China Economics Blog

The End of the Chinese Miracle (FT)

2016-03-11T06:15:00.001-08:00

According to the FT, China's economic miracle is under threat from a slowing economy and a dwindling labour force.

Apologies for the long absence in posting - my main social media engagement is now through twitter at "@RobertJRElliott" where I post very regularly on China economics related issues.

Conducting field work in China

2014-05-21T00:43:00.003-07:00

Useful post from Sinograduate. Click the link to see expanded descriptions of each point.

Conducting Field Work in China

If you’re a masters or Ph.D. student conducting social science research on China for your thesis or dissertation, at some point you might find yourself in China for fieldwork. Having recently spent a year in China for my own dissertation fieldwork, here are some suggestions for a successful (or at least not overwhelmingly painful) fieldwork experience in China.

1) You’ll need an affiliation.

2) Don’t necessarily affiliate at the top universities.

3) Load up on your guanxi.
4) Have copies of an affiliation letter from your institution for cold calls.

5) It’s easier to say no on the phone than it is in person.

6) Hire a Chinese research assistant to bring to meetings with you.

7) Come bearing gifts.

What Should Economists Know about the Current Chinese Hukou System?

2014-05-12T01:39:00.001-07:00

Research paper. Impacts on all aspects of research on the Chinese economy.

What Should Economists Know about the Current Chinese Hukou System?

Yang Son

Abstract

This article explains the current hukou system in China and provides the most recent evidence on the impact of the hukou system on the Chinese labor market and economy. By a comprehensive literature survey, this paper shows that the hukou system plays in two major roles in current China. First, workers with different hukou face different costs of living in cities and have different access to government-provided public services and welfare programs in the urban areas. Migrants with rural and non-local hukou working in the Chinese big cities have no or little access to welfare programs provided by local city governments. Second, there exists labor market discrimination against rural hukou holders in cities, especially in the urban high-wage sector such as state-owned enterprises. The current hukou system has a negative impact on rural-to-urban migration in China as well as on economic efficiency and equality by reducing the expected benefits associated with migration.

Are China's Financial Markets Deep and Liquid enough for RMB internationalisation?

2014-05-09T03:33:00.000-07:00

Could China internationalise the RMB?

This paper examines the case for China and concludes it is not there yet. How long? Perhaps not as long as you might expect. Obstacles in China have a way of disappearing when they need to.

"The People's Republic of China's Financial Markets: Are They Deep and Liquid Enough for Renminbi Internationalization?"

ADBI Working Paper 477

PRINCE CHRISTIAN CRUZ, Asian Development Bank

YUNING GAO, Tsinghua University

LEI LEI SONG, Asian Development Bank

Domestic financial market development is a key determinant of a currency’s international status, and financial depth and market liquidity are two essential attributes for an international currency. This paper discusses the status of the People’s Republic of China’s (PRC) financial markets and their depth and liquidity conditions. The paper also compares the PRC’s financial markets with those in developed and emerging economies, contemporaneously and historically. The paper finds that the PRC’s financial markets are not as deep and liquid as those in developed economies, and are much less so than those with international currencies. To support the internationalization of the renminbi, the PRC needs to remove several major obstacles to deepen its financial markets and improve their liquidity conditions.

Image of the day

2014-04-11T02:57:00.000-07:00

For some reason I find this figure interesting.

Understanding Chinese Consumption: The Impact of Hukou

2014-04-11T01:46:00.002-07:00

Rebalancing hinges on China increasing consumption. It has long been acknowledged that the Hukou system is an institutional blockage on consumption driven rebalancing. This new working paper looks at this important issue.

Understanding Chinese Consumption: The Impact of Hukou

BOFIT Discussion Paper No. 7/2014

CHRISTIAN DREGER, German Institute for Economic Research (DIW Berlin), European University Viadrina Frankfurt (Oder), Institute for the Study of Labor (IZA), Chinese Academy of Social Sciences (CASS)

TONGSAN WANG, Chinese Academy of Social Sciences (CASS)

YANQUN ZHANG, Chinese Academy of Social Sciences (CASS)

Capital investment and exports have driven China’s remarkable economic growth for decades, but recent trends have put pressure on the government to move to a more consumption-driven model of growth. Unfortunately, China’s institutional framework does little at the moment to spur household consumption. While the country’s weak social security setup and highly regulated financial markets are routinely cited as disincentives to private consumption, the role of the hukou household registration system in depressing consumption gets less attention. Controlling for income levels on datasets from 2002 and 2007, we show the average propensity to consume is significantly lower for internal migrants to cities. Official figures suggest that China in 2013 had about 260 million internal migrants. These individuals are often separated from their families for long periods and denied access to public services in the cities where they work. The government’s current urbanization strategy calls for increasing migrant populations in cities, which, in the absence of hukou reform, is likely to further dampen consumption.

The Conflicted Emergence of the Renminbi as an International Currency

2014-04-09T00:32:00.001-07:00

Research paper by McKinnon and Schnabl (CESifo). I agree with the sentiment expressed in this paper. Internationalization of the RMB will be a massive challenge with plenty of pitfalls along the way.

"China'sExchange Rate and Financial Repression: The Conflicted Emergence of theRenminbi as an International Currency"

CESifo Working Paper Series No. 4649

RONALD MCKINNON, Stanford University - Department of Economics, CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

GUNTHER SCHNABL, University of Leipzig - Institute for Economic Policy, CESifo (Center for Economic Studies and Ifo Institute)

China has been provoked into speeding renmnibi internationalization. But despite rapid growth in offshore financial markets in RMB, the Chinese authorities are essentially trapped into maintaining exchange controls — reinforced by financial repression in domestic interest rates — to avoid an avalanche of foreign capital inflows that would threaten inflation and asset price bubbles by driving nominal interest rates on RMB assets down further. Because a floating (appreciating) exchange rate could attract even more hot money inflows, the People’s Bank of China should focus on tightly stabilizing the yuan/dollar exchange rate to encourage naturally high wage increases for balancing China’s international competitiveness.

China: Size matters

2014-03-27T01:54:00.002-07:00

Nice little IMF article. http://blog-imfdirect.imf.org/2014/03/26/china-size-matters/

"How big is China?

Big. China is the world’s second largest economy. Based on PPP exchange rates, China increased from 6 percent of global output in 1995, to 15 percent last year (see chart). Or, if you prefer using market exchange rates, the corresponding rise in China’s share of global GDP is from 2 percent in 1995 to 12 percent in 2013.

When will China surpass the US? In 2018, based on PPP exchange rates. Later using market exchange rates—by 2019, the last year of our projections, China’s economy would be equivalent to about 64 percent of US GDP."

Chinese capitalism - first default on bond payments

2014-03-07T05:06:00.002-08:00

WSJ reports that Chinese state owned banks have let a company default. This might be the first company default and whilst seemingly bad news (certainly for investors in Shanghai Chaori) it shows that China is prepared to let companies go under. In the long run this has to be good news.

As an aside for environmental readers - it is not surprising it is a solar company. Massive over capacity.

Shanghai Chaori in Default on Bond Interest Payments [Wall Street Journal]

BEIJING—A Chinese solar-equipment maker on Friday failed to meet interest payments on a bond, according to a company official there, becoming China's first domestic corporate bond default.

Liu Tielong, board secretary of Shanghai Chaori Solar Energy Science & Technology Co., said on Friday that it was in default. The heavily indebted company had warned on Tuesday that it wouldn't be able to meet interest payments totaling 89.8 million yuan ($14.7 million), citing a credit squeeze and its inability to raise enough funds to make the interest payments.

The default, though small in size, marks the first time a Chinese company has defaulted on a bond traded in the mainland, according to Moody's Investors Service.

Research Paper: "How Far Can Renminbi Internationalization Go?"

2014-02-28T02:36:00.003-08:00

I can only agree that the road ahead will be long and bumpy. Capital controls are key. London stands to benefit from internationalisation but there will be increased competition for this business. George needs to be on the case.

"How Far Can RenminbiInternationalization Go?"

ADBI Working Paper 461

YU YONGDING, Chinese Academy of Social Sciences (CASS)

Since the formal launch of the renminbi trade settlement scheme in 2009, renminbi internationalization has made impressive inroads. The progress in renminbi trade settlement is especially impressive. However, Hong Kong, China’s offshore renminbi deposits failed to make significant progress as expected. The question of how far renminbi internationalization can go has become a common concern in the international financial community. This paper argues that the sheer size of the People’s Republic of China’s (PRC) trade and the convenience of using the renminbi for transaction settlements is one contributing factor, but that exchange rate arbitrage and interest rate arbitrage matter also. As well, a fundamental constraint for renminbi internationalization is the PRC’s capital controls. Before fully opening up its capital account and making the renminbi freely convertible, however, the PRC needs first to put its own house in order, most importantly making the renminbi exchange rate flexible. While the renminbi can and will become a major international currency eventually, the road to internationalization is bound to be long and bumpy.

Opium wars, trade and precious metals

2014-02-21T04:37:00.003-08:00

China economics blog always keeps an eye on trade. The Opium wars are a fascinating case study. A recent article provides an interesting reminder of the issues.

Old Time Farm Crime: The Opium Wars [Modern Farmer]

"It was a major drug bust with more than 1,600 arrests and the confiscation of 11,000 pounds of a highly addictive substance.

No, this wasn’t a DEA raid of a major meth operation, or an Interpol investigation into international drug smuggling. It was the year 1839 and the Chinese government was cracking down on British importation of opium. The drug issue was a powder keg that led to a series of wars between the two countries over the course of more than 20 years and changed both nations for generations.

To the British, the Chinese crackdown was a matter of business. It was a perceived trade imbalance on the British end due to Chinese officials requiring silver in trade for their goods, most notably tea, that led the British to realize that opium could tip the scales in their favor.

The British government, initially through its East India Company, had tried trading everything from woolens to scientific instruments to pottery, but the Chinese only cared about precious metals."

What is interesting here is that Chinese imports of gold and silver and yet again reaching record levels.

"In a 50 year period prior to 1828, Britain paid out £27m in silver to the Chinese. During the same period they only sold about £9m of British goods to them. That balance shifted dramatically when the British went full bore into opium smuggling.
In the decade of the 1830s, despite an imperial decree outlawing the export of silver, China exported more than seven times more silver than it took in (an estimated $7 million in and $52 million out) a lot of that used to buy opium. And that doesn’t include the gold that was exported in the same decade.

By the eve of war British merchants were exporting about $25 million (about $245 million today) worth of opium to China from their Indian possessions."

Interesting how things change and yet stay the same.

China rebalancing - rural income rises suggest light at the end of the very long tunnel

2014-02-20T05:39:00.005-08:00

China is currently getting a bad rap. Everyone from this blog to Robert Peston's documentary are highlighting doom and gloom ahead. This recent Bloomberg piece suggests there is some light at the end of the tunnel.

China needs to increase consumption and rely less on exports. My view has been that the gulf is too great and that there is some serious pain ahead. I have not changed that view yet but it is always good to see some progress.

Debt fuelled investment remains a major concern.

I am working on a couple of projecting looking at urbanization and energy use. Urbanization in China is an interesting and in my view important topic where government policy is changing and that will impact China and the world economy. There is also a close tie in with migration and registration issues. This Bloomberg piece is a nice summary. [My bold]

China Rural-Income Gains Aid Shift Toward Consumption [Bloomberg]

"Chinese incomes rose faster in the countryside than in cities for a third straight year in 2012 as migrant workers boosted their pay and the government strengthened the social safety net.
Rural per-capita net income advanced 10.7 percent, compared with 9.6 percent for urban dwellers, partly on the rise in migrant laborers and their wages, the National Bureau of Statistics said Jan. 18. Rural residents’ income from benefits payments rose 21.9 percent, almost double the urban pace, as the government boosted its budget for health-care handouts.

Rural spending power has been lifted by wages earned by peasants working in cities, underscoring the broader benefits of the urbanization drive championed by incoming Premier Li Keqiang. Spreading gains in consumption would help sustain a growth rebound and reduce the economy’s reliance on exports, which rose last year at less than half 2011’s pace.

“Rising rural incomes should definitely help boost consumption and aid rebalancing,” said Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong. “Growth will gear down a bit as rising labor costs diminish investment incentives, but such consumption-led expansion will be more sustainable.”

The trend may persist for a while as a declining working- age population helps push up migrant laborers’ pay and the government keeps improving social safety-net funds including for health care in the countryside, said Zhang, who previously worked for the International Monetary Fund.

Retail Sales
Rural per-capita net income, which includes migrant workers’ pay, rose more than that of urban residents in 2010 for the first time since 1997. Retail sales in rural regions rose 14.5 percent last year, exceeding the gain in urban areas, which increased 14.3 percent, for the first time in three years. That compares with 17.2 percent growth for urban consumption in 2011 and a 16.7 percent advance for rural dwellers.

Rural spending, at 2.78 trillion yuan ($447 billion) last year, was still less than one-fifth of what urban households spent. Urbanites account for about 52.6 percent of China’s population of 1.35 billion, according to the statistics bureau.

The central government’s transfer-payment budget for rural health-care coverage in 2012 increased 36 percent to 106.3 billion yuan, according to the Ministry of Finance.

“Income and wealth reallocation favoring rural households should definitely help boost consumption, as the lower-income households normally have higher propensity to consume,” said Ren Xianfang, a Beijing-based analyst with researcher IHS Inc. “This should help rebalancing.”

Registration System
The situation highlights the urgency of measures such as overhauling a household-registration system that keeps 642 million rural dwellers from permanently joining the urban workforce, limiting their ability to contribute to the economy.

The State Council, or cabinet, said in February 2012 it will implement a policy of helping people register as urban residents in small and medium-sized cities and small townships and ensure equal benefits for countryside residents who have an urban registration. At the same time, the government will continue to “reasonably control” the population of bigger cities including Beijing and Shanghai.

China had about 230 million people by the end of 2011 who lived in cities without permanent residence, Chen Xiwen, China’s top rural-policy adviser, said Nov. 29. The Chinese government has a huge challenge in providing education, health care and jobs for these people, Chen said.

Major Tasks
Strengthening consumption’s role in boosting economic growth is one of the major tasks this year, the government said after the annual central economic work conference in December. Stephen Roach, former non-executive chairman for Morgan Stanley in Asia, said in a Project Syndicate opinion article this week that “without rebalancing and reforms, the days of the automatic Chinese soft landing may be over.”

A resurgence in optimism for China’s economy has given stocks a boost. The Shanghai Composite Index (SHCOMP), the nation’s benchmark gauge, advanced 20 percent through yesterday since its 2012 low on Dec. 3, a threshold used by some investors to signal a bull market. The index fell 0.1 percent as of 1:08 p.m. local time today.

While economic growth for the full year was the weakest since 1999, expansion rebounded in the fourth quarter to a 7.9 percent year-on-year pace following a seven-quarter slowdown.

Gree Electric Appliances Inc. (000651), China’s biggest air- conditioner maker, may benefit from growing sales in the countryside, China International Capital Corp. analysts said in a Jan. 21 note. Gree said Jan. 18 that its 2012 profit may have increased 41 percent.

[...]

Bigger Cake
Even with the gains in China, per capita rural net income last year was 7,917 yuan, less than a third of per capita urban disposable income of 24,565 yuan, statistics bureau data showed. Ma Jiantang, head of the agency, said Jan. 18 that China must on one hand, “make the cake bigger, and on the other hand, we must do a better job in sharing the cake.”

Under President Hu Jintao and Premier Wen Jiabao, both set to retire in March, the government since 2003 has abolished agriculture taxes, expanded health-care coverage and increased minimum purchase prices of grains under efforts to boost rural development.

The difference between rural and urban income growth was smaller in 2012 than the 3 percentage-point gap in 2011.

“As the narrowing of the gap in the pace of gains shows, more needs to be done to reduce income disparities, and I expect the new government to move in this direction,” said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong."

Scared of shadows? You should be - China's shadow banks

2014-02-04T05:45:00.001-08:00

China economic watch article. There are warning signs written all over the Chinese economy at the moment.

Meet China’s Biggest Shadow Bank [The Peterson Institute for International Economics]

Shadow banks in China come in a variety of forms and guises. The term is applied to everything from trust companies and wealth management products to pawnshops and underground lenders. What surprising is that China’s biggest shadow bank is actually a creation of the central government and receives billions in financing directly from the banks. Even more interesting, this shadow bank recently pulled off a successful international IPO where it raised billions of dollars.
First, let’s deal with the terminology. The “shadow” in shadow banking doesn’t imply nefarious doings, although it frequently involves a bit of regulatory arbitrage. At the most basic level, shadow banking is borrowing funds and extending credit outside of normal banking structures.

So what is this mysterious shadow bank that has such tight government connections? It’s none other than Cinda Asset Management Company, a creation of the Ministry of Finance (MoF) and the beneficiary of a recent 2.5 billion U.S. dollar IPO in Hong Kong. In terms of total assets, Cinda is more than 15 times as large as any of the country’s trust companies.

The normal business of a distressed asset management company (AMC) is not shadow banking. It involves purchasing troubled loans at a discount and trying to collect a higher amount from the debtors. Cinda was one of the four AMC’s created by the central government to bailout the banking sector in the 1990s. The initial round of bad debt purchasing was policy-directed, starting in the late 1990s and lasting through the mid-2000s. In the second half of the 2000s, the big four AMCs began to purchase NPLs from banks on commercial terms and in the process tried to transform themselves into market-oriented businesses.

Over the last three and a half years, Cinda’s business has diverged from this model. In addition to purchasing bad debts from banks and other financial institutions, it has accumulated a vast stock of distressed debt assets directly from non-financial corporations.

China currency crisis to cause "global meltdown"

2014-02-02T14:13:00.000-08:00

The Telegraph do a good global crisis story. My bold.

It appears that Chinese firms have been borrowing a lot of foreign money. The question is why given they have enough money of their own (this is another story). The risk is that US rate rises will lead to serious problems for Chinese borrowers and then "meltdown".

China should be able to print enough money to solve most problems so fears are likely to be overdone but it is interesting to highlight the extent to which China is now borrowing from abroad.

Currency crisis at Chinese banks 'could trigger global meltdown’ [Telegraph]

The growing problems in the Chinese banking system could spill over into a wider financial crisis, one of the most respected analysts of China’s lenders has warned.

Charlene Chu, a former senior analyst at Fitch in Beijing and now the head of Asian research at Autonomous Research, said the rapid expansion of foreign-currency borrowing meant a crisis in China’s financial system was becoming a bigger risk for international banks.

“One of the reasons why the situation in China has been so stable up to this point is that, unlike many emerging markets, there is very, very little reliance on foreign funding. As that changes, it obviously increases their vulnerability to swings in foreign investor appetite,” said Ms Chu in an interview with The Telegraph.

Ms Chu has been warning since 2009 about the growth of a shadow banking system in China that has helped fuel the credit expansion seen in the country in the wake of the Western financial crisis.

However, fears are growing that the build-up of foreign borrowing by the Chinese, particularly in US dollars, is creating an even greater build-up of risk than that seen before the crisis of 2008.

Figures published by the Bank for International Settlements (BIS) in October showed foreign currency loans booked in China, as well as cross-border borrowing by Chinese companies, had reached $880bn (£535bn) as of March 2013, from $270bn in 2009.

Analysts say this figure is now likely to exceed $1 trillion and is continuing to grow, raising the prospect of the potentially dangerous vulnerability of the Chinese financial system to a rising dollar.

“It is very hard to work out the exposures of individual banks to the Chinese financial system, but it seems to us there are some very large numbers on some of the bank’s balance sheets,” said the analyst.

“Without a doubt, that has been on the rise [foreign currency borrowing] and was really starting to grow fast in the latter half of last year and it’s only going to continue. For the time being, it is only a fraction compared to the massive size of the financial sector, but still we’re talking about a growing amount of funding coming from offshore sources,” she said.

“You look at the exposure numbers from the BIS and the Hong Kong banks . .. you’re going to encounter a few [foreign] institutions that are going to have a sizeable exposure to China.”

George Magnus, senior independent economist at UBS, said the Chinese banking system resembled that of Japan during the 1980s in the years leading up to the country’s financial crash.

“If the dollar were to appreciate it could cause problems for those banks that have borrowed in dollars. Anywhere you have a banking system that uses a non-domestic currency, there is a possibility of a mismatch that could cause issues when the value of your liabilities runs away from you,” said Mr Magnus.

The BIS figures show foreign-currency loans are already at a decade high, though the body said there was no reason this should mean there was a “currency mismatch”.

Paper: "Consumption Based Estimates of Urban Chinese Growth"

2014-01-31T00:35:00.000-08:00

IMF paper: Urban inflation in China was pro-poor. Given rising inequality this is a ray of sunshine.

It is interesting to note that consumption growth is put at 6.8% a year at a time when official growth statistics were generally over 10%.

"ConsumptionBased Estimates of Urban Chinese Growth"

IMF Working Paper No. 13/265

MARCOS CHAMON, International Monetary Fund (IMF) - Research Department

IRINEU DE CARVALHO FILHO, International Monetary Fund (IMF)

This paper estimates the household income growth rates implied by food demand in a sample of urban Chinese households in 1993–2005. Our estimates, based on Engel curves for food consumption, indicate an average per capita income growth of 6.8 percent per year in 1993–2005. This figure is slightly larger than the 5.9 percent per year obtained by deflating nominal incomes by the CPI. We attribute this discrepancy to a small bias in the CPI, which is of a similar magnitude to the one often associated with the CPI in the United States. Our estimates indicate stronger gains among poorer households, suggesting that urban inflation up to 2005 in China was “pro-poor,” in the sense that the increase in the cost of living for poorer households was smaller than for the average one.

"Air-pork-alypse"

2014-01-24T04:34:00.001-08:00

I can never resit a good play on words and a fine sets of images from Shanghaist. As someone who has spent sometime in Wuhan this comes as no particular surprise.

The flavor must be something to savour.

Air-pork-alypse: Wuhan butcher cures bacon outdoors in the smog [Shanghaiist]

Journal: The Growth and Decline of the Modern Sector and the Merchant Class in Imperial China

2014-01-23T00:44:00.001-08:00

Interesting paper in the most recent Review of Development Economics. Historically, guns and growth have been close companions.

The Growth and Decline of the Modern Sector and the Merchant Class in Imperial China

Abstract

This paper offers an explanation of why, in Imperial China, the merchant class expanded and the economy modernized up to the 13th century, and why it entered into decline from the 14th century onward. The modernization of China required the accumulation of public capital and the building of good institutions, upon which a vibrant class of merchants and entrepreneurs could gradually emerge. This class contributed to the enrichment of the society and the emperor, but its activities also weakened the dominance of the emperor and the élite, who would then prefer to block the modernization of China and to restrict the size of the merchant class, putting the economy into long-run stagnation. However, when the emperor faced severe foreign military threats and when he realized that a modern sector improved the defense capabilities of China, he made the opposite choice.

Will China's $23 Trillion Credit bubble collapse - and collapse soon?

2014-01-21T16:24:00.004-08:00

The guys over at Zero hedge warn it might. MEGA DEFAULT ahead? A classic dismal scientist story.

As an economist it is always interesting and useful to read "the worst case" scenario articles. By now we know very well that black swan events happen and more often that we care to imagine. In this case the concern is China's increase in credit from $9 trillion to over $23 trillion in 5 years.

But China has been growing rapidly so it is not a problem right? Not so simple.

I agree with Michael Snyder here (author of the Zerohedge article) - many Chinese companies are in deep - way too deep.

Other posts have considered local government debt.

The date suggested - 31st January. Of course this is scaremongering and not a reason to sell everything and buy gold (as many would suggest).

In reality the Chinese government have enough firepower to prevent catastrophic collapse but it might be worth watching the indices carefully on the 31st January.

The $23 Trillion Credit Bubble In China Is Starting To Collapse – What Next? [Zerohedge]

China's elite and their "offshore" assets

2014-01-21T16:02:00.001-08:00

An open secret is that large numbers of Chinese have assets outside of the country and money is leaving China at a significant rate. Now CBCnew have written a nice article on the subject that is sure to raise some eyebrows.

Things could get ugly. Worth reading in full. My bold.

Offshore assets of China's elite revealed in leaked records [CBCnews]

"Close relatives of China's top leaders have used secretive offshore companies in tax havens that helped shroud the Communist elite's wealth, according to a massive cache of leaked financial records, posing a formidable challenge for President Xi Jinping, the country's avowed anti-corruption leader.

The confidential files include details of a real estate company co-owned by Xi's brother-in-law, as well as British Virgin Islands corporations set up by former premier Wen Jiabao's son and son-in-law, plus dozens of more cases of people tied to high-level officials."

../

CBC News has exclusive access in Canada to the files, which show that nearly 22,000 people with addresses in mainland China and Hong Kong are involved in offshore dealings in locales such as the British Virgin Islands and the Cook Islands, places usually associated with hidden wealth. Among them are some of China's most powerful men and women — including at least 15 of China's richest, members of the National People's Congress and executives from state-owned companies entangled in corruption scandals.

Academic Paper: Sector-Level Productivity, Structural Change, and Rebalancing in China

2014-01-17T05:57:00.001-08:00

The future of China depends to large extent to some degree of structural re balancing. Export driven growth will be harder to achieve in a sluggish global economy. This new IMF working paper is a province level study that considers productivity in the services sector. Services have been growing rapidly - this will help GDP growth in the future. Will the change happen quick enough?

Sector-Level Productivity, Structural Change, and Rebalancing in China"

IMF Working Paper No. 13/240

MALHAR NABAR, International Monetary Fund (IMF)

KAI YAN, Yale University

This paper studies structural changes underlying China's remarkable and unprecedented growth in recent years. While patterns of structural transformation across China's provinces are broadly in line with international experience, one important difference is in labor productivity differentials between services and the rest of the economy. Specifically, the gap between labor productivity in the rest of the economy and services has widened across China's provinces as they have moved from low to middle income, which is contrary to the trend observed in cross-country experience. Evidence from a panel of China's provinces suggests that credit and labor market frictions have inhibited labor productivity growth in services relatively more than in the rest of the economy. Reducing these frictions is essential for achieving the next stage of China's development, one in which the service sector will need to play a more prominent role as an engine of growth. The evidence also suggests that improving labor productivity in services will lift the consumption share of GDP, thereby advancing the needed rebalancing of domestic demand in China.

Academic Paper: "Local Government Financing Platforms in China: A Fortune or Misfortune?"

2014-01-17T05:19:00.000-08:00

New IMF working paper. Local government "issues" are a key element of China's future success (or failure). Bad debts and poor investment decisions need careful examination. Land to sell is running out.

"Local Government Financing Platforms in China: A Fortune or Misfortune?"

IMF Working Paper No. 13/243

YINQIU LU, International Monetary Fund

TAO SUN, International Monetary Fund (IMF)

China’s rapid credit expansion in 2009–10 brought local government financing platforms (LGFPs) into the spotlight. This paper discusses their function, reasons behind their recent expansion, and risks they are posing to the financial sector, local governments, and sovereign balance sheet. This paper argues that LGFPs were a fortune for China in the past, but would turn out to be a misfortune if the causes of the rapid expansion of LGFPs are not addressed promptly. In this context, the paper proposes ways to avoid misfortune by: acknowledging and addressing the revenue and expenditure mismatches at the local government level; establishing a comprehensive framework to regulate and supervise local government budgets; ensuring the sustainability of the financial resources obtained from the sale of land use rights; and developing local government bond markets and promoting financial reforms.

The Middle Dream

2014-01-15T03:44:00.000-08:00

Lauren Johnston explains "the Middle Dream" on the China Policy Institute Blog. Link.

A small flavour.

Soon after becoming Chinese President in November 2012 Xi Jinping spoke of his belief that “The Great Revival of the Chinese nation is the greatest Chinese dream”. Attempts to understand the concept of “Chinese dream”, inside and outside of China, have followed extensively since. This post reflects on the evolution of Chinese leaders’ political lexicon since Deng, and finds that Xi’s China dream is a lexical shift, but a policy continuum, allowing for greater aspirational convergence among China’s own poor and rich, and also in China’s foreign relations with developed as well as developing countries.

Reformist leader Deng Xiaoping famously employed the slogan “opening and reform”. Enduring to now have become the commonly used phrase capturing China’s remarkable program of economic reforms since 1979. Lesser-known of Deng’s lexicon however, and directly sharing more in common with the essence of the contemporary Chinese dream, is his 1978 call for the “invigoration of China” (zhenxing zhonghua). In sum, the “invigoration of China” was arguably Deng’s national vision, while “opening and reform” served as the umbrella policy direction that would be used to move the nation toward that vision.

Will the Renminbi Emerge as an International Reserve Currency?

2014-01-14T08:25:00.003-08:00

Academic paper published in the most recent issue of World Economy.

Will the Renminbi Emerge as an International Reserve Currency? [World Economy]

Abstract

The global reserve system can be strengthened by increasing the role of alternative currencies. A gradual evolution to a multicurrency system reduces pressure on a single reserve currency issuer from an ever-growing balance-of-payments deficit. It also allows countries to better diversify their foreign exchange holdings. Given the continuing strong economic growth in the China and its growing influence on the world economy, the renminbi will likely emerge as a new international currency. However, this is contingent on the China accepting a more convertible capital account and developing an efficient financial system. Internationalising the renminbi will likely be a gradual and drawn-out process. Simulations show that, with greater convertibility, the renminbi could gradually become an international currency within Asia and beyond – sharing from 3 to 12 per cent of international reserves by 2035.

China's runnaway train - crash ahead?

2014-01-11T14:38:00.001-08:00

Bloomberg give an impressively bleak outlook on China. Link. The key is the "debt" - this is a real problem. Patrick Chovanec does a great job.

My bold.

I have real concerns about a liquidity crisis - the issue is local government debt. The newspaper headlines are usually about how much money China has. How can debt be a problem?

I have included the whole article given how good it is. The interesting questions and first, what can China do to address these issues and second, what should the West and investors around the world do to protect themselves from a possible crisis (and in the case of hedge funds - profit from it).

China’s Runaway Train Is Running Out of Track [Bloomberg]

"A financial drama is unfolding in China as the new year begins. Last week, for the second time in six months, interest rates in the critical interbank lending market spiked above 10 percent, prompting fears of a liquidity crisis that would trigger mass defaults and cripple the world’s second-largest economy.
Western investors largely ignored the cash crunch and failed to grasp its potential significance. Although the situation has largely eased after the People’s Bank of China hastily injected at least $55 billion into the market, that isn’t the end of the story. These repeated crises are a sign that the foundations of China’s investment-driven growth model are crumbling -- with unsettling implications for the rest of the global economy.

To those who wrote off China’s first banking seizure in June as a fluke, this latest episode appeared to come out of nowhere. They cast about for explanations: Perhaps some seasonal surge in cash withdrawals was to blame, or the U.S. Federal Reserve’s decision to taper its bond-buying policy. Optimists assumed the PBOC was tightening credit on purpose, as a warning to banks to rein in unsafe lending practices. With inflation at manageable levels, they reasoned, the People’s Bank of China had plenty of room to loosen monetary policy again and ease the cash crunch.

In fact, loose monetary policy is the problem, not the solution. Two simple words -- bad debt -- are the key to understanding why China has too much money, yet not enough. In the years since the global financial crisis, China has racked up impressive growth in gross domestic product by engineering an investment boom, fueled by a surge in easy credit. Total debt has risen sharply, from 125 percent of GDP in 2008 to 215 percent in 2012. Credit has spiraled to $24 trillion from $9 trillion at the end of 2008. That’s an additional $15 trillion - - the size of the entire U.S. commercial banking sector -- lent out in just five years.

A lot of that money has gone into projects whose purpose was to inflate the country’s economic statistics, not to generate a return. Officially, China’s banks report a nonperforming loan ratio of less than 1 percent. In reality, they are rolling over huge amounts of bad debt, both on their own books and by repackaging it into retail investment products -- many of them extremely short-term -- that promise ever higher rates of return.

China’s banks can hide bad debt by playing this shell game, yet that doesn’t change the fact that they’re not getting their money back. With their capital locked up in existing projects, the only way they can finance the next round of big investments -- and keep China’s GDP growth rates from collapsing -- is by expanding credit. More and more of that new credit is now eaten up paying imaginary returns on the growing pile of bad debt.

This year, total credit in China grew about 20 percent, from an extremely high base -- hardly tight money. Yet the cash needs of China’s banks aren’t what they seem. In addition to its declared balance sheet, each bank is juggling a host of dubious assets and hidden cash obligations (in the form of quasi-deposits) on what amounts to a “shadow” balance sheet. Rein in credit growth, even modestly, and there isn’t enough to go around.

That’s what Chinese authorities discovered in June, and again last week. In both instances, the People’s Bank of China didn’t take away the punch bowl by tightening credit, it merely tried to resist handing over an even bigger punch bowl. The result, both times, was a near-meltdown in the interbank lending market that threatened to unleash a cascade of defaults throughout the economy. Nor have the signs of financial stress been limited to the interbank market: Over the past few months, yields on Chinese government and corporate bonds have steadily risen, even as the economy slows.

The PBOC could, and did, halt the immediate liquidity crisis by injecting more cash. But in doing so, it effectively cedes control over monetary policy to the shadow banks. Runaway lending continues, bad debts mount even higher, and the need for more cash to paper over losses becomes that much more acute. Far from solving the problem, pumping in more cash just kicks the can farther down a dead-end street.

The implications of this brewing storm are bigger than many global investors realize. China’s credit-fueled investment boom has been a driver of metals prices and machinery exports. China has become the world’s largest automobile market, its largest oil importer, and its largest buyer of gold. Although foreign banks have relatively little direct exposure to Chinese financial markets, capital flows into and out of the mainland are potentially large enough to have a significant impact on asset classes not normally associated with China. A financial train wreck would send tremors through global markets.

The detailed blueprint for market reform published by the Communist Party in November encouraged many. China’s leaders clearly recognize that its economy needs to move in a new direction. But the first crucial step, weaning China away from its addiction to debt-fueled stimulus, is proving a lot harder than many imagined. China’s leaders are riding a runaway train that they don’t quite know how to stop. And they’re running out of track.

(Patrick Chovanec is managing director and chief strategist at Silvercrest Asset Management, and a former associate professor at Tsinghua University’s School of Economics and Management. Follow him on Twitter at @prchovanec.)

To contact the writer of this article: Patrick Chovanec at pchovanec@silvercrestgroup.com."

China's Coal BOOM

2014-01-10T09:08:00.004-08:00

China approved the construction of more than 100 million tonnes of new coal production capacity in 2013 – six times more than a year earlier. Reuters Link. Airmageddon!

The problem is of course that coal is cheap and despite great progress on renewables and nuclear these can never increase fast enough to outpace economic growth - for now.

Cheery Friday post bit next....

Of course when the Chinese bubble bursts as wages rise, productivity falls, energy costs rise and the construction boom collapses after the housing bubble bursts, things may change and pollution may improve. Until then - airmageddon will continue.

What is interesting (from academic paper perspective) is to map the "closed mines" relative to the newly "opened mines". I suspect this will match population densities and lobbying power of cities and provinces. This means a large shift in jobs (and detrimental health impacts). The winners in terms of jobs may well be the losers in terms of health.

China approves massive new coal capacity despite pollution fears [Reuters]

"BEIJING, Jan 8 (Reuters) - China approved the construction of more than 100 million tonnes of new coal production capacity in 2013 - six times more than a year earlier and equal to 10 percent of U.S. annual usage - flying in the face of plans to tackle choking air pollution.

The scale of the increase, which only includes major mines, reflects Beijing's aim to put 860 million tonnes of new coal production capacity into operation over the five years to 2015, more than the entire annual output of India.

While efforts to curb pollution mean coal's share of the country's energy mix is set to dip, the total amount of the cheap and plentiful fuel burned will still rise.

According to data compiled by Reuters, the National Development and Reform Commission (NDRC), China's top planning authority, approved the construction of 15 new large-scale coal mines with 101.3 million tonnes of annual capacity in 2013.
"Given that China's total energy consumption is still growing along with the economy, then coal production will continue to grow," said Helen Lau, senior commodities analyst with UOB Kay Hian in Hong Kong.

"While China is trying to foster consumption from other sources like hydro and nuclear, we expect actual coal production to grow 2-3 percent a year in the next five years."
Chinese coal production of 3.66 billion tonnes at the end of 2012 already accounts for nearly half the global total, according to official data. The figure dwarves production rates of just over 1 billion tonnes each in Europe and the United States.

Much of China's new capacity is in regions like Inner Mongolia and Shaanxi, reflecting a strategy to close small mines in marginal locations like Beijing and consolidate output in a series of huge "coal industry bases" that will deliver thermal power to markets via the grid.

While expanding output at such bases, China has shut more than 300 million tonnes of old capacity in the last decade, but critics say new mines are rapidly outpacing closures and the policy merely shifts China's environmental problems elsewhere.

"Despite the climate change pressure, water resource scarcity and other environmental problems, the coal industry is still expanding fast in northwest China," said Deng Ping, a campaigner with environmental group Greenpeace in Beijing.
"The scale of these coal bases has been rarely seen in other places in the world, with open-cast coal mines, coal power plants, and coal chemical plants all combined together."

The new projects involved a total investment of 54.1 billion yuan ($8.9 billion). In 2012, the administration approved just four coal projects with 16.6 million tonnes of annual capacity and a total investment of 7.8 billion yuan.

The list of approvals does not cover all mines launched in 2013, with many smaller projects under the purview of local authorities and not the central government. According to rules issued in December, coal mines producing more than 1.2 million tonnes per year need Beijing's go-ahead, while local governments can approve the rest.
It takes the NDRC months to announce new mine approvals, so other projects may have been passed in the fourth quarter. One 46 million-tonne mine was approved in December but the NDRC has yet to publish details. An NDRC spokesman was not available to comment.

TACKLING SMOG

With major cities hit by smog last year, the government has promised to ease its dependence on coal, a major source of air, soil and water pollution as well as climate-warming emissions.

It has issued guidelines to restrict mining in residential areas, improve quality and reduce overcapacity.

But coal is cheaper than all the alternatives and China is the world's biggest producer as well consumer. It is also far more reliable than intermittant energy sources like hydropower or wind.

The 2011-2015 plan said around 860 million tonnes of new coal production capacity will be brought into operation, as well as 300 more gigawatts of coal-fired power, twice the total generation capacity of Germany.

While Beijing said in September that it would cut the share of coal in its primary energy mix to "less than 65 percent" by 2017, down from 66.8 percent in 2012, consumption will still rise in absolute terms, with total energy demand set to grow 4.3 percent a year over the 2011-2015 period.

"The replacement of coal hasn't been as fast as expected, and other sources of energy are not only expensive but also face a lot of technical and environmental problems," said UOB's Lau.

The government's 2011-2015 energy plan put coal production capacity at 4.1 billion tonnes by 2015, but Lau said it may be much higher.

"We estimate China's total coal production capacity will be 4.7 billion tonnes by 2015 - I think the government figure is a big underestimation."

($1 = 6.0506 Chinese yuan) (Reporting by David Stanway; Editing by Richard Pullin)"

China Economics Blog

The End of the Chinese Miracle (FT)

Conducting field work in China

What Should Economists Know about the Current Chinese Hukou System?

What Should Economists Know about the Current Chinese Hukou System?

Are China's Financial Markets Deep and Liquid enough for RMB internationalisation?

Image of the day

Understanding Chinese Consumption: The Impact of Hukou

The Conflicted Emergence of the Renminbi as an International Currency

China: Size matters

Chinese capitalism - first default on bond payments

Shanghai Chaori in Default on Bond Interest Payments [Wall Street Journal]

BEIJING—A Chinese solar-equipment maker on Friday failed to meet interest payments on a bond, according to a company official there, becoming China's first domestic corporate bond default.

Research Paper: "How Far Can Renminbi Internationalization Go?"

Opium wars, trade and precious metals

Old Time Farm Crime: The Opium Wars [Modern Farmer]

"It was a major drug bust with more than 1,600 arrests and the confiscation of 11,000 pounds of a highly addictive substance.

What is interesting here is that Chinese imports of gold and silver and yet again reaching record levels.

"In a 50 year period prior to 1828, Britain paid out £27m in silver to the Chinese. During the same period they only sold about £9m of British goods to them. That balance shifted dramatically when the British went full bore into opium smuggling.

China rebalancing - rural income rises suggest light at the end of the very long tunnel

China Rural-Income Gains Aid Shift Toward Consumption [Bloomberg]

"Chinese incomes rose faster in the countryside than in cities for a third straight year in 2012 as migrant workers boosted their pay and the government strengthened the social safety net.

Retail Sales

Registration System

Major Tasks

Bigger Cake

Scared of shadows? You should be - China's shadow banks

China economic watch article. There are warning signs written all over the Chinese economy at the moment.

Meet China’s Biggest Shadow Bank [The Peterson Institute for International Economics]

China currency crisis to cause "global meltdown"

Currency crisis at Chinese banks 'could trigger global meltdown’ [Telegraph]

The growing problems in the Chinese banking system could spill over into a wider financial crisis, one of the most respected analysts of China’s lenders has warned.

Paper: "Consumption Based Estimates of Urban Chinese Growth"

"Air-pork-alypse"

Air-pork-alypse: Wuhan butcher cures bacon outdoors in the smog [Shanghaiist]

Journal: The Growth and Decline of the Modern Sector and the Merchant Class in Imperial China

The Growth and Decline of the Modern Sector and the Merchant Class in Imperial China

Abstract

Will China's $23 Trillion Credit bubble collapse - and collapse soon?

China's elite and their "offshore" assets

Offshore assets of China's elite revealed in leaked records [CBCnews]

Academic Paper: Sector-Level Productivity, Structural Change, and Rebalancing in China

Academic Paper: "Local Government Financing Platforms in China: A Fortune or Misfortune?"

The Middle Dream

Will the Renminbi Emerge as an International Reserve Currency?

Abstract

China's runnaway train - crash ahead?

China’s Runaway Train Is Running Out of Track [Bloomberg]

China's Coal BOOM

China approves massive new coal capacity despite pollution fears [Reuters]

"BEIJING, Jan 8 (Reuters) - China approved the construction of more than 100 million tonnes of new coal production capacity in 2013 - six times more than a year earlier and equal to 10 percent of U.S. annual usage - flying in the face of plans to tackle choking air pollution.

The scale of the increase, which only includes major mines, reflects Beijing's aim to put 860 million tonnes of new coal production capacity into operation over the five years to 2015, more than the entire annual output of India.

While efforts to curb pollution mean coal's share of the country's energy mix is set to dip, the total amount of the cheap and plentiful fuel burned will still rise.

Much of China's new capacity is in regions like Inner Mongolia and Shaanxi, reflecting a strategy to close small mines in marginal locations like Beijing and consolidate output in a series of huge "coal industry bases" that will deliver thermal power to markets via the grid.

While expanding output at such bases, China has shut more than 300 million tonnes of old capacity in the last decade, but critics say new mines are rapidly outpacing closures and the policy merely shifts China's environmental problems elsewhere.

The new projects involved a total investment of 54.1 billion yuan ($8.9 billion). In 2012, the administration approved just four coal projects with 16.6 million tonnes of annual capacity and a total investment of 7.8 billion yuan.

TACKLING SMOG

It has issued guidelines to restrict mining in residential areas, improve quality and reduce overcapacity.

But coal is cheaper than all the alternatives and China is the world's biggest producer as well consumer. It is also far more reliable than intermittant energy sources like hydropower or wind.

The 2011-2015 plan said around 860 million tonnes of new coal production capacity will be brought into operation, as well as 300 more gigawatts of coal-fired power, twice the total generation capacity of Germany.

While Beijing said in September that it would cut the share of coal in its primary energy mix to "less than 65 percent" by 2017, down from 66.8 percent in 2012, consumption will still rise in absolute terms, with total energy demand set to grow 4.3 percent a year over the 2011-2015 period.

"The replacement of coal hasn't been as fast as expected, and other sources of energy are not only expensive but also face a lot of technical and environmental problems," said UOB's Lau.

The government's 2011-2015 energy plan put coal production capacity at 4.1 billion tonnes by 2015, but Lau said it may be much higher.

"We estimate China's total coal production capacity will be 4.7 billion tonnes by 2015 - I think the government figure is a big underestimation."

($1 = 6.0506 Chinese yuan) (Reporting by David Stanway; Editing by Richard Pullin)"