Chinese Economics Thread

[SampanViking]

Hi Norfolk

Re Stock Market Bubble

It is very difficult to try and gauge how much of a bubble and how volatile it is, in respect of the PRC's domestic Bourses. These are after all new and developing markets and many trademark traits and characteristics of the Chinese Market are yet to be established.

One difference I think we can claim, is that the volume of re-traded shares is probably low in comparison to New Issues and IPO's etc in comparison to the West. This is due to a very wide and popular view of shareholding in the PRC, but which shares are then held for long periods. This may make Chinese Shares appear overpriced, but without the volatility you would see in markets selling on in high volumes.

In the past there have been worries with regard to bad debts and quotes of big figures and high percentages. Remember however that these stories are now quite old and relate to the main transitionary phase from old SOE to modern public (or semi public) Corporations. As a result, recent earnings and profits have dwarfed the debts and removed them as a serious problem from the balance sheet.

If a large percentage of shareholders are in for the long term, then the Issue of Capital values is somewhat diminished, especially if earnings per share is reflected in a generous dividend, which is what most ordinary Chinese Investors are actually looking for.

 

[Norfolk]

Hi SampanViking.

Keep the analyses coming...we're hungy for info.

Re the large Chinese holding of US T-Bills and the like; what constraints are there to putting this back into China? I guess what I am asking is, how does China wean itself off of US debt, without sparking disruptions in either international money markets or within the Chinese economy itself?

Edit:

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by Martin and Loretta Wong, South China Morning Post, at LexisNexis News.

The wholesale prices went up by 70% yesterday, but it is unclear how this will affect retail prices. The upcoming New Year Celebrations are the immediate cause for this, as pork producers have reduced their stocks as demand for beef increases, and as such are short of pigs to meet the spike in demand for pork occasioned by the imminent festivities. Retail beef prices rose 15% yesterday; this is the fifth time that retail beef prices have increased in seven months.

I'm not certain whether these prices are just for Hong Kong, or generally applied across much of China - but it seems to be the former.

The article also mentions that 130,000 hectares of land in Guangdong Province will be developed for vegetable production in order to supply Hong Kong.

 

[Troika]

Norfolk asks


HI Norfolk

No, their is no real shortage of Agricultural land in China, the real problem is highly inefficient subsistence farming methods, which cannot produce anything like the yields of Intensive Farming.

Chinese Farmers do not use Pesticides, Herbicides or have veterinary cover for their livestock, so when attempts are made to increase production, crop blight and livestock disease are the usual consequences.

China is however wary of land clearances in order to create modern farms on a substantial level, due to the numbers of people involved and it wants to avoid recreating the conditions of the UK during the Enclosures Act of the early 19th Century or indeed the US's own Share Croppers in the 1930's.

Umm, you sure about the pesticide and herbicide bit? I am pretty sure China's the largest producer of chemical pesticides/ herbicide in the world, and there's something like over a million cases of pesticide poisoning each year in China.

Besides, I am also doubtful of inefficiency. In terms of output per unit area, farming in China is quite efficient (the oft-quoted statistics of 7% of arable land in world, China produces more rice, wheat, potatoes, sundry vegetables and fruits than any country in the world - the margin sometimes is completely staggering, see the website I give at the end), and I am fairly certain southern Chinese rise paddies have the highest yield per unit area in the WORLD.

Cash flow, or per capita, that's a different story, of course.

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[SampanViking]

Umm, you sure about the pesticide and herbicide bit? I am pretty sure China's the largest producer of chemical pesticides/ herbicide in the world, and there's something like over a million cases of pesticide poisoning each year in China.

Besides, I am also doubtful of inefficiency. In terms of output per unit area, farming in China is quite efficient (the oft-quoted statistics of 7% of arable land in world, China produces more rice, wheat, potatoes, sundry vegetables and fruits than any country in the world - the margin sometimes is completely staggering, see the website I give at the end), and I am fairly certain southern Chinese rise paddies have the highest yield per unit area in the WORLD.

Cash flow, or per capita, that's a different story, of course.

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Thanks, a very useful site.

Well I suppose that with a country the size of China, any attempt at a definitive statement will make you a hostage to fortune. Whilst you are quite correct in what you say, I would still hold to my original point due to the fact that many of the hundreds of millions of farmers in the Interior will not have be able to afford chemical additives in any considerable quantity.

The main point here though is not staples, but production of high end luxury foods such as meat etc. Over the last few years there have been significant outbreaks of Swine Fever, plus of course Avian Flu in many parts of the PRC. Much of this (obviously not all) is due to trying to rear to many animals in too cramped conditions and without the regular (expensive) antibiotics that are common practice in the West.

The picture may be different in the Coastal Provinces and I have seen some massive plantations especially in the Pearl Delta, but whether these are modern plantations or simple sprawling small holdings I could not tell you.

 

[Troika]

Thanks, a very useful site.

Well I suppose that with a country the size of China, any attempt at a definitive statement will make you a hostage to fortune. Whilst you are quite correct in what you say, I would still hold to my original point due to the fact that many of the hundreds of millions of farmers in the Interior will not have be able to afford chemical additives in any considerable quantity.

There is considerable amount of exports from interior provinces - milk, cotton (especially cotton), and a bulk of meat not based on swine, but I suspect you are correct, due to distribution of wealth. However, I think it is unfair to characterise it as subsistence farming. Farming income have been rising steadily, if steadily lower than urban income, the absolute and relative number of actual subsistence farmers have fallen much. This is of course quibbling, but I cannot help it.

The main point here though is not staples, but production of high end luxury foods such as meat etc. Over the last few years there have been significant outbreaks of Swine Fever, plus of course Avian Flu in many parts of the PRC. Much of this (obviously not all) is due to trying to rear to many animals in too cramped conditions and without the regular (expensive) antibiotics that are common practice in the West.

The picture may be different in the Coastal Provinces and I have seen some massive plantations especially in the Pearl Delta, but whether these are modern plantations or simple sprawling small holdings I could not tell you.

That may well be so (though China also produces masses amount of fruits, for example. I know executive in juice business, and he said to me, 75% of our apples come from China, for example.) But I think I am missing the thrust of your argument by now. Is it that the agricultural sector could be improved? If so, definite agreement.

One can imagine what a China that aggressively applies modern methods of agricultural, apart from environmental problems, would be stimulating a lot of internal demands and creating new jobs and new high-paying positions spreaded more evenly across China, boost production, and generally profoundly reshape China's socio-economic landscape.

 

[SampanViking]

Is it that the agricultural sector could be improved? If so, definite agreement.

Hi Troika

Yes precisely my point. Ultimately, if you still have a situation where it takes 1000 people to farm by hand an area that in the West would be farmed by 1 man and a few contractors, mechanically, the your agricultural sector will suffer many structural inefficiencies.

Its not a simple problem as it is more socially cohesive to allow these largely ageing farmers (itself hardly an aid to efficiency)to remain in situ rather than encourage their displacement in to enthusiastic a manner. This means that it could be another twenty years before the situation is naturally able to resolve itself, which is quite a headache for the country.

Re the large Chinese holding of US T-Bills and the like; what constraints are there to putting this back into China? I guess what I am asking is, how does China wean itself off of US debt, without sparking disruptions in either international money markets or within the Chinese economy itself

Hi Norfolk

Literally the $1 Trillion question!

T Bills are themselves securities not cash although they can be used as Collateral for other loans if required. Further, its not a question so much of offloading bills, rather than reducing the rate of acquisition. The key here is Oil, as Oil purchases have typically been transacted in dollars through the US banking system, hence the need to hold dollars in reserve and the dollar held up by this requirement.

This is OK up to point, but to work, it does mean the US taxpayer having to finance a large part of global growth through consumption and this has put a huge strain on the stability of the economy and currency. The obvious answer is to use other strong currencies to take the slack and this is what we are now seeing. In addition we are also seeing Foreign Currency reserves being invested directly through Sovereign Funds and this Corporate Investment may well be far more useful to the States than more unsustainably soft loans to Washington.

I know many on your side of the pond are anxious about Chinese acquisitions or part acquisitions of major Corporate names and Institutions, but the flip side has to be that access to cheap Chinese Corporate Finance and Chinese Directors sitting on the Board are going to help these Corporations better penetrate the vibrant Chinese Domestic market and actually provide the kind of boost that America needs in order to recover from the crunch and help soften the impact of a dollar that must now be in a long period of retreat until it achieves a stable and sustainable new equilibrium.

One last observation would be that the definition of a rogue state is shifting in the 21st century from that of ideology towards a definition of Protectionist and Isolationist attitudes. If Business is the new Doctrine, being closed to business is the new heresy and so it will not matter what your domestic politics are, as long as your markets are open and resources available for sale.

 

[Deleted member 675]

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One thing worth noting is the link drawn between these shortages and the central government's attempts to control inflation.

China is facing its most severe power shortage ever as some plants struggle to secure increasingly costly coal and others shut down capacity rather than rack up losses by selling electricity at low rates. The rebellion by power plant managers unwilling to generate at a loss is likely to worry policymakers still haunted by the nationwide diesel supply crisis last autumn, when refiners under similar pressure quietly curbed output and forced the government to make an unplanned and unwanted rise in fuel prices.

Beijing is battling high inflation and has promised not to raise energy prices in the short-term, so few analysts expect an immediate hike in power tariffs. But the shortages may prove a tricky test of the central government's resolve and power.

Brownouts have hit at least 13 provinces, and at its peak nationwide demand outstripped supply by nearly 70 gigawatts, or the equivalent of most of Britain's generating capacity, the official People's Daily newspaper reported on Wednesday. Many plants are being turned off or running at reduced rates as capped electricity tariffs combined with record coal costs demolish profits, traders and industry figures said. About 80 percent of China's electricity is generated by burning coal.

A crackdown on unsafe mines, high global demand pushing up coal prices and a cold snap that shut roads and downed cables added to the problem, an official from the state regulator said.

But, at its core, analysts said the problem was largely the result of Beijing's attempts to control inflation and avoid social unrest by controlling the price of some types of energy, like power, while allowing others like coal to be liberalised.

"The main reason behind the power shortages this time is rising coal prices," said Henry Li, analyst at Core Pacific- Yamaichi, adding that power capacity is basically balanced.

"I don't expect the government to raise power tariffs in the first half of this year, so the shortages will last till then."

If brownouts do run that long, they will impact other markets. Aluminium Corp of China Ltd. has already shut down two plants because of the shortages. During China's biggest previous power crisis in the summer of 2004, when demand was around 40 GW above supply, a rush for individual generators and diesel to run them helped push up international oil markets.

But though China is anxious to ensure that things run smoothly ahead of the summer Olympics, it is reluctant to move on power prices as it struggles to damp down inflation that reached an 11 year-high near the end of last year.

Officials are caught between two policies -- fixed power tariffs, and coal prices freed to float several years ago. In theory the two are linked and tariffs should rise when coal prices climb more than a set amount, but Beijing has been reluctant to authorise increases.

"Power shortages may persist until the mechanism linking coal prices to electricity prices is reactivated," said Li Jianwei, vice president of Shanxi Electric Power Association, a lobby group for power generators. "Shanxi's unusually low on-grid power price, coupled with rising coal costs has cornered many generating companies into a loss," he told Reuters.

Major generators like Huaneng Power International, Datang International Power and Huadian Power International have not yet commented on the shortages.

But stocks of coal are down nearly half from a year ago and only enough to cover eight days of generation, the official Xinhua agency said, quoting data from the State Grid. "Limited transportation capacity and recent natural disasters including snow and sleet all contributed to coal shortages," said an official with the State Electricity Regulatory Commission who asked for anonymity because he is not an authorised spokesman.

A drought has hit hydropower output and worsened the impact of the coal squeeze in central and southwestern provinces. Beijing also cut coal production last year, even as international markets rose to record levels, by closing thousands of small, hazardous pits as part of a safety drive.

Now the government has warned miners against making "chaotic" price increases, ordered railways to find extra wagons to transport coal for power generation, and requested the re-opening of any closed mines that meet safety standards.

Avoiding short-term pain (allowing prices to rise more naturally) can cause far worse consequences as a result.

A similar problem China has is in regards to fresh water. Because the central government won't allow prices to rise as they should do, people and businesses waste too much of it as there's little financial incentive to use it more carefully. That causes supplies to dwindle further and those at the bottom of the ladder have to make do with dirtier sources/can't get enough - as well as stocking up trouble for the future for more people.

 

[Schumacher]

.........
Avoiding short-term pain (allowing prices to rise more naturally) can cause far worse consequences as a result.

.....

That's assuming the rises are all natural. It's foolish to talk about theories/academic points with no knowledge of the real world situation on the ground, especially on a complex economy like China.
Short term price controls is a necessary evil if there're signs price increases are not entirely caused by market forces.
When market mechanisms are less well-developed like in China, anti-competitive behaviours by suppliers can contribute substantially to price movements.
In such a situation, much pain can be inflicted on the public if the government takes a hands off attitude & hope market forces alone can rectify the situation.

 

[Schumacher]

Another significant trend. Similar, I'd say, to what was discussed earlier about Guangdong passing Taiwan in terms of GDP.

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China, HK replace US as Taiwan's top exporter source

This was the first time that Hong Kong/China export orders topped the level of the US. -AFP

Thu, Jan 24, 2008
AFP

TAIPEI - CHINA and Hong Kong have knocked-off the United States as the number one source for export orders following the release of annual figures on Wednesday, officials said.

The economic ministry said export orders from Hong Kong and China reached US$91.42 billion (S$132.10 billion) in 2007, surpassing the 84.53 billion registered from the United States.

'This was the first time that Hong Kong/China export orders topped the level of the US,' said Huang Ji Shih, head of the ministry's statistics department.

In 2007, Taiwan took in export orders worth US$345.81 billion, up 15.54 per cent from the year before. For December total export orders to Taiwan fell to US$31.02 billion from 31.89 billion in November.

Still, the December figure represents a 17.56 per cent increase from the same month a year earlier, compared with a 17.18 per cent year-on-year rise in the preceding month, the ministry said.

The ministry said December export orders from Hong Kong and China rose 23.53 per cent year-on-year to 8.24 billion while orders from the United States amounted to 7.52 billion, up 9.48 per cent year-on-year.

'The major contributors to our export orders last year were information technology and communications products as well as electronics devices,' Mr Huang said.

The ministry expects export orders in January to fall to around 30 billion from 31.02 billion in December 2007, blaming seasonal factors.

Mr Huang added that export orders in February may fall from January because there are fewer working days in the month and because of the Lunar New Year holidays. -- AFP

 

[crobato]

5 billion bucks? China spends more money on Morgan Stanley than its entire Flanker fleet.


China sees opportunity in US recession
By Antoaneta Bezlova

BEIJING - Chinese pundits continue to fret about the gloom and doom scenarios that an imminent United States economic recession might have in store for China's surging economy, but some are beginning to see a silver lining in it too.

"If it was not for the subprime mortgage crisis, China could not have dreamed of pumping money into top Wall Street financial institutions," legal expert Zhu Yiwei wrote in an opinion piece in the Southern Weekend. "But now that China has acquired a 10% stake in Morgan Stanley, there is hope that, through building a network of personal connections on Wall Street, we can work to reduce trade frictions between the two countries."

Indeed, China's infusion of US$5 billion into the financial titan Morgan Stanley in December to help rebuild its capital base has been portrayed by some experts as a successful inroad into the Wall Street fortress that should be used by Beijing to acquire more power to influence opinions in US political backrooms.

The investment in Morgan Stanley is the latest in a series of prominent deal-making abroad the country's new $200 billion sovereign wealth fund - the China Investment Corporation (CIC) - has completed since its inception in May. Both its creation and activities have created a buzz in global financial markets in anticipation that a sizeable sum of money will be channeled into global assets.

But the fund has also raised political hackles in some countries for fear that its masters may exploit the openness of developed countries to international capital to seek strategic dominance of key resources and infrastructure and further their national foreign-policy objectives.

China's investment fund is only the latest newcomer among sovereign wealth institutions that have proliferated in recent years in countries that produce oil or have built up large currency reserves through surging exports. These funds at present control between $2 trillion and $3 trillion; experts predict that their assets will swell to more than $10 trillion within a decade.

Fears that such assets will be used to take over key domestic industries in the US and Europe have prompted officials from the Group of Seven leading nations to call for clear rules on sovereign wealth funds. The International Monetary Fund has also been called on to help design codes of conduct for them.

In China, the reaction to such fears has sometimes been unabashedly nationalistic. "The excessive interest in China Investment Corp is a reflection of the heating global competition between major world powers," said a recent editorial piece in the China Times.

"It is pointless for an investment firm from a country like China to attempt and hide its aspirations, pretending its goals are entirely market-driven. CIC is a sovereign wealth fund of a big power and should use the available market mechanisms to fulfill the country's strategic needs," the article went on. "Purchases of strategic foreign assets and much-needed natural resources should be on top of its agenda."

Ironically, these opinions have appeared at a time when Chinese leaders are at pains to emphasize the political independence of the country's new investment vehicle. "This investment company is entirely commercial," Premier Wen Jiabao said at a joint news conference with visiting British Prime Minister Gordon Brown last weekend. CIC's external activities "must not be politicized", Wen said, adding, "The government doesn't meddle."

Chinese policy-makers remember well the setback the country's third-largest state-run oil company, the Chinese National Offshore Oil Corporation, encountered in the US when it tried to acquire California's energy company Unocal in 2005. The political backlash that ensued showed the suspicions and hurdles awaiting other potential Chinese attempts to acquire large companies in major developed countries.

Nevertheless, the opportunities presented to investors by America's sinking financial fortunes have been difficult to resist. Big losses from bad loans tied to the battered US housing market have forced top investment banks such as Merrill Lynch and Citigroup Inc to look for help from overseas investors as far afield as China, South Korea, Singapore and Saudi Arabia.

After pumping money into Morgan Stanley in December, Beijing eventually decided to reject a proposed multibillion-dollar investment in Citigroup by the state-owned China Development Bank last week, inviting speculation that Chinese leaders have chosen to maintain a low profile for their investment targets. Neither China Development Bank nor Citigroup has commented on the reasons behind the last-minute rejection of a plan that had been in the works for weeks.

Some Chinese experts suggest the decision may have to do with Beijing's reluctance to clinch another high-risk deal at a time when public criticism that its previous investments in Blackstone Group LP and Barclays Plc have fared poorly is rife.

"We still haven't seen the end of the subprime crisis and this is perhaps not the best time to invest in Wall Street," says Ding Zhijie, professor of finance at the Beijing University of Foreign Trade and Economics. "The fear is that intense competition between Asian investors may push many to enter that market prematurely and pay a high price for it."

Other experts argue that China should seize the opportunity and invest in resource-rich developing countries with fewer regulatory hurdles compared to the West. "CIC should set its targets on emerging markets where there is a lack of capital and they are looking to attract strategic investors," says Zhang Ming, an economist with the Chinese Academy of Social Sciences. "It is only a matter of time before protectionist sentiments arise there too."

All seem to agree that the establishment of the sovereign wealth fund marks only the beginning of a high time for Chinese investments overseas.

Under pressure to reduce China's gaping trade surplus and ease appreciation pressure on its currency, Beijing has relaxed many rules about overseas investments and Chinese companies and individuals have been spending big on acquiring assets and stocks abroad.

Flush with cash from recent flotations on the stock markets, Chinese commercial banks have been busily acquiring stakes in foreign banks to expand their international presence. Chinese companies for their part have been encouraged to look aggressively to purchase long-term supplies of energy resources and raw materials.

If the current trend continues, overall Chinese institutional and private investments in 2008 may well exceed $250 billion, or nearly double the $134 billion China poured into overseas investment in 2006, said the Beijing Youth Daily.

(Inter Press Service)

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