Category Archives: economy

“China inequality causes unease – Pew survey”

Pew has a new survey out, asking Chinese about a whole lot of things. The results confirm what a lot of us have sensed about China:

A slowdown is particularly troubling for Xi because, as China prepares for its once-in-a-decade leadership transition, a Pew Global Attitudes survey conducted there this year finds that its citizens are also increasingly worried about a variety of other domestic issues, especially corruption, inequality and consumer protection.

In the economic realm, while standards of living have improved for the vast majority of Chinese, and the country’s middle class has expanded tremendously, there is nonetheless a widespread belief that not everyone is enjoying their fair share. And as consumers, many Chinese feel at the mercy of a system that cannot guarantee the safety of life’s basic necessities.

Half say corrupt officials are a very serious problem in China, up from 39% in 2008.

Second, there is a consensus that some people are being left behind by China’s rapid growth – 81% of those polled agree that today the “rich just get richer while the poor get poorer”. Nearly half (48%) describe the gap between rich and poor as a very big problem, up from 41% four years ago.

And in another sign that many do not see a level economic playing field, less than half (45%) agree with the statement “most people can succeed if they are willing to work hard”.

Roughly four-in-ten (41%) now consider food safety a very big problem, up from just 12% in 2008.

During that same time period, concerns about the safety of medicine have more than tripled, from 9% to 28%. Similarly, the percentage saying they are very worried about the quality of manufactured goods has jumped from 13% to 33%.

These are important points, and I think they’re very telling for the crisis of confidence the Party is facing. Xi needs to seriously change course if he wants these numbers to stop climbing.

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“Inflated Notions”

Patrick Chovanec has been writing posts defending comments he made on Bloomberg News last week, essentially calling China’s official growth numbers into question. From his most recent piece:

My first assertion is that the decrease in China’s consumer inflation rate (CPI) — 3.6% in March, down from a peak of 6.5% last July — does not seem to accord with my own daily experience of rising prices in China. On Bloomberg I offered, as a counterpoint, the fact that the price of the fresh milk I have delivered to my home had, just that weekend, risen by 33%, from 6 yuan/bottle to 8 yuan/bottle.

Now I want to be clear that I am not claiming consumer inflation in China is actually running at 33%. I’m simply offering an example of the kind of head-turning price hike that remains an all-too-frequent experience despite the government’s declared “success” in getting inflation under control.

Some have suggested that the price increases I’m seeing reflect a higher rate of inflation in Beijing than elsewhere in China. That’s certainly possible, but it doesn’t help reconcile them with official figures. According to the official CPI numbers for February, inflation in Beijing stood at 3.5%, barely above the national figure of 3.2% for that month.

None of this necessarily means the National Bureau of Statistics (NBS) is lying, or making up numbers out of thin air. CPI is calculated based on a basket of goods, the exact composition of which is not disclosed by Chinese authorities, although some analysts have done a decent job of trying to re-engineer it. I’m sure you could come up with a basket that shows consumer inflation at 3.6%. Whether that reflects what consumers are actually feeling, though, is another matter. The picture is complicated by the fact that the government knows what is in the basket and can target those items for price controls and other forms of intervention. That keeps the prices for the select items — and the index — down, for a while at least. But it doesn’t solve price pressures, it only distorts their impact on the economy.

Now that the monetary expansion has peaked, and China’s investment boom is slowing (more on that in a moment), one would not be surprised to see prices dropping — even collapsing — as a result of the inflationary bubble popping. In fact, that is precisely what we are seeing in property and property-related inputs. The -0.3% drop in the Producer Price Index (PPI) matches up well with the the industrial slowdown I’m seeing. We may yet see a downturn in wages if that slowdown continues or deepens. But for a number of reasons, including people cashing in inflated assets, as well as the bottled-up pressure from earlier price controls, the everyday cost of living continues to rise. That suggests that inflation is turning into stagflation, a problem that places serious constraints on the Chinese government’s ability to pump money in to reignite growth.

There is no way to definitively prove that prices in China have risen, and continue to rise, faster than official CPI indicates. One could, of course, devise a transparent basket of one’s own and collect independent price data from cities across China. But the Chinese government strongly discourages such projects, to put it mildly. Absent an alternative measure, we are left with impressions and pieces of data.

More as he posts them.

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“Is Prosperity Strengthening Beijing’s Iron Grip?”

The New York Times on how success is making the Chinese government stronger in some ways, leading to worse human rights conditions:

This is the historic price and promise of industrialization: It is no fun, but it is better than subsistence living back on the farm. And, modernization theorists like Seymour Martin Lipset have argued, as people get richer thanks to dismal jobs like those at Foxconn, they are able to demand more rights.

That is a powerful argument, and it has been true not only in the Western developed world, which industrialized first, but also in 20th-century stars like Japan and South Korea. But Daron Acemoglu, an economist at the Massachusetts Institute of Technology, warns that we should not assume that the happy connection between prosperity and democracy will automatically hold true for China. That is because China is industrializing in the age of Apple — in an era of globalization and the technology revolution.

The result, Mr. Acemoglu argues, is that China is able to deliver strong economic growth without transforming its domestic political and social institutions.

But globalization and the technology revolution mean that China’s authoritarian rulers have been able to deliver strong economic growth without surrendering political and social control: “Instead of having to develop an entire industry, an emerging market economy can house just some of the tasks such as assembly and operation. This not only enabled China to grow very rapidly by relying on world technology and leveraging its cheap and abundant labor force, but has also mollified demands for structural, social and institutional changes that previous societies undergoing catch-up growth had experienced,” he writes.

Mr. Acemoglu sees a powerful, and worrying, paradox at work. It is the triumph of the open society in the West, with its focus on individual rights, independence and iconoclasm that created the technology revolution. But the impact of those discoveries on the world’s mightiest dictatorship may be to prolong its reign.

They didn’t share many of the details of his argument, but parts of that seem undeniable. As prosperity grows in China, the government dedicates more and more resources to repressing the people, and simultaneously uses increasingly sophisticated techniques. Are we sure this stage of development has only one possible outcome?

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“China Data, Part 2: Slowing Growth”

Chovanec has yet more analysis on the Chinese economy over here. Go read the entire thing, it’s not toooo long but makes a pretty solid case for how serious the challenges facing China’s economy really are. His introduction:

As China enters 2012, concerns that its economy may face a “hard landing” have entered the mainstream. In recent weeks, Paul Krugman (“Will China Break?” in the New York Times) and Robert Samuelson (“China’s Coming Slump?” in the Washington Post) both penned hand-wringing op-eds warning of an impending Chinese downturn. It’s interesting to see the rest of the world starting to wake up to the worrying trends we’ve been discussing on this blog for some time now.

When people talk about a “hard landing,” they’re usually talking about a sharp deceleration in GDP growth, which brings with it both business failures and unemployment. In two earlier posts (Parts 1 and 1A), I examined a variety of data points that suggest China’s real estate market is in the midst of a serious downturn. In this post, I want to take the next step beyond this and explore the impact of collapsing property prices on the pace of broader economic growth, and the prospects of a “hard landing”.

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“Wu Jinglian: China must move on reform”

CMP has a translation of Chinese economist Wu Jinglian’s article here, claiming that economic and political reforms are both vital to China’s future:

What drives the gap between rich and poor? I believe there are two things, the first being corruption and the second being the monopolization [of riches, resources and opportunity]. Both of these have to do with government power. The type of monopoly we have [in China] is not the outcome of free economic competition but has been generated instead by political power. Chen Tonghai (陈同海), the former CEO of Sinopec Corp, China’s most profitable enterprise in 2009, was subsequently arrested for taking bribes, and it was later found that he had on average personally used 40,000 yuan (US$6,350) of public funds a day. This should not happen according to economic reforms as they were originally intended. But inadequate reforms created this situation.

In recent years there has been a tendency in thinking that easily misleads the public, and that is that the polarization of rich and poor has resulted from the market economy. But the root of resentment against the rich (仇富) is in fact anger over corruption (仇腐). I believe entirely that certain people have willfully redirected the target, deflecting the disgust people feel toward corruption onto the shoulders of run-of-the-mill rich. Some who are rich have amassed their wealth through diligence and hard work, because they are good at what they do. Others have relied on power and position, turning public power to private advantage. Diverting public anger onto the shoulders of the wealthy not only does a disservice to general prosperity, but also has serious social consequences.

If we want to allow ordinary Chinese to prosper, moving the country in the direction of democracy, civilization (文明) and harmony means relying on economic reform, but also on political reform. We must realize the proposals made by Comrade [Deng] Xiaoping, who said in the 1980s: “Political reform and economic reform should be interdependent and coordinated. If we seek economic reforms but do not seek political reforms, then economic reforms will not work out.”

Further, I would like to emphasize the importance of building a nation of rule of law. This issue has come up against certain difficulties of late, whether one is talking about the legislative side or the judicial side. On the question of democracy and constitutionalism, we must find a path forward. The first order of business on this front is enabling a fair environment for discussion. Not only do we need to allow ordinary Chinese to seek prosperity — we must also give ordinary Chinese the courage to speak.

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China: Collapsing in 2012?

Probably not? I don’t think that we have enough evidence to make a statement like that, but Gordon Chang, writing in FP, is doing just that- despite having been proved wrong last year:

Many analysts assume this growth streak can continue indefinitely. For instance, Justin Yifu Lin, the World Bank’s chief economist, believes the country can grow for at least two more decades at 8 percent, and the International Monetary Fund predicts China’s economy will surpass America’s in size by 2016.

Don’t believe any of this. China outperformed other countries because it was in a three-decade upward supercycle, principally for three reasons. First, there were Deng Xiaoping’s transformational “reform and opening up” policies, first implemented in the late 1970s. Second, Deng’s era of change coincided with the end of the Cold War, which brought about the elimination of political barriers to international commerce. Third, all of this took place while China was benefiting from its “demographic dividend,” an extraordinary bulge in the workforce.

Today, social change in China is accelerating. The problem for the country’s ruling party is that, although Chinese people generally do not have revolutionary intentions, their acts of social disruption can have revolutionary implications because they are occurring at an extraordinarily sensitive time. In short, China is much too dynamic and volatile for the Communist Party’s leaders to hang on. In some location next year, whether a small village or great city, an incident will get out of control and spread fast. Because people across the country share the same thoughts, we should not be surprised they will act in the same way. We have already seen the Chinese people act in unison: In June 1989, well before the advent of social media, there were protests in roughly 370 cities across China, without national ringleaders.

So will China collapse? Weak governments can remain in place a long time. Political scientists, who like to bring order to the inexplicable, say that a host of factors are required for regime collapse and that China is missing the two most important of them: a divided government and a strong opposition.

At a time when crucial challenges mount, the Communist Party is beginning a multi-year political transition and therefore ill-prepared for the problems it faces. There are already visible splits among Party elites, and the leadership’s sluggish response in recent months — in marked contrast to its lightning-fast reaction in 2008 to economic troubles abroad — indicates that the decision-making process in Beijing is deteriorating. So check the box on divided government.

And as for the existence of an opposition, the Soviet Union fell without much of one. In our substantially more volatile age, the Chinese government could dissolve like the autocracies in Tunisia and Egypt. As evident in this month’s “open revolt” in the village of Wukan in Guangdong province, people can organize themselves quickly — as they have so many times since the end of the 1980s. In any event, a well-oiled machine is no longer needed to bring down a regime in this age of leaderless revolution.

Not long ago, everything was going well for the mandarins in Beijing. Now, nothing is. So, yes, my prediction was wrong. Instead of 2011, the mighty Communist Party of China will fall in 2012. Bet on it.

Do I have to? Because while I’m still sticking with the general belief that the Communist Party won’t live out the decade (at least in its current form), this year seems like a pretty tall order. Fear of a Red Planet has a good response:

I agree that all the indicators look bad at the moment, but the fundamentals that have kept the Chinese economy chugging forward – most notably a cheap, well-educated workforce – are still there. Even the relatively pessimistic forecasts show an average per capita GDP growth rate of 5% year-on-year by 2016 – something that is far from a disaster.

More to the point though, Chang’s prediction of collapse of the Chinese government within the next year has several conceptual problems that need examining:

-Firstly, if China is due for a “a Japanese-style multi-decade decline”, then this does not at all mean that a massive crash of the kind that would shake the government will occur next year.
-Secondly, countries with communist political systems such as mainland China’s have weathered very harsh economic crises without the government falling. Cuba and North Korea in the wake of the collapse of the USSR are stark examples of this, but we also see examples in Central Europe – Poland during the 1970’s being one.
-Thirdly, even if serious unrest does occur, the Chinese state has overcome such movements in the past and would stand every chance of doing so again. In 1989 there was essentially no limit to the willingness of the Chinese leadership to use force to suppress opposition, even if great bloodshed resulted, and there is every reason to believe that the leaders due to take power next year are of the same temperament.

Put simply, whilst I do think pessimists like Chang may have a point and that at some point their predictions may come true (hence the title) I don’t think it will be any time soon, at least not in the next year.

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“More on Property Downturn”

Chovanec is still on a roll:

First, two on-the-ground reports about the property bubble bursting in 2nd-tier cities. Bloomberg offers this report on Sanya (on China’s southern island province of Hainan) where the frenzy to pick up vacation villas has taken a nosedive, with home prices dropping 28% year-on-year in November and sales volume off 52%. Steve Dickinson, based in Qingdao (in the northeast coastal province on Shandong) reports on ChinaLawBlog.com that developers there are regularly offering 30-50% discounts and that construction on uncompleted projects has slowed. He says “the collapse in the real estate market has already occurred” and the only remaining question is how the government will pick up the pieces. In a related post, he relates the story of a Qingdao couple who now find themselves deep underwater after going into debt to buy a unfinished apartment at the peak of the market. Events in Sanya and Qingdao reinforce my point that China’s property bubble — and its consequences — is really a nationwide phenomenon, by no means limited to Beijing and Shanghai.

Caixin offers this report on the huge stress that plummeting land sales are putting on local government finances. As one expert declares, “The land market is basically deadlocked” as developers enter “winter mode” and stop buying land for new construction projects — a description eerily reminiscent of my own warning, at The Economist China Summit last month, that “winter is coming.” Again, the problem is even more serious in 2nd and 3rd-tier cities (Dalian’s revenue down 50%, Wuxi’s by 34%, Nanjing by 29%, Wuhan by 21%) than in Beijing (down 14.4%)and Shanghai (down 13%). The revenue shortfall is making it hard for some cities to pay for basic services like police and hospitals, much less repay the massive amount of debt they borrowed for stimulus projects – which, according to this report from Bloomberg, may be much larger than official statistics suggest. Interestingly, Caixin reports that some city governments are forcing local developers to continue buying land whether they want to or not — which makes local efforts to loosen up lending look less like real economic stimulus and more like a dangerous game of pass-the-buck.

Finally, I just have to remark that I find it a real hoot when I read officials claiming — and credible media reports repeating the claim – that plummeting property prices across China are evidence that the government’s top-down “cooling” measures are “taking effect” and ”working.” Keep in mind, the central government started putting its most prominent administrative controls, such as purchase restrictions, into effect in April 2010 — nearly two years ago — and began trumpeting their success a mere two weeks later. The reason we are where we are now is because property developers ignored those measures and piled up unsold inventory for nearly two years in the not-unreasonable belief they could call the government’s bluff. (I said as much at the time, on Chinese TV — see interview on May 18, 2010, beginning at point 23:50). Even when rapid credit expansion caused inflation to balloon, forcing the central bank not exactly to tighten, but at least rein in the pace of that expansion, authorities turned a blind eye to an explosion in off-the-books shadow credit that kept funding land purchases and construction, and applauded when statistics showed real estate investment continuing to grow at 25-30% year-on-year – until this Fall, when the growing need to roll over bad debt while keeping inflation in check made it well-nigh impossible to keep throwing money at this boom.

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“China Data, Part 1: Real Estate Downturn”

I’ve been hearing a lot about the real estate market downturn recently, and Chovanec has the best piece exploring all of the potential ramifications- this could be way bigger than it sounds:

The first signs of a downturn emerged in August, when China’s top 10 property developers reported unsold inventories totalling RMB 318 billion (US$ 50 billion), up 46% from the previous year. Highly leveraged, with debt to asset ratios approaching 65%, developers were coming under increasing pressure to liquidate those inventories for cash. The fire sale began in October, with several Shanghai developers slashing sale prices on new apartments by 25% or more. The discounts sparked angry (and sometimes violent) protests from investors who had previously bought the same units at full price, demanding refunds.

One location of particular interest is Ordos, the so-called “ghost city” in Inner Mongolia which I’ve been interviewed about so many times on TV. This summer, I began hearing stories of financial troubles — even a few suicides – among some of the less well-connected developers and speculators. Then, a few weeks ago, qq.com carried a dire report that average property prices there had suddenly plunged 70%, from RMB 10,000 per square meter to RMB 3,000, spawning a massive credit crisis.

The pressure on developers is unlikely to ease up anytime soon. According to property agency Centaline, unsold developer inventories reached new highs in September and October, levels that it calculates would take at least 22 months to clear in Beijing and 21 months in Shanghai, assuming normal sales volumes, even if no new projects were completed. Because more projects are underway, Centaline said it expects the country’s unsold housing inventory to keep growing and peak only in March of next year.

Caijing magazine paints a similar picture, estimating that the unsold housing piled up by developers in various cities across China would take roughly 12 months to sell at normal transaction volumes. It reports that, by the end of November, the total inventory of new unsold housing in eight major Chinese cities reached 45.95 million square meters, an increase of 38.4% over last year — and was still growing, by 3.1% over the previous month.

How investors in the secondary market will react to the collapse in primary market prices is the biggest question of all. As I’ve mentioned many times, many people in China buy multiple units of housing in order to hold them empty indefinitely, as a form of savings. They do this because they have few attractive alternatives and because they have faith that housing prices will go up.

Even without sparking a panic in the secondary market, a prolonged correction in the primary market is enough to pose a serious challenge to the broader Chinese economy. Remember what that unnamed realtor told WantChinaTimes.com, that “if the situation continues, many property projects will be postponed next year.” According to Shanghai Securities News, PBOC data on new bank accounts being opened by developers indicates that fewer projects are being initiated, and that property investment is slowing.

According to a central government study, local governments in China depend on land sales for approximately 40% of their revenues. The all-purpose answer, whenever doubts are raised about the ability of local governments to repay the loans or bonds that funded various stimulus projects, is that they can always sell more land. But when developers stop building, because they are too busy desperately trying to liquidate their existing inventories, they stop buying land.

According to Centaline, in November, 117 land parcel auctions in 35 major cities failed to find a buyer.

Suffice it to say — and I will have plenty more to say about this in follow-on posts — ever-rising land prices serve as one crucial underpinning for China’s entire financial system (the other, as we will see, is the nominal fiscal balance sheet of the central government).

The more you read about the real estate market and the overall Chinese economy, the less sense the entire system makes. That it has so many connections to local governments, who are themselves already sitting on massive piles of debt, just makes the entire thing more worrisome.

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“China’s Ordos property bust offers warning sign”

I’d be careful about drawing large-scale lessons from Ordos- it seems to be an extreme case. But the same principles that are at work in Ordos also seem to be at work in much of the country, and now via Reuters we hear that they’re starting to hit some serious snags:

The monumental, neo-Mongolian sculptures, empty plazas and hulking concrete shells of buildings in Ordos district, deep in the steppes of Inner Mongolia, are a potent symbol of how China’s property boom can turn to bust.

Off the back of a thriving coal industry, the local government has been building a new city for one million people called Kangbashi. It sits virtually empty and property prices are falling.

Even in the old city of Dongsheng where people live and work, some 45 minutes drive away, a wave of investment has backfired. Cranes sit idle over unfinished skyscrapers and migrant workers are fleeing.

The swing in fortune — residents and property agents say prices have dropped by up to a third — is a severe example of what is happening in cities across China, including Shanghai and Beijing.

After a housing bubble that doubled values in 35 cities between 2004 and 2009, prices are now falling nationwide. The central bank said on Friday property prices had reached a turning point while banks are worried a price slide of 20 percent could trigger panic selling.

“People are worried. Especially if they have bought two or three apartments,” said Yu Mingjun, a worker sitting in a down jacket at a ramshackle office of a half-completed project in the old town.

Nationwide, the decline is so far more modest. Home prices fell slightly in October from September for the first time this year, official data showed, but private surveys indicated prices began falling in September and continued through November.

With local governments often dependent on land sales to fund payments on a staggering 10.7 trillion yuan ($1.7 trillion) of debt, Beijing worries that a collapsing property market will trigger a wave of defaults that in turn will hit the banks.

“If society demonizes the property sector, especially if buyers think prices will fall, creating a sharp cooling off for instance 30-40 percent, I think that’s very serious,” said Hui Jianqiang, head of research for consultancy E-House China.

More worrisome, the property market, which contributes about 10 percent of Chinese growth and drives activity in 50 other sectors, could drag the real economy to a hard landing.

In empty showrooms of Dongsheng, Ordos’ old city, saleswomen immediately offer 30 percent price discounts if a buyer is willing to pay for a property upfront and in cash.

Chinese and foreign media seized on Ordos as the prime example of wasteful and pointless government projects after the government built the sprawling new city of Kangbashi.

Investors view ghost towns like Kangbashi as an example of the sort of excesses that could pull hard on the reins of the country’s growth.

On Thursday, a policeman shooed a Reuters cameraman away from the Wenming (“Culture”) property development right near government buildings in Kangbashi, as workers bearing shovels walked in to demand their last payment before heading home.

“Kangbashi is a sensitive place now,” he said.

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“Materialism in modern China”

Tom from SeeingRedinChina writes about his personal experiences with materialism in China- as always with him, worth a read:

As I’ve mentioned before, when co-workers return from overseas trips, more often than not, I hear about what they bought rather than what they saw. One friend told me he had spent over $25,000 on watches during a brief trip to Taiwan. Another said she had bought 4 new designer bags on a trip to Hong Kong. This binge shopping is shrugged off when people discuss how much they “saved” by avoiding China’s high taxes on these products.

The Party has realized the value in promoting the pursuit of material goods, as it bolsters the economy and maintains the status quo. The other day, the People’s Daily approved the idea that gov’t officials shouldn’t spend more than 180,000RMB on a car, which is more than most Chinese farmers make in 30 years, as if this was a reasonable way to spend public funds (they were heralding the Gov’t’s responsible nature in lowering the limit from 200,000RMB).

This growth of materialism in China’s more affluent areas surprised me when I arrived in Chengdu from the countryside of Guangxi. I actually experienced culture shock the first time I visited one of the large foreign supermarkets (Metro). My Chinese co-worker laughed at me as I marveled at all of the choices while slowly wandering down each and every aisle. To her, I was another country bumpkin (she actually used 土包子 tubaozi) exploring China’s big cities for the first time.

In some ways I was.

When I was in Guangxi, I tried my best to live simply. Students were either given a little pocket money from their parents who made much less than $1,000/year, or worked part time jobs that paid about 2-3RMB/hour ($.25-.37 at the time). Nobody had much money to spend, so it was pointless to dream of things they could never afford.

In the present, they felt fortunate for the little they had. They wore additional fabric sleeves to protect their jackets and sweaters in the winter, they moved carefully through the rain for the sake of their shoes, and almost never left a scrap of food behind during a meal. I greatly admired their sense of thrift, and I think my grandparents, who grew up in the Great Depression, would too.

This absence of materialism in the Chinese countryside was one of the things I most frequently praised China for. Now, living in Nanjing, the never ending pursuit of material goods that I see around me is one of the things that bothers me most. Possibly because just as Guangxi made me thankful for what I had, Nanjing just makes me want more.

I still can’t blame Chinese for this- coming so suddenly from having almost nothing, and then arriving at a time where ordinary people can suddenly afford so much… well, I understand why so many people get swept up in it. I’ve got to agree with Tom in the end, though- seeing so much uninhibited materialism can feel pretty depressing at times.

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“China labour unrest flares as orders fall”

FT reports on this trend, which is a key part of the argument claiming that a severe dip in the Chinese economy could easily topple the government:

China is facing its worst wave of labour unrest since a series of wildcat strikes at Japanese-owned car plants last year, as declining export orders force factories to reduce worker pay.

More than 10,000 workers in Shenzhen and Dongguan, two leading export centres in southern Guangdong province, have gone on strike over the past week. The latest protests broke out on Tuesday at a Taiwanese computer factory in Shenzhen.

Last week, Guangdong’s acting governor said the province’s exports dropped 9 per cent in October from the previous month. Provincial leaders are also contending with widespread protests by farmers over land seizures. On Monday nearly 5,000 residents in the town of Wukan marched on government offices in a peaceful protest.

Factories are cutting the overtime that workers depend on to supplement their modest base salaries, after a drop in overseas orders.

According to CLB, the average basic wage for electronic workers is about Rmb1,500 ($236) a month, but rises to Rmb2,500 with overtime. “Their basic wage is never enough on its own without overtime,” Mr Crothall said.

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“China’s rural poverty falls but inequality rises”

The Hindu has a report on a new Chinese white paper making this claim- and in this case, it seems likely enough to be true:

The paper, the first released on poverty since 2001, attributed the steep decline to the effectiveness of a series of subsidies for China’s farmers, including the removal of agricultural taxes and a new social security assistance programme. Despite fast-declining rural poverty, the report also warned of new — and, analysts said, harder to address — developmental challenges as a result of increasing inequality between the countryside and cities.

The number of rural poor had declined from 94.22 million in 2000 to 26.88 million in 2010, or 2.8 per cent of the rural population today. Behind the decline, said the paper, were several pro-farmer measures, particularly the abolishing of agricultural taxes in 2006, which was part of a series of rural reforms unveiled during the mid-2000s, shortly after the Hu Jintao-Wen Jiabao administration took over following a decade of rapid, but increasingly uneven, urban-focused growth.

The central government’s spending on agriculture in this time rose from 214.42 billion yuan ($34 billion) in 2003 to 857.97 billion yuan ($136 billion) last year — an annual 22 per cent increase. Much of this spending went to a development programme that targeted 592 of the poorest counties. The programme, said the paper, helped increase farmland by 3.5 million hectares in these counties, as well as renovate and extend roads by 952,000 km.

Some measures which had helped bring growth, such as marketisation, had now left a legacy of rising health and education costs, particularly in rural areas. A urban resident earns more than 3.3 times a rural one in China today, with the Gini income inequality index rising from 30.9 per cent in 1981 to 45.3 per cent in 2003.

Some of those numbers might well be off by a bit, but the notion that rural poverty has continued to decline seems believable.

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“How Tracks Froze from Hangzhou to Changsha”

Caixin Online claims that the national high-speed rail push has been badly damaged by the Wenzhou crash and the earlier sacking of corrupt Rail Minister Liu Zhijun. Given how invested the Party has been in the high-speed network as a sign of a newly reinvigorated China I’d be surprised if they allow it to continue to wither like this, but for now it seems to be slowing down:

July 1, 2013, is still the official target date for completing a bullet railway line between the willow-shaded city of Hangzhou and historic Changsha.

But central government funding for the 295-kilometer, Zhejiang Province section of the 10 billion yuan project froze in February and began only a partial thaw in November.

The ministry’s provincial rail bureaus and building contractors have struggled to obtain bank financing. Equipment suppliers haven’t been paid. And tens of thousands of laborers haven’t seen a paycheck since spring.

Today, cranes stand idle and work crews have vanished from construction sites along the route, part of tracks eventually slated to connect Shanghai with the Yunnan Province capital Kunming. Partially completed tunnels and piers without bridges bespeak a grand infrastructure project in limbo.

420 million yuan was allocated to the Zhejiang section. And a Jiangxi Province source with a project supplier told Caixin the amount earmarked for work in that province was only about 200 million yuan, most of which went toward overdue worker paychecks.

The source said his company paid back 1 million yuan of his nearly 100 million yuan of overdue payments.

Contractors and the provincial rail bureaus overseeing the project were heartened again in early November by news that the Ministry of Railways would raise another 250 billion yuan through bank loans.

Ministry officials convened a “back-to-work” meeting November 2, where each bureau was ordered to raise 100 million yuan in matching funds within two months.

Yet the amount of money promised this fall pales in comparison to 2010 financing, when the national fast-train buildout was moving at full-throttle speed. For example, the Zhejiang section of the Hangzhou-Changsha line alone received some 10 billion yuan last year.

Through the summer, some hopeful contractors tapped their own funds to keep projects alive. Ringing in their ears were the words of rail bureau officials who, since March 2010, had urged them to meet accelerated project schedules.

After the funding train derailed, however, building crews and material suppliers were along those left in the lurch. Some workers haven’t been paid since April, according to rail bureau officials. And some material suppliers have complained they’ve been owed money since July.

The big stall is also raising technical risks. For example, engineers have warned about the integrity of elevated tracks on the Zhejiang segment, many of which have been only been partially completed.

For unfinished bridges, one chief engineer told Caixin, “concrete quality will change with time. Suspending or slowing construction affects bridge quality.” Similarly, he said, half-done tunnels “bring the risk of collapse.”

Today, while bridge piers and tunnel walls weaken, contractors who had been gung-ho for bullet trains are shopping for new clients.

Scrawled on walls that surround construction sites along the Hangzhou-Changsha right-of-way are phone numbers for crane suppliers whose company bosses, when contacted, said they will no longer take jobs on China’s high-speed railway.

Could the earlier arguments against the viability of the entire project have resurfaced after Liu Zhijun was fired? Or is this just a momentary slackening? We’ll see.

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“Property Prices Collapse in China. Is This a Crash?”

Maybe, maybe not. The idea that the Chinese property market is some kind of unstoppable force that will power China indefinitely is a joke, though. Via Forbes:

Residential property prices are in freefall in China as developers race to meet revenue targets for the year in a quickly deteriorating market. The country’s largest builders began discounting homes in Shanghai, Beijing, and Shenzhen in recent weeks, and the trend has now spread to second- and third-tier cities such as Hangzhou, Hefei, and Chongqing. In Chongqing, for instance, Hong Kong-based Hutchison Whampoa cut asking prices 32% at its Cape Coral project. “The price war has begun,” said Alan Chiang Sheung-lai of property consultant DTZ to the South China Morning Post.

What started slowly in September turned into a rout by the middle of last month—normally a good period for sales—when Shanghai developers started to slash asking prices. Analysts then expected falling property values to move Premier Wen Jiabao to relax tightening measures, such as increases in mortgage rates and prohibitions on second-home purchases, intended to cool the market.

They were wrong. After a State Council meeting on October 29, Mr. Wen affirmed his policy, stating that local authorities should continue to “strictly implement the central government’s real estate policies in the coming months to let citizens see the results of the curbs.” Then, the selling began in earnest as “desperate” developers competed among themselves to unload inventory. One builder—Excellence Group—even said it would sell flats in Huizhou at its development cost.

Citi’s Oscar Choi believes prices will decline another 10% next year, but that’s a conservative estimate. Even state-funded experts are more pessimistic. For example, Cao Jianhai of the prestigious Chinese Academy of Social Sciences sees price cuts of 50% on homes if the government continues its cooling measures.

When Beijing’s pet analysts are saying prices could halve in a few months, we can be sure they are thinking the eventual sell-off will be worse. In any event, the markets are bracing for trouble. Investors are dumping both the bonds and the shares of Chinese developers, and legendary bear Jim Chanos, citing the property market, late last month said he is still not covering his short positions on China.

One does not have to agree that China will be “Dubai times 1,000—or worse”—Chanos’s memorable phrase—to understand that the unwinding of “the biggest housing bubble ever created” will be especially painful. Analysts have great confidence in Beijing’s technocrats because they managed to continue to manufacture growth through the global downturn, but most of us seem to forget that the Chinese, through massive stimulus, created even bigger challenges for themselves. At the moment, Beijing has yet to resolve two intractable problems: persistent inflation and artificially high property prices.

And once housing prices return to Earth, will it still make sense for development companies to power the Chinese economy like they do now? And will seizing land and flipping it to developers still be the ‘free money cheat code’ it is now for local and city governments? And if they don’t have free money anymore and are already in massive debt, what happens next?

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“Falling copper points to global pain”

The Globe and Mail has an article about scrap scavengers near Beijing. I’ve never heard of this ‘copper as a bellwether’ thing before, but here goes:

On the northeastern edge of sprawling Beijing, the hardscrabble neighbourhood of Dongxiaokou is some 20 kilometres from the glittering skyscrapers that provide this community’s livelihood. Here, virtually every scrap left over from a modern life – used computers and mobile phones, household appliances, furniture, clothing, even paper and plastic bottles – is collected, sorted, broken down and sold for cash.

Traditionally, copper has been among the most valuable materials for collection. But this week, after a month of sinking prices, no one is in a good mood.

“The prices are very unstable,” said Li Yibing, 42, a nattily dressed native of Henan province whose recycling business consists of a Chinese web portal advertisement, a mobile phone and a crew of about 10 men pedalling three-wheeled bicycle carts, who spend their days journeying all over Beijing to sort through other people’s cast-offs. One tonne of copper scrap now earns about 10,000 yuan ($1,580) less than it did a year ago, he said, and there are fewer places buying. “The factories which refine copper, some have stopped or have suspended working now,” he said.

Another recycler a few blocks from Mr. Li, who would only give his family name, Jiang, was morose as he sat at home, his mobile phone quiet. Also from Henan, he has been in the business for seven years, weathering the 2008 financial crisis even as many others gave up and went home.

But now, in a corner of his yard, metres-high piles of insulated copper and aluminum wire sit undisturbed, and he said this week has felt “almost the same” as three years ago. “We don’t recycle copper any more because the price has fallen too much. The price has been down for more than a month, so I’ve stopped,” Mr. Jiang said. “I don’t believe the price will go up. It’s a crisis now.”

The price of copper – used in everything from household goods to power grids – is considered a bellwether for measuring global demand and, more broadly, economic health. China is thought to be responsible for some 40 per cent of the world’s total copper demand, so any fall in the need for copper here can be interpreted as an economic slowdown with repercussions for the rest of the world.

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“As Its Economy Sprints Ahead, China’s People Are Left Behind”

Another article (this one from NYT) that seems to reflect the darkening outlook on the Chinese economy:

Wang Jianping and his wife, Shue, are a relatively affluent Chinese couple, with an annual household income of $16,000 — more than double the national average for urban families.

They own a modest, three-bedroom apartment here in this northeastern industrial city. They paid for their son to study electrical engineering at prestigious Tsinghua University, in Beijing. And even by frugal Asian standards, they are prodigious savers, with $50,000 in a state-run bank.

But like many other Chinese families, the Wangs feel pressed. They do not own a car, and they rarely go shopping or out to eat. That is because the value of their nest egg is shrinking, through no fault of their own.

Under an economic system that favors state-run banks and companies over wage earners, the government keeps the interest rate on savings accounts so artificially low that it cannot keep pace with China’s rising inflation. At the same time, other factors in which the government plays a role — a weak social safety net, depressed wages and soaring home prices — create a hoarding impulse that compels many people to keep saving anyway, against an uncertain future.

Here in Jilin City, where chemical manufacturing is the dominant industry, the state banks are flush with money from savings accounts. The banks use that money to make low-interest loans to corporate beneficiaries — including real estate developers, helping fuel a speculative property bubble that has raised housing prices beyond the reach of many consumers. It is a dynamic that has played out in dozens of cities throughout China.

But tomorrow’s money may not be worth as much as today’s — not as long as their savings account earns only a 3 percent interest rate while inflation lopes along at 6 percent or more.

Yet the Wangs see no good alternatives to stashing nearly two-thirds of their monthly income in the bank. They are afraid to invest in China’s notoriously volatile stock market. And Chinese law sharply limits their ability to invest overseas or otherwise send money outside the country.

Nor do the Wangs feel flush or daring enough to join the real estate speculation that some Chinese now see as one of the few ways to get a return on their money — risky as that might prove if the bubble bursts.

Mainly, like many in China, the Wangs save because they worry about soaring food prices and the high cost of health care, which the People’s Republic no longer fully provides. They also worry about whether they can afford to buy a home for their son, a cost that Chinese parents are expected to bear when their male children marry.

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“What If the China Bubble Bursts?”

One from Time about the property market here:

The popular narrative is that China’s rise from nowhere in 1978 to its position today as the world’s second largest economy has been fueled by cheap labor. While this is one factor, cheap capital and land have been as important. Most Chinese, who are huge savers, have little choice but to put their money in bank accounts that pay interest lower than the rate of inflation; these funds are then channeled into state-owned enterprises whose capital expenditures create the factories and buildings on which the Chinese miracle has been built.
(See pictures of China’s cutting-edge architecture.)

But the Chinese are pretty smart about money. They see the fortunes the elites have made by buying land at bargain prices and developing it. Ordinary individuals cannot get in on the ground floor to reap the obscene profits made by well-connected officials who facilitate purchases from historical occupants, but they are permitted to invest in real estate at later stages of development, and their wealth grows every year. Anyone who’s spent more than a day or two in China knows that real estate is a popular preoccupation. Apartment flipping is all the rage; real estate prices have tripled in the past five years.

The question is whether the building bubble — not only in housing but in commercial property as well — is about to burst. Everywhere you go in China, you see new airports and high-speed train lines under construction; see-through apartment buildings whose empty units loom unilluminated in the night; beautiful underutilized roads, bridges and tunnels; and newly risen ghost towns waiting for occupants. One such town, Kangbashi, in Inner Mongolia, has everything a city needs, including investors who have bought apartments on spec. Yet it remains unoccupied, as reported last year in this magazine.

Unfortunately, the strains caused by hell-bent growth are starting to show up everywhere. Mass protests of party abuses — often the taking of land without just compensation — have been rising so steadily that the government did not publish the number of them last year. At government facilities in many regions of the country, there have been explosions set off by citizens so disaffected that they don’t care about the consequences.

Senior Chinese officials are secretly quite worried about a hard landing. Many observers say a sharp economic decline won’t be permitted to happen before the change of leadership in 2012. But the Chinese stock market was not supposed to be allowed to crash in the run-up to the 2008 Beijing Olympics, and it did. The Chinese Communist Party is trying to engineer a delicate redefinition of how its economic model will work going forward.

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“This is What a Bubble Looks Like”

Patrick Chovanec has a new blog post up, talking more about Ordos, the ‘ghost town’ that Melissa Chan reported on a few days ago:

Last week, Melissa returned to Ordos to see what, if anything, had changed, and asked me to comment and help make sense of what she had seen. Suffice it to say, Ordos remains largely empty, and construction continues — although there’s a growing nervousness about how long it can last. As I’ve frequently said, demand in China for real estate as an unproductive “store of value” may be extremely persistent, but that doesn’t mean it’s sustainable. And the longer it persists, the more worrisome the overhang becomes.

Then take a look at this Bloomberg segment, from earlier this year (January 2011), about China’s largest mall, which is standing almost entirely empty. You may find it interesting to compare it with this Bloomberg article, about the very same property, written in April 2007 — empty then, still empty now. As the later report states, the original developer went bust and then Peking University bought it, and now doesn’t know what to do with it. The real gem comes at the very end:

Reporter: Despite obvious problems, the malls owners plan to expand.

Mall Manager: We’ve been trying hard to make money, and we’re actually heading towards that direction. We still have some 200,000 square meters soon to be developed. I think we’ll balance out as soon as those 200,000 square meters are open.

Ah yes, we’re losing money on each unit we sell – but we’ll make it up on volume! The solution, as always, is to keep building.

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“The China Debate Continues”

From the WSJ, a piece about two economists squaring off on China’s future:

Arvind Subramanian, an economist at the Peterson Institute for International Economics, argues in a new book, “Eclipse: Living in the Shadow of China’s Dominance,” that China is bound to become the world’s number one economy even if it’s growth rate slows substantially. That’s because China is still likely to grow faster than the U.S. for years to come and its population is four times the U.S.

A China with GDP-per-capita of just 26% that of the U.S. would be number one — although it would still be a poor country. That would be the first time since the industrial revolution that a poor country was also the world’s biggest economy.

At the U.S. Federal Reserve’s Jackson Hole conference, Harvard economist Dani Rodrik, a development specialist, was far more skeptical about the inevitability of convergence. While the manufacturing sectors in some poor countries can catch up to those of wealthy ones, Mr. Rodrik argues, that doesn’t necessarily translate into an economy wide catch-up. Why? As manufacturing sectors get more productive, they need to employ fewer people to do the same amount of work, so the gains don’t necessarily spread to the whole nation.

The gains in manufacturing often also require subsidies of one sort or another, which can produce a backlash in rich countries — witness the threats in the U.S. to retaliate against China because Beijing keeps its currency undervalued.

In follow-up comments to the Wall Street Journal, Mr. Rodrik said that while Mr. Subramanian’s projections about China may turn out to be correct, “I see lots of fragility in the Chinese system. Combine the stresses that will arise from the need to alter their economic model with the restiveness beneath the surface (the number of riots that take place in that country every single day is mind boggling) and their inability to effectively deal with political dissent, and I think you have a very explosive situation.”

“It could well be that a balance that you can maintain at 9% growth becomes impossible at 6%.”

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“Ordos: Boom town to ghost town”

Melissa Chan from Al Jazeera has yet another great piece up on her blog- this one about Ordos, a city that exemplifies the weirdness of the housing market here:

We had discovered Ordos by accident. Our team was in the area filming a report on the environment when we learned the city was nearby. I had heard about “Ordos 100″, a residential building project that had invited 100 globally renowned architects to design 100 homes for the city. It would be a fun detour.

We imagined wealthy residents, made rich over the past decade from the region’s mining boom, living in homes created by the Ordos 100 project. But instead, we found ourselves arriving at Ordos in the evening, checking into the only hotel we could find – a fancy one, encased in marble whose staff looked perplexed to see us.

We were the only guests there for the night. In the morning, we drove past streets of empty, but beautiful buildings. Never mind Ordos 100 – we never found it. City centre had us spellbound, and wondering if officials had watched that film classic, Field of Dreams.

Others who later visited Ordos, including economist Ting Lu of Bank of America-Merrill Lynch, pointed out that the real estate was not sitting idle, but had all been sold. So while the city lacked human beings, it was certainly supplying this odd demand from Chinese purchasers for empty apartments.

Inflation hit a three-year high this past July at 6.5 per cent, meaning that wherever Chinese store their savings, it had better yield something that can keep up with the rate of inflation.

The stock market is no longer a popular choice for many ordinary citizens, who find it too unpredictable. That really only leaves property to dump your money.

Ordos is one oversized, inefficient bank vault.

And when we decided to check in after two years to see how “Bank of Ordos” was doing, we found a surprise: construction is still happening at a fierce pace.

Ordos now boasts Asia’s largest fountain show. Its theatre has managed to hold a few concerts this year. There are definitely more signs of life than the last time around – but still comparatively little relative to the size of the city. We came to realise just how little when our team got thirsty midway through our shoot and decided to buy water.

We ended up spinning around and around city blocks, searching for a store selling water. Eventually we found sine – but not without the feeling we had gone on a treasure hunt. There is no major supermarket in Ordos, because not enough people live in the city.

As it turned out, while no real-estate sales offices in Ordos really wanted to talk to us, we were told off camera that apartment units up for sale in the secondary market were not getting offers. And, as we poked around apartment buildings in Ordos, we noticed broken windows and cracked paint on the exteriors, suggesting that building managers were not too fussed about keeping the place spiffy.

A wander into the buildings themselves showed dusty hallways and vacant apartment units. Some apartments were clearly halfway through interior decorating when work stopped, presumably because the owners decided, quite practically, that since they were not going to live in the unit, why bother?

People rebut stories like this by talking about how many people in China still live in tiny shacks in the countryside, or caves in the dusty north. There’ll always be demand for housing, right?

But if it’s housing like this, that cave-dwellers will never be able to afford, then doesn’t that defeat the whole purpose? What is the inherent value of a concrete cube you can’t actually sell to anyone? And if you end up having to dramatically slash the price down to a tiny fraction of what it is now just to attract a renter, then haven’t you essentially lost your entire investment? Especially given how poorly these places have been constructed and the short lifespan they’ll presumably enjoy, I don’t see how this can continue without a crash some day.

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