Can China’s leaders revive the economy and reform it at the same time?

Can China’s leaders revive the economy and reform it at the same time?

May 18th 2013 | HONG KONG |From the print edition

EVERY economy, like every story, has two sides: supply and demand. The supply side of China’s economy is the stuff of legend: 767m workers, perhaps $20 trillion-worth of machinery, buildings and other kinds of capital, combined with rapidly advancing techniques and technologies, many of them assimilated from abroad. This combination of labour, capital and know-how dictates how much the economy can produce. But whether it actually does produce all it can depends on the other side of the economy—the demand side—which reflects the spending decisions of consumers and investors. The supply side sets the scene; the demand side provides the drama. Sadly, demand is recovering more slowly than expected. Figures released this week showed somewhat disappointing growth in fixed-asset investment and industrial production last month, following a similarly underwhelming first quarter. Economists who were expecting growth of 8-8.5% this year are now projecting something closer to 7.5%.

But as the drama darkens, the scene may also be shifting. A meeting of the State Council, China’s cabinet, on May 6th outlined a long list of structural reforms designed to improve the supply side of the economy. Some of the reforms, such as extending the value-added tax to services, are already under way. Others, such as liberalising capital flows, will reach fruition only gradually. The reforms are also in keeping with pronouncements by former leaders like Wen Jiabao, who liked to talk the reform-talk. But the new agenda “goes far beyond Wen-era platitudes in its boldness and specificity,” argues Andrew Batson of GaveKal Dragonomics, a consultancy in Beijing. The “walk-to-talk” ratio is improving, he believes. Read more of this post

About China’s capacity to absorb more capital

About China’s capacity to absorb more capital

Kate Mackenzie | May 22 10:30 | 42 comments | Share

We’ve all heard, many times, the story that China’s capital stock is nowhere near that of more advanced economies, therefore it will inevitably increase. And we can count on continued efforts to build roads, buildings, airports, and other infrastructure — just look at how the less-developed eastern provinces have been pouring money into new projects, the argument has gone, more recently. Or went. We really hope it’s not necessary, here, to go into the weaknesses of that argument. Here are a few places to start, but it’s partly a causal problem — does growth cause increased capital stock or vice versa? What kind of growth are we talking about, anyway? Fine. But surely investment is still a net positive if it creates infrastructure that people will actually use, sooner or later? Leaving aside the question of financing burdens, we’ve struggled here with the idea that there’s ‘bad’ and ‘good’ investment. How does one know, in the short term, which is which? Read more of this post

China Should Stop ‘Micromanaging’ Auto Industry, Researcher Says

China Should Stop ‘Micromanaging’ Auto Industry, Researcher Says

China should refrain from “micromanaging” the automotive industry and allow market competition to spur innovation and weed out weaker automakers, the Chinese Academy of Social Sciences said in a report.

The government should focus instead on building a fair and competitive environment and abandon monopolistic polices aimed at creating fewer and bigger automakers, the state-backed research institute said in an annual report on industrial competitiveness released this week. Read more of this post

China Rule Changes May Halt Copper-Financing, Goldman Says

China Rule Changes May Halt Copper-Financing, Goldman Says

New rules from China to control capital inflows are likely to end commodity-financing deals, hurting the short-term outlook for copper, analysts at Goldman Sachs Group Inc. wrote in a research report today.

The regulations from the State Administration of Foreign Exchange, effective from June, will probably mean an end to Chinese use of copper as a tool to enable interest rate arbitrage, Goldman said. The London Metal Exchange market may need to “carry” as much as 250,000 metric tons of additional physical copper over one to three months, about 4 percent to 5 percent of quarterly global supply, the bank said. Read more of this post

In China, food scares put Mao’s self-sufficiency goal at risk

In China, food scares put Mao’s self-sufficiency goal at risk

Wed, May 22 2013

By David Stanway and Niu Shuping

BEIJING (Reuters) – The discovery of dangerous levels of toxic cadmium in rice sold in the southern city of Guangzhou, the latest in a series of food scandals, has piled more pressure on China to clean up its food chain – possibly at the expense of Mao Zedong’s cherished goal of self-sufficiency.

The ruling Communist Party has long staked its legitimacy on its ability to guarantee domestic staple food supplies, and has pledged to be at least 95 percent self-sufficient even as demand increases and the fastest and biggest urbanization process in history swallows up arable land. Read more of this post

China’s Not Hiring; the number of new jobs advertised on leading recruitment website Zhaopin.com fell sharply by 22% in April, the steepest decline since Zhaopin started collecting data in 2010

May 22, 2013, 11:29 p.m. ET

China’s Not Hiring

By TOM ORLIK

China’s labor market has been a bright spot amid economic gloom. Strong jobs data over the past year has helped offset concerns about slowing growth. But there are signs employment is beginning to weaken too. The official job numbers in China are irregular and, in some cases, inaccurate. But other sources of data fill in the blanks. For instance, the number of new jobs advertised on leading recruitment website Zhaopin.com fell sharply in April. With the first quarter peak hiring season, some falling off in April is expected. But a 22% drop in new job postings from the previous month was the steepest decline since Zhaopin started collecting data in 2010. Business surveys suggest the downturn is broad-based across manufacturing and services too. The preliminary reading for the HSBC HSBA.LN -3.23% China Manufacturing Purchasing Managers’ Index in May showed factories trimming their workforce for a second month. Worryingly, the HSBC Markit services PMI also points to job losses. If labor markets are turning down, they are at least doing so from a position of strength. China’s private sector wages rose 14% in real terms in 2012 according the National Bureau of Statistics. Demand for workers outstripped supply by a record amount in the first quarter. The drop in new job adverts on Zhaopin came after a record high in March. Read more of this post

China’s SASAC Steps in to Save Bleeding SOEs

SASAC Steps in to Save Bleeding SOEs

By Kang Yi (康怡) and Zhang Xiangdong (张向东)
Issue 620, May 20, 2013
Over recent weeks, some of China’s biggest state-owned enterprises have been visited by their biggest investor – the State-owned Assets Supervision and Administration Commission (SASAC).  The supervisory body that administers the operations of more than a hundred of China’s biggest and most powerful state-owned companies has been dropping by the offices of those companies that have dragged down the overall profits of the state sector in 2012 with their huge losses.  Read more of this post

Local government financing platforms have “prominent potential risks” that pose grave challenges to controlling debt, the China Banking Regulatory Commission (CBRC) said

05.22.2013 15:58

Risks in Financing Platforms Pose a Challenge, CBRC Says

Regulator’s calculations show debts have risen to 9.5 trillion yuan, 50 percent more than government revenues last year

By staff reporter Wen Xiu

(Beijing) – Local government financing platforms have “prominent potential risks” that pose grave challenges to controlling debt, the China Banking Regulatory Commission (CBRC) said in a recent meeting. The debts they have taken on are a heavy burden on public finance, the banking regulator said. The CBRC’s calculations show that the amount of outstanding platform debts has reached almost 9.5 trillion yuan this year, not including those borrowed through trust products. That is more than 50 percent higher than local governments’ revenue last year, and up to 40 percent of the debts will mature within the next three years. The CBRC aims to stop platform loans from further increasing and wind down existing loans orderly while guaranteeing the financing needs of important projects. But the task is getting harder to achieve because local governments are electing leaders and new officials always tend to splash out on investments, the regulator said. The platforms have increasingly relied on bank loans to finance new projects because most other channels to raise funds have been blocked over risk concerns, the CBRC said. That said, the banking regulator noted that some financing platforms had been circumventing restrictions to borrow through less-regulated channels because they could not get loans from banks. Many local officials resorted to personnel connections with bankers to try to get more loans, a bank executive said. But that means cutting into others’ lending quota because the overall amount of loans banks can make to financing platforms had been capped, he said. That is all the more concerning from a regulatory perspective, the CBRC said, since local small banks could be forced to bend lending rules.

Honeymoon’s Over for Sweethearts of SOE Reform; Less than two years after tying the knot, Ping An Trust’s relationship with Jahwa Group, held as a model for SOE reform, is on the rocks

05.22.2013 18:19

Honeymoon’s Over for Sweethearts of SOE Reform

Less than two years after tying the knot, Ping An Trust’s relationship with Jahwa Group is on the rocks

By staff reporters Shen Hu, Zheng Fei and Wang Xiaoqing

Corporate wedding bells were ringing in 2011 when a trust controlled by insurer Ping An Insurance Group forged a partnership with a Shanghai-based cosmetics maker called Jahwa Group and its listed subsidiary Jahwa United. The tie-up was duly praised for diversifying Jahwa’s ownership in line with a Chinese government push to reform the shareholder structures at state-owned enterprises (SOEs). China Ping An Trust Co. paid the Shanghai government’s Municipal State-owned Assets Supervision and Administration Commission some 5.1 billion yuan for 100 percent of Jahwa Group. It also got a 27.8 percent stake in Jahwa United. But what looked like a match made in corporate heaven – and a model for SOE reform – is now on the rocks. Read more of this post

Chinese enterprises are expanding overseas rapidly and on a large scale, but many of these projects are seeing poor returns

Chinese Enterprises Struggle Overseas

By Sun Qizi (孙琦子)
Issue 620, May 20, 2013
Chinese enterprises are expanding overseas rapidly and on a large scale, but many of these projects are seeing poor returns. China Mobile Communications Corporation (CMCC), for example has invested in six major overseas projects since 2005. But according to data from the National Audit Office, among these projects three have suffered losses altogether totaling nearly 3.2 billion yuan. Why do so many of these projects fail to take off? How does one choose an overseas investment that will see a reasonable return? Economic Observer asked Xu Jing (许京), vice president of China International Trade Association, Chen Weidong (陈卫东), chief economist at the Energy Economics Research Institute of China National Offshore Oil Corp, Andrew Zhu (朱桉), a tax partner and cross-border mergers and acquisitions specialist at Deloitte, and Claire Yang, managing director of Accenture Greater China. Read more of this post

Overcapacity set to blight China’s LED industry

Overcapacity set to blight China’s LED industry

Staff Reporter 2013-05-23

The same overcapacity issues that rocked China’s solar power sector now threaten to take their toll on the country’s LED industry, the Chinese-language Beijing Business Today reports. A recent announcement by the Shenzhen city government that it will suspend its 2009-2015 plan to develop the local LED industry has sparked concerns that it may soon suffer a similar fate as the photovoltaic industry, with the solar sector seeing a capacity utilization rate of 60%. When the Shenzhen government first revealed its plan in March 2009, it declared the city would become an global base for the industrial development, research and manufacture of LED products. In the same year, 44.3% of China’s’s LED businesses were based in Shenzhen, with a further 24.7% in other cities in the southern province of Guangdong. Luo Qi, general manager of Zongke Optoelectronics Equipment, a Shenzhen-based LED company, said that he was yet to be received confirmation concerning the government’s suspension of its investment plan, though it is not a surprise as the industry has already encountered a series of operational difficulties, with high costs and excess inventories resulting in overcapacity. According to market research website gg-ii.com, over 80 LED enterprises in Shenzhen closed down last year alone. Chen Yansheng, deputy chairman of the China Association of Lighting Industry, also forecasts that more companies will face economic difficulties in the near future due to the expected increase in companies within the upstream LED chip manufacturing industry this year. Last year, several LED companies recorded a significant drop in their sales and net profit, with LED chip maker Elec-Tech International recording a net profit of 168 million yuan (US$27.4 million), down by 57% from the previous year. Luo said his company’s orders had steadily declined from October and so far this year, the volume of orders has fallen by 40%-50%, compared with the same period last year. He Zaihua, a senior researcher at CI Consulting, said the key to resolving the overcapacity crisis is in the hands of those in the LED sector and the government. Companies must take active measures to expand both the overseas and domestic markets, while trying to expand their core technology research and development at the same time, he added.

Luxury brands to be sold at supermarkets in China

Luxury brands to be sold at supermarkets in China

Staff Reporter

2013-05-23

Luxury goods brands are breaking the confinements of major department stores and boutiques to enter supermarkets in cities across China, reports the Chinese-language Guangzhou Daily. Some experts note that the move is in response to the recent sluggish demand for luxury goods but added that offering discounts on their products and entering the new market may not be enough, the paper said. China’s largest domestic retailer, Lianhua Supermarket, recently began to sell seven brands of luxury products in its outlets, including international brands Gucci, Prada and Armani. A representative of Okaicheng, a luxury brand agent that will help sell the products, said that Lianhua’s decision to sell luxury goods in their stores was based on appealing to the company’s 2 million store-value card holders. In the first two hours of the luxury goods being place on the supermarket shelves, Okaicheng closed six deals, four of which were carried out by store card customers. It’s hard to imagine purchasing high-end items at a supermarket, since many consumers that purchase luxury goods prefer a topnotch shopping environment and experience, a luxury goods salesman told the paper. Ms Li, who often buys luxury brands, said that “Luxury goods are no longer luxury goods once they are sold in a supermarket, they become like oil, rice and salt.” Luxury goods have suffered from sluggish sales in China this year. Fondazione Altagamma, the Italian luxury goods industry trade association, reported recently that due to slowing sales in Europe and the global economic slowdown, luxury-goods sales are expected to grow by only 4%-5% this year, lower than the 5% growth achieved in 2012. The current market climate has led Gucci and Louis Vuitton to slow down the pace of their expansion in China, the Guangzhou Daily said.