was 10.1 percent in the second quarter.

Money supply grew last month at the slowest pace in three years, the central bank said today.

M2, the broadest measure, increased 15.3 percent from a year earlier, compared with a 16 percent gain in August. The median estimate of 14 economists in a Bloomberg News survey was for a 16 percent increase.

 

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China democracy: Reformer's words signal a new debate on political reform
China's leadership may be willing to reopen a debate about political reform now that the Beijing Olympic Games are over.


By Malcolm Moore in Shanghai
Last Updated: 4:58PM BST 14 Oct 2008

Zhou Tianyong, 50, is the most senior figure within the Communist Party charged with thinking about democracy and a key adviser for the country's senior leaders. The deadline of 2020 that he gave for China's transition to a version of democracy in his interview with the Daily Telegraph already has great significance. President Hu Jintao has promised "more extensive democratic rights" by 2020, without being more specific, and this is also the year when China's booming economcy should deliver per capita GNP of $3,000, ushering in "moderate prosperity for all".

A plan produced by Mr Zhou in February, entitled "Storming the Fortress", suggested that China could face social and economic instability if the Communist Party did not curb its power and acknowledge a desire for democracy. "Citizens' steadily rising democratic consciousness and the grave corruption in the Party make it increasingly urgent to press ahead with demands for political system reform. The backwardness of the political system is affecting economic development," wrote Mr Zhou.

Rana Mitter, a professor of the politics of Modern China at Oxford University, said: "2020 seems to be a bit of a turning point at the moment. It seems to be the deadline for a lot of things, including the arrival of 'moderate prosperity' for all. It also depends on how you define democracy. We all understand democracy as a multi-party system, but in China there has been a definition of democracy since Mao's time as popular participation, but not necessarily with the right to change the government."

"Storming the Fortress" was placed under wraps after the government's hardline response to the riots which swept Tibet in March. Several powerful hard-liners within the politburo, such as Wang Lequan, the governor of Xinjiang province, are openly opposed to any loosening of the Party's iron-clad control. In June, Zhou Yongkang, the head of China's security, said the police, army and courts would all deal with the enemies of the Communist Party, guarantee the government's rule and "implement the people's democratic dictatorship".

The re-emergence of Mr Zhou into the public arena appears to demonstrate the desire of the Party to re-start possible reform. As a senior Communist official, he shied away from calling for the dismantling of the Party's monopoly on power, or for the direct election of China's leaders. But he did suggest that China's tiny grassroots movements could play a larger role in the future.

There are eight political parties in China which could form the seeds of a future multi-party system. They were mostly founded during or just after the Second World War and have all pledged their support to the government. The largest party, the China Democratic League, boasts around 150,000 "higher and mid-level intellectuals" as members.

At present, the parties advise the government through the Chinese People's Political Consultative Conference, a largely symbolic body. Mr Zhou said this structure could be "optimised" in future to give the other parties a greater role.

Many Chinese commentators favour a "guided democracy", similar to the model in Singapore, where ostensibly free elections have always resulted in victories for the ruling People's Action Party. In 2002, Jiang Zemin, the former president, vowed that while China would push ahead with grassroots changes, it would "never copy any models of the political system of the West".

In August, Zhou Ruijin, the former deputy editor of the People's Daily, the mouthpiece of the Party, gave a briefing to academics, officials and businessmen in Guangzhou in which he also called for China's alternative political parties to be strengthened.

He said the Communist Party should move from being "the leading party" to being "the administrative party" and there should be multi-candidate elections within the Party for government positions. Asked if the government actually had any intention of relinquishing power, Mr Zhou said: "Don't underestimate how far the Party has come. The Party still has effective leadership and is committed to further reform."

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China will transform itself into a working democracy in just over a decade, according to one of the country's most influential reformers.


By Malcolm Moore in Shanghai
Last Updated: 2:35AM BST 15 Oct 2008
Police in Beijing try to persuade demonstrators against bad air quality to stop protesting: China will transform itself into a working democracy in just over a decade, according to one reformer
Police in Beijing try to persuade demonstrators against bad air quality to stop protesting. Photo: AP

Zhou Tianyong, an adviser to the Communist Party's Central Committee and one of its most liberal voices, told the Daily Telegraph that "by 2020, China will basically finish its political and institutional reforms".

He added: "We have a 12-year plan to establish a democratic platform. There will be public democratic involvement at all government levels."

Mr Zhou also predicted "extensive public participation in policy-making, such as drawing up new legislation".

Mr Zhou is deputy head of research at the Central Party School, the most important institution for training senior leaders. President Hu Jintao is among its former directors.

After two weeks of heightened tension between China and Taiwan because of a £3.5 billion American arms sale to the island, Mr Zhou said the transition to democracy was "essential for relations with Taiwan and a possible peaceful reunification".

His comments appear to rebuff the widespread belief that Chinese political reform had stalled after the riots in Tibet in March and a security clampdown before the Olympic Games in Beijing.

Instead, Mr Zhou said the government was determined to reform itself, but that there had been some infighting between different departments. He called for the number of ministries in Beijing to be halved to between 19 and 21 in order to form a "modern government structure".

Mr Zhou added that civil society in China would also play an important role. "There will be many more non-governmental organisations, chambers of commerce, industry associations and other social groups. Religion should also be given a wider platform to play a positive role. We should protect religious freedom," he said.

"People should not follow the traditional mindset," he added. "We should recognise that the government should serve the people and society."

But Mr Zhou did not predict the end of the one-party state, nor the demise of the Communist Party's monopoly of power.

Any transition to democracy is likely to be a slow process. China already has grassroots elections in over 660,000 villages, although these contests are often rigged. However, there are already small signs of change, with larger cities, such as Nanjing and Guangzhou, recently opening more important posts to public competition.

 

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No longer the 'Revolutionary' Party.

From Asia Times.

Red capitalists' unravel the party line
By Wu Zhong, China Editor

HONG KONG - In an apparent move to defuse a decades-old ideological debate, China's Vice President Xi Jingpin, who is widely tipped to succeed President Hu Jintao, has proclaimed that the Chinese Communist Party (CCP) has turned itself from a "revolutionary party" into the "ruling party".

For observers, it is plain to see that the CCP is the ruling party of China, so Xi's statement seems to be tautologous. But for party members and Chinese people in general, this is a new definition of the CCP which is of great significance in theory and in practice. It may even be a breakthrough for a new round of the "emancipation of minds".

Late paramount leader Deng Xiaoping's political wisdom was to shelve thorny issues that might impede progress. For example, in April 1978, a dispute rising from the sovereignty over the Diaoyu Islands (called Senkaku Islands in Japan), a cluster of barren islets north of Taiwan and south of the Ryukyu Islands, flared up and threatened to disrupt the signing of a peace treaty between China and Japan.

Deng demanded the territorial dispute be shelved. In October of that year, Deng visited Japan and attended a ceremony to exchange the instruments of ratification for the Sino-Japanese Peace and Friendship Treaty. When he was asked about the Diaoyu Islands issue, he said, "The issue of Diaoyu Island ... could be set aside for the moment; probably the later generations would be cleverer than us and would find a practical solution."

At home later that year, Deng started economic reforms aimed at turning the socialist command economy into a capitalist-style market economy. He was fully aware this was a revolution that would spark fierce political and ideological debates which could ruin his goal. In turn, he used all his authority to suppress attempts to instigate such debate. The issue of whether the economic reforms were socialist or capitalist "must never be debated, not in 100 years", Deng said in what was later called his "political will" during an inspection trip to the south in 1992, his last public appearance.

Deng's pragmatic approach proved successful in pushing forward economic reforms. However, the tough stance also meant many necessary political and ideological changes were put off and now must be clarified in face of fundamental changes in Chinese society.

Foremost among these issues is how to define the CCP in a capitalist-style market economy.

According to classical Marxist, Leninist and Maoist theories, political parties are products of class struggles with each party representing the interests of a certain social class. A communist party is thus the vanguard of the proletariat.

In fact, the current CCP constitution still stipulates just that: "The CCP is the vanguard of the Chinese proletariat ... The highest ideal and ultimate goal of the party is to achieve communism." According to the charter, China must "uphold [the] socialist road, uphold people's democratic dictatorship, uphold the CCP's leadership, uphold Marxism, Leninism and Mao Zedong thought ... and oppose bourgeois liberalization".

But if the CCP remains a revolutionary party representing the interests of the working class, how can it lead reforms aimed at developing a capitalist-style market economy?

After Deng's death in 1997, this "contradiction" has been used by orthodox Marxist ideologues led by Deng Liqun, the CCP's former propaganda tsar, to attack economic reform and open-door policies as trying to "restore capitalism". In the view of Deng Liqun and his cohorts, this goes against the principles of the party itself. In recent years, Deng Liqun has found dozens of young followers mainly based in Beijing.

Nevertheless, in practice the CCP has quietly adopted a pragmatic approach toward this problem by accepting people from various social sectors - including "red capitalists". This approach has gradually changed the CPP into an "all-peoples party" rather than the so-called "vanguard of the proletariat".

According to Vice President Xi, the number of CCP members was 4.4 million in 1949 when it seized power, growing to more than 36 million by 1978. By end of 2007, party membership jumped to 74 million, of which 70% were new members who joined the party after Deng's economic reforms. The number of CCP members in the private sector now totals more than 4 million.

But change has come quietly for the CCP. The party shied away from publicly abandoning revolutionary rhetoric until now. The timing is good: after 30 years, Deng's reform and open-door policy have taken root. The few surviving senior revolutionaries and orthodox ideologues are getting old (Deng Liqun is now 93 years old) and their young followers wield little influence. Addressing the issue in today's political and economic climate is unlikely to stir up serious debate.

It was against this backdrop that Xi Jingpin on September 1 told new students at the Central Party School, the CCP's top training center of which Xi is the president, that the CCP has matured from a party of revolution into one which "holds the power to rule the country in the long term". His full speech - 23,000 Chinese characters in total - was later published by the Study Times, the official newspaper of the Central Party School.

Analysts say Xi certainly wasn't just offering his personal opinion, but announcing a policy decision made by the top CCP leadership. This signals - after 30 years of economic reforms and openness - the CCP is finally willing to declare its departure from revolution.

"It is good that finally the CCP explicitly says goodbye to revolution. 'Revolution' always reminds people of the cruel struggles during the early CCP rule under Mao. And declaring itself as the ruling party, it must try to continue and consolidate its rule by devoting its efforts to better serve, and thus 'flatter', the majority in society, rather than relying on violent means. This is big progress," a retired political science professor at Nankai University told Asia Times Online.

Still, the CCP may have to revise its charter to reflect this change and its new emphasis on putting people first, he added.

Chinese dissidents in exile, however, have criticized the announcement, claiming that it does nothing to change the actual nature of the party. For example, Xu Shuiliang wrote that calling the CCP a "ruling party" does not change the fact that it remains a one-party dictatorship. After all, opposition parties are still not allowed.

There is difference, however, between a revolutionary party and a ruling party. By calling itself a "ruling party", the CCP must be responsible for its rule. Therefore, CCP officials must take responsibility for what happens under their jurisdiction. The CCP must now be subject to public supervision, while as a revolutionary party, it could always suppress dissent in the name of "the revolution".

On celebrating the 30th anniversary of Deng's reforms, Chinese leaders, including Hu himself, have encouraged officials to further "emancipate their minds". In this regard, Vice President Xi has set a fine example by addressing a thorny ideological issue.

Hopefully, this will encourage more officials to follow suit, and more new ideas to take root.

 

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Reuters
Published: October 5, 2008



SHANGHAI: Chinese regulators, seeking to support the equities market in the face of global financial turmoil, said Sunday that they would soon allow investors to buy stocks on margin and to short-sell stocks.

The changes, which have been approved by the cabinet, will initially be made on a trial basis by a small number of brokerage businesses and gradually expanded to other securities companies, the China Securities Regulatory Commission said.

The introduction of short-selling in China would contrast with recent regulatory moves in much of the rest of the world. In response to the global crisis, U.S., British, French, Italian and German regulators in recent weeks temporarily banned short-selling of financial stocks, while Australia, Singapore and Taiwan restricted the practice.

But the Chinese commission said the establishment of "margin trade and short-selling is an important step in the reform and development of our capital markets and will inject new vitality into the securities market."

China has been considering since 2006 the start of margin trading, in which investors borrow money from brokerage businesses to buy shares, and short-selling, in which they borrow stocks from brokers and sell them, hoping to buy them back at lower prices.

The changes have been delayed by market volatility, starting with the bull run that lifted the Shanghai Composite index sixfold from mid-2005 to October 2007 and then a bear market in which the index fell more than 70 percent.

But the authorities now appear to believe that a government rescue plan for the market is creating conditions under which the new rules can proceed.

The index has rebounded 21 percent from a 22-month low hit late last month in response to steps including purchases of shares from the market by a government fund and the abolition of the tax on stock purchases.

The commission said Sunday that it would monitor its new rules closely to reduce risk and that it expected "margin buying will greatly exceed short-selling" in the initial stage because brokerage businesses had only a limited amount of stocks available to lend.

By underlining the government's desire to stimulate the market, the commission's announcement may encourage fresh buying of Chinese stocks this week, analysts said. "The government clearly wants to prevent the panic in overseas markets from spreading to the domestic market," said Li Xianming of Ping An Securities. "This will keep people guessing about the next step which the government may take to support the market."

Some investors are hoping for the introduction of stock index futures, another change that has been under consideration for years. The commission did not specify exactly when margin trading and short-selling would start or name the brokerage companies that would take part in the initial stages.
Seoul seeks action on fund

South Korea is seeking to speed an $80 billion currency swap system to prevent the turmoil in the U.S. financial sector from creating financial crises in Asia, Reuters reported Sunday from Seoul, quoting Deputy Finance Minister, Shin Je Yoon.

In May, East Asian finance ministers agreed to upgrade the system in an effort to fight regional financial crises, taking them a step closer to creating a full-scale Asian monetary fund.

Japan, China and South Korea agreed to provide 80 percent of the total funds for the system at the time. A meeting of the finance ministers of South Korea, Japan and China to discuss the project has been scheduled for May 2009, but Seoul plans to propose that it be held earlier so access to the pooled funds can be made sooner, Shin said.

 

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More doom and gloom.

Credit Crisis Casts Gloom Over China's Exporters

Credit crisis casts gloom over China's exporters ahead of biggest export fair

By JOE McDONALD AP Business Writer

BEIJING October 14, 2008 (AP) The Associated Press
As they prepare for China's biggest export fair this week, managers at Shunde Xiongfeng Electric Industrial Co. are anxious.

Sales of electric fans are down this year, and the financial crisis will likely further cut demand from overseas. The 5,000-employee company in the southern city of Shunde, near Hong Kong, sold 6 million electric fans abroad last year.

"We are worried that if our clients are short of capital, they might shut down," said Shunde's export manager, who would only give his surname, Zeng. "That's certainly bad for us."

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