China: Delta blues; Shoppers will have to pay more as the world’s factory comes under wage and labour strain

China: Delta blues; Shoppers will have to pay more as the world’s factory comes under wage and labour strain

January 22, 2014 7:06 pm
China: Delta blues
By Demetri Sevastopulo
Shoppers will have to pay more as the world’s factory comes under wage and labour strain
Gerhard Flatz, the general manager of an Austrian factory in China that makes high-end skiwear for European brands, has a problem. He cannot find enough skilled seamstresses even though top performers can earn $1,500 a month, about eight times the local minimum wage in Heshan.
“China has a shortage of skilled labour,” says Mr Flatz during a tour of the Heshan factory southwest of Guangzhou.

As he walks past the pattern room where his most talented employees work, the garrulous Austrian explains that he is careful not to reveal their names to prevent poaching.
“This is like the NSA”, he says with a smile, referring to the most secretive branch of the US intelligence services.
Heshan is just one of the many cities in Guangdong that has transformed the province into the factory of the world. Shenzhen, the home to companies such as Huawei and Tencent, is another.
When Christina Zhang moved to Shenzhen in 1983, the rural fishing county was a far cry from the booming city it has become in the three decades since Deng Xiaoping created China’s first special economic zone .
“Most of the area was paddy fields,” says Ms Zhang, who works at PCH International, a logistics company. “I learnt how to ride my bicycle on Shennan Road. There were no cars [but] now it is the main road.”
Since Deng launched his economic reforms in 1979, Shenzhen has changed from a tiny county of 30,000 people across the border from Hong Kong to a metropolis of 10m with one of the highest per-capita incomes in China.
Shenzhen, Guangzhou, Dongguan, Foshan and other regional cities form the heart of the Pearl River Delta, a region of 56m that is vital to the world economy because it produces everything from bicycles to jeans and sex toys to iPads.
Dongguan alone made about 30 per cent of the toys delivered over Christmas around the globe. Yao Kang, deputy Communist party secretary of the city, says it also makes 20 per cent of the sweaters and 10 per cent of the running shoes worn by consumers. As locals say: “When there is a traffic jam in Dongguan, the world runs out of supplies.”
Underscoring its phenomenal growth, Guangdong last week estimated that its economy grew 8.5 per cent to Rmb6.33tn ($1.05tn) in 2013, which would sandwich it between South Korea and Indonesia.
The PRD has managed to produce cheap goods for so long because millions of migrants have been willing to work in factories making products they can rarely afford. In Shenzhen, authorities plan to raise its minimum wage by 13 per cent to Rmb1,808 next month. Although the city has the highest minimum wage in China, it would take a worker two months to earn enough to buy an iPad Air.
But the system is coming under strain in ways that affect everyone from London shoppers to young Chinese in Guangdong: workers are harder to find, wages are rising rapidly, raw material and land prices are going up, the renminbi is getting stronger and other regions are becoming increasingly attractive for manufacturing.
The obvious challenge to the region is labour costs, with wages in Guangdong rising at double-digit rates each year. That is unlikely to change since China is targeting nationwide annual increases of 13 per cent in its 2011-15 five-year plan, as part of a push to spur consumption and reduce the economy’s dependence on investment.
Roger Lee, chief executive of TAL, a Hong Kong company with 11 factories in Asia that produces clothes for dozens of global brands, says wages have doubled over the past five years. In 2008 its Dongguan factories made clothes at half the cost of its facilities in Malaysia and Thailand but that gap has since disappeared.
Crystal Group, one of Asia’s largest apparel companies with 11,000 workers in Dongguan, says organic costs – including wages and the strengthening renminbi – have risen 10-12 per cent over the past five years. As a result, it has been forced to shift production of commodity items such as polo shirts and underwear elsewhere.
“Our strategy is to . . . produce them in cheaper countries like Vietnam or Cambodia,” says Dennis Wong, executive director. “That is why we are still surviving.”
While some companies such as Crystal are shifting production to southeast Asia, others are moving to cheaper parts of China. Samsonite, the luggage maker that outsources about 65 per cent of its production to Chinese companies, has seen many of its vendors move to provinces around Shanghai in the Yangtze River Delta.
“About 80 or 90 per cent of the people we were working with were based in southern China,” says Tim Parker, chief executive of Samsonite. “Now probably the majority . . . we purchase comes from eastern China”.
Despite rising labour costs, any decision to leave the delta is not easy for foreign companies and their local manufacturers. Its ecosystem – everything from clusters of suppliers to road and rail infrastructure to access to ports in Shenzhen and Hong Kong – is hard to match elsewhere without sparking other cost increases.
Nick Debham, Asia head of consumer markets at KMPG, says textile manufacturers, for example, can shift lower-skilled production to countries such as Bangladesh and Cambodia relatively easily, although wages in those countries are also rising. But other industries, such as toy manufacturing, which is concentrated in south China, are less mobile as they rely on concentrated clusters of suppliers.
“There are so many ancillary bits and pieces that need to be in place, it is difficult to move the whole thing lock, stock and barrel out of China,” says Mr Debham.
For companies that are contemplating moving inland in China instead of overseas, the decision is no easier. Mr Lee of TAL says his company conducted a study five years ago that concluded that moving inland would cut labour costs by 15 per cent but that the level of infrastructure would not be as good as in Guangdong.
For manufacturers that cannot easily relocate, one solution is to automate more. Samsonite’s Mr Parker says his Chinese vendors are doing exactly that. He says there is plenty of scope since many Chinese factories use far more basic equipment than, for example, those the suitcase maker employs in its own facility in
Belgium.
“In China . . . you will find a totally different set-up and it is driven . . . by the relatively low cost of labour,” says Mr Parker. “That’s all changing because as the costs of labour increase, so some of our more enterprising suppliers are beginning to invest in more . . . sophisticated sewing equipment in order to reduce the labour content.”
Some local governments, such as Dongguan, are trying to accelerate that process with subsidies. Mr Yao, the deputy party secretary, points to the knitting town of Dalang as a successful example, saying that its factories used the government funds to buy 40,000 computerised knitting machines, reducing the need for 200,000 workers.
While manufacturers juggle solutions to rising labour costs, the trend is expected to get worse for various reasons. Rising wages are partly due to local governments raising the minimum levels. In its 2011-15 economic plan, Guangdong is targeting a 40 per cent rise. But the driving cause is factories being forced to pay more to attract workers amid an increasingly tight labour market.
Several factors explain the scarcity of workers but the main reason is demographics. As a result of its one-child policy, China’s working-age population – people between the ages of 15 and 59 – fell by 3.45m to 937m in 2012, in what was the first decline in many years.
The labour squeeze is exacerbated in the PRD as migrant workers now have greater opportunities in their home provinces. These new opportunities are a result of central government policies aimed at promoting inland development to reduce the income gap with rich coastal regions. The “go-west” strategy is creating jobs in the interior that are particularly attractive to women who in the past left their children and moved to Guangdong for factory jobs.
Another reason manufacturers are having to pay more is that workers are increasingly picky about jobs, since they have more choices as the PRD labour market shifts in their favour. Young workers are also less willing than earlier generations of migrants to toil in factories.
The explosive growth in smartphones and Weibo and Weixin – known as WeChat in English – one of the most popular social media services in China, has further empowered workers by making it easier for them to learn about other factories that may have better conditions.
Factories say finding female workers is increasingly difficult. The one-child policy, coupled with the general preference for male children, has skewed the gender balance, reducing the number of female workers. But young women also increasingly prefer service industry jobs over more arduous production line work.
The demographic and economic trends that are sparking higher wages in the PRD are forcing multinationals to raise prices, put more pressure on their suppliers to cut costs or simply accept lower profits.
But some manufacturers, such as KTC in Heshan, say a more serious issue than rising wages – which can be absorbed at a cost – is the difficulty in finding enough workers with the right skills to allow production to continue.
KTC has opened a factory in Laos but, as in the case of Crystal Group, the workers there make less complicated garments than in Heshan because they do not have the same skills as their Chinese peers.
Top Form, a Hong Kong lingerie maker, faces a similar problem. Kevin Wong, executive director, says it closed a factory in Shenzhen and opened one in Cambodia in 2011.
Mr Wong says that although wages in the southeast Asian nation are
one quarter of the level in Shenzhen, that was not the main reason for the move.
“It was never the labour cost. Once you don’t have the people, the overhead just kills you,” says Mr Wong, explaining that it was becoming impossible to find enough workers in Shenzhen.
Regardless of the industry, the challenges in the PRD are forcing all manufacturers to find cost-cutting solutions, with the most extreme one being relocation from China. But Mr Debham says talk of multinationals abandoning China are overblown, and that many companies do not follow through on their repeated threats to leave China.
“People think that the cost issues in China and the labour issues in China will inevitably force low value-added production out of China, but it is still there,” says Mr Debham.
Given the scale of manufacturing in the PRD, the region is likely to remain the world’s factory for a long time. But manufacturers in the region and consumers buying the products face a pricier future.
William Fung, chairman of Li & Fung, the big global sourcing company that procures products for everyone from Walmart to Target, says rising labour and raw material costs mean the model that served China and the world for 30 years has changed for good.
“The era where China subsidised the world’s standard of living – by giving them really affordable goods from 1979-2009 – is basically over,” says Mr Fung. “People will pay what other people will probably say is a proper price.”
Policy: Keep the cage but change the bird
Manufacturers are not alone in worrying about cost pressures in the Pearl River Delta. Guangdong is also promoting policies that it hopes will prevent it from losing economic competitiveness.
In what Wang Yang, the former Communist party secretary of Guangdong, referred to as “Teng Long Huan Niao” – “Keep the cage, but change the bird” – the province wants to replace inefficient low-cost and labour-intensive manufacturing with more high-tech and service companies and “greener” manufacturing.
As part of that push, it is developing several new economic zones to attract knowledge-based industries. They include Qianhai in Shenzhen, which it hopes to turn into a financial centre, and Nansha port in Guangzhou.
Guangdong is also talking to Hong Kong and Macau about creating a big free-trade zone with the two Chinese special administrative regions. In Guangzhou, Jim Barber, president of UPS International, said the zone would provide an important boost to the region by facilitating cross-border trade and logistics.
The proposal has taken on greater urgency since the central government unveiled a free-trade zone in Shanghai that is expected to provide a boost to the Yangtze River Delta, one of the main competitors to the PRD in China.
Xiao Geng, a PRD expert at the Fung Global Institute in Hong Kong, says the delta needs to push ahead with integration to facilitate knowledge-based industries. But he says it is moving too slowly, mainly because of the fragmented nature of the region, which includes many local governments in addition to Hong Kong and Macau.
Guangdong officials are worried about losing economic ground to Jiangsu – an increasingly prosperous Yangtze River Delta province – particularly since Hu Chunhua, the Guangdong party secretary, is a possible candidate to replace Xi Jinping as president roughly a decade from now.
The PRD received a boost in 2012 when Mr Xi chose to make his first trip as the new Communist party leader to Shenzhen, following in the footsteps of Deng Xiaoping’s southern tour three decades before. “We came here to . . . show that we’ll unswervingly push forward reform and opening up,” Mr Xi said.

Chinese hoteliers hope to catch a falling star

Chinese hoteliers hope to catch a falling star
By Josh Noble in Hong Kong

January 22, 2014 3:53 pm
In austerity China, only one thing can top a five-star rating: a four-star rating.
Last year, more than 50 Chinese hotels asked to have their five-star ratings downgraded, according to state-run news service Xinhua, as they attempt to regain business from chastened Communist party officials.
A number of other hotels have suspended their applications for five-star gradings in the hope of staying on government registers of acceptably austere accommodation.
The newfound humility of the hotel sector is the latest sign of Beijing’s running battle with bling.
President Xi Jinping, who came to power last year, has launched a nationwide campaign to stamp out the kind of lavish spending that became the norm for those in all echelons of the party apparatus at the height of China’s boom.
The aim is not only to quell corruption and waste but also to relieve potential social pressures from the wide and worsening inequality in one of the fastest growing economies.
It has sent shockwaves across the luxury industry, hitting products from Swiss watches to sports cars to shark’s fin soup.
Even as the festive lunar new year period approaches, banquets and parties have been cancelled while officials have been ordered not to accept the bribes – or “gifts” – to which many had become accustomed.
Other strict instructions include “travelling with smaller entourages, simplifying receptions, and practising frugality”, according to Xinhua. Government workers have been told to leave only clear dinner plates after a meal so as not to be accused of over-ordering at the taxpayer’s expense.
The result has been a plainer form of celebration as the country prepares to ring in the year of the horse. Toothpaste has replaced the iPad on the new year’s gift list, while the annual raffle no longer comes with a prize. Instead, workers are heading to the staff canteen.
Beijing’s clampdown on conspicuous consumption has spread far beyond the civil service. Many of China’s richest business people plan to cut down on giving presents over Chinese New Year, according to a report by wealth-tracker Hurun.
The excesses of the rulers were made clearer during the trial of Bo Xilai, the now-jailed former party head of Chongqing, a city-province of more than 30m. During his corruption hearing, details emerged of his personal fortune, a family villa in the south of France and of African getaways on private jets.
The round of belt-tightening has hit hotel operators particularly hard owing to the loss of banquet business and overnight guests. Chen Miaolin, vice-president of the China Tourism Association, told Xinhua that hotel revenue fell by around a quarter last year, in an economy growing more than 7 per cent.
But, as always in China, there are opportunities amid the crisis. Mr Chen, who also owns a chain of hotels, plans to close one of them after the new year holiday and reopen it as a nursing home. For him, silver may be the new gold.

Chinese offshore holdings: Xinhua reported it years ago

Chinese offshore holdings: Xinhua reported it years ago
23 January 2014 9:30AM
The fallout from a report on the secret offshore holdings of China’s business, military and political elites continues.
In case you missed it, here’s a brief summary of the report, compiled from leaked financial documents by the International Consortium of Investigative Journalists (ICIJ):
Relatives of at least five current or former members of China’s Politburo Standing Committee, the country’s most powerful decision making body, have incorporated companies in the Cook Islands or British Virgin Islands (BVI).
The files include details of a BVI company, Excellence Effort Property Development, 50% owned by Deng Jiagui, the brother-in-law of President Xi Jinping.
The Hong Kong office of Credit Suisse registered a BVI company for Wen Yunsong, son of former premier Wen Jiabao, while his father was still in office. Other western banks and consulting firms, including PricewaterhouseCoopers and UBS, also helped elites set up companies in tax havens.
Others notable persons include heads of state-owned enterprises, more than a dozen of the country’s wealthiest men and women, and members of the National People’s Congress,
It is estimated between US$1 trillion and US$4 trillion in untraced assets have left the China since 2000.
While the use of tax havens is not necessarily illegal, the revelations add to the increasing scrutiny of the accumulation of vast wealth by China’s powerful and well connected elite.
At the time of writing, the websites of many news outlets that had published details of the report were blocked or partially blocked in China. These include the website of the ICIJ itself, El País, a Uruguayan newspaper, France’s Le Monde, CBC of Canada, and The Guardian, which ran with the story on the front page of its UK edition Wednesday.
The Chinese internet has been scrubbed clean of news of the report. The Weibo blog account of the ICIJ has been deleted. A keyword search for ‘ICIJ’ and ‘China offshore’ on Baidu, China’s (censored) Google equivalent, turns up only one relevant search result: a discussion on Zhihu, a web forum known as a relatively free space for the exchange of online opinion. Zhihu is one of the services many Chinese are turning to as they abandon Weibo, which has been subject to a fierce crackdown on freedom of speech since the inauguration of President Xi.
Ironically, another Baidu search for ‘British Virgin Islands tax avoidance’ returns hundreds of results for pages that promise to explain the process of moving funds offshore.
The revelations come at an awkward time for the Chinese leadership. President Xi has led an anti-corruption drive in the government since coming to power. He has promised to target ‘tigers’ as well as ‘flies’ in the fight. Along the way his government has imprisoned civil activists who call for the full disclosure of officials’ assets. One prominent activist, Xu Zhiyong, went on trial the day the ICIJ report was published.
With the heads of many powerful state owned enterprises, titans of private industry — and the president’s own brother-in-law — now revealed to be hiding massive wealth abroad, Xi’s anti graft drive faces a make-or-break challenge to its credibility.
The ICIJ findings are a scandal, for sure. But they’re hardly a surprise. Reports on the secret wealth of the Chinese elite have been surfacing for several years now, thanks to extensive investigations by the New York Times, Bloomberg and others. The ICIJ report merely gives us an idea of the scope of the wealth being amassed.
There’s one other reason why the ICIJ findings aren’t necessarily a surprise. Official state media news agency Xinhua (hardly a bastion of investigative reporting) reported on Chinese companies’ exploiting the BVI as a tax haven back in November 2005. The Chinese language article is here. The author cites official statistics that ‘of the more than 80,000 companies registered in the BVI, around 20,000 have relations with Chinese enterprises.’ The report says Chinese enterprises are heading to the BVI for tax avoidance in droves.
The author goes on to interview Robert Matta, CEO of the BVI Financial Services Commission. Matta is asked, ‘How can Chinese enterprises take advantage of offshore centres to avoid taxes?’
It appears a lot of people read his answer.

For Liquor Makers, Cheer Dries Up in China; Liquor Companies Reeling From a Gift Crackdown Likely Won’t See Relief Soon

For Liquor Makers, Cheer Dries Up in China
Liquor Companies Reeling From a Gift Crackdown Likely Won’t See Relief Soon
PETER EVANS
Jan. 22, 2014 11:20 a.m. ET
LONDON—More than a year after the Chinese government banned extravagant gift giving and scaled back state-funded banquets, liquor makers are starting to feel punch drunk.
The crackdown on conspicuous consumption—part of an anticorruption drive led by President Xi Jinping —has hit spirits companies harder than most. Profit warnings, executive departures and restructuring drives have all been linked to the ban.
One potential opportunity for a revival is the coming Lunar New Year celebration over two weeks starting Jan. 31, traditionally the busiest sales period of the year for drinks companies in China. But the omens for a shot of New Year’s cheer don’t look good.
“No significant recovery can be expected due to the Chinese New Year,” Rémy CointreauSA, RCO.FR +0.34% the maker of Rémy Martin cognac, said Tuesday.
China is the world’s biggest alcohol market, making up 38% of global spirits consumption, according to the International Wine & Spirit Research industry body. The country is especially important for cognac makers: Rémy Cointreau derives about 40% of its total profit from cognac sales in China, while sales of the French liquor account for 15% of Pernod Ricard
SARI.FR +0.37% ‘s earnings.
At first, it was Chinese companies—especially those making baijiu, a rice-based white spirit—whose sales plummeted, some by more than 50% last year. But now, international competitors such as Pernod and Rémy Cointreau of France and DiageoDGE.LN +0.45%
PLC of Britain also have started to feel the heat.
Rémy said sales of its flagship cognac fell 35% in the three months through December as the group sharply reduced its shipments to China and tried to run down inventories that have piled up since the crackdown on corruption began.
Rémy said late last year that it expected operating profit in fiscal 2014 to drop 20%. Former Chief Executive Frédéric Pflanz blamed the “situation in China” for the profit warning. He resigned this month citing personal reasons, although some analysts have speculated that poor performance led to his departure.
The Lunar New Year marks an extended period of celebration in many other Asian countries. In China, giving expensive liquor—especially cognac—to gain favor with officials is common throughout the festival.
In the run-up to last year’s celebration, the Chinese government banned soldiers from drinking liquor at official banquets and toned down the lavish parties thrown by state-owned companies. Television commercials for expensive luxury gifts also were banned.
Although official sales figures aren’t released, analysts said spirits sales in China were down during Lunar New Year 2013. This year, many expect sales to fall again.
“It is a critical watershed for the spirits companies in Asia,” said Trevor Stirling, an analyst at Sanford C. Bernstein & Co. A “nightmare scenario” could emerge for Western liquor makers—as it did in Japan during the so-called lost decade of the 1990s—with patterns of entertainment changing for good and consumers reverting to less-expensive local spirits, he said.
The effect of such a shift would be catastrophic for the world’s leading beverage companies, many of whom rely on China to drive growth as Western markets remain sluggish.
Evidence of a slowdown is mounting. Overall spirits volume in China is expected to rise an average of 16% a year through 2016, down from 21% growth between 2006 and 2011, according to data tracker Euromonitor International.
Some of the decline can be attributed to China’s slowing economic growth. The country’s economy expanded 7.7% in the fourth quarter from a year earlier, slower than the 7.8% posted in the third quarter. But executives said the government’s austerity drive is eating into sales.
Pernod Ricard, the world’s second-largest distiller, warned late last year that the situation in China would weigh on profit this year. Diageo, the biggest, said government policies in China led to a substantial decline in sales of its Shui Jing Fang brand of baijiu, which the company bought outright last year.
Warwick Every-Burns, interim chief executive of Australia’s Treasury Wine Estates Ltd.TWE.AU -1.83% , the world’s No. 2 listed winemaker, said austerity measures in China were sapping demand and making forecasting for 2014 uncertain.
“We are observing signs that consumer pull-through in China is softening,” Mr. Every-Burns said, speaking at his company’s annual meeting. Treasury Wine declined to comment on recent sales in China, citing a quiet period before it releases its results in February.
Still, the size of the Chinese market means drinks companies are exploring ways to beat the government’s crackdown on elaborate gift giving. Consulting firms working in China said they had requests from clients in the spirits industry to help reposition their high-end products to fit in with austerity.
“Brands want to move away from signs of being visibly expensive,” said Adam Xu, a Shanghai-based director at management consulting firm Booz & Co. “There is now more of a focus on success than luxury.”

China’s First Default Is Coming: Here’s What To Expect

China’s First Default Is Coming: Here’s What To Expect
Tyler Durden on 01/22/2014 20:46 -0500
As we first reported one week ago, the first shadow default in Chinese history, the “Credit Equals Gold #1 Collective Trust Product” issued by China Credit Trust Co. Ltd. (CCT) due to mature Jan 31st with $492 million outstanding, appears ready to go down in the record books.
Of course, in a world awash and supported by moral hazard, where tens of trillions in financial asset values are artificial and only exist due to the benevolence of a central banker, it would be all too easy to say that China – fearing an all too likely bank run on comparable shadow products (of where there a many) as a result – would just step in and bail it out. However, at least until today, China has maintained a hard line on the issue, indicating that as part of its deleveraging program it would risk a controlled default detonation, in order to realign China’s credit conduits even though such default would symbolically coincide with the first day of the Chinese New Year.
In turn, virtually every sellside desk has issued notes and papers advising what this event would mean (“don’t panic, here’s a towel”, and “all shall be well”), and is holding conference calls with clients to put their mind at ease in the increasingly likely scenario that there is indeed a historic “first” default for a country in which such events have previously been prohibited.
So with under 10 days to go, for anyone who is still confused about the role of trusts in China’s financial system, a default’s significance, the underlying causes, the implications for the broad economy, and what the possible outcomes of the CCT product default are, here is Goldman’s Q&A on a potential Chinese trust default.
From Goldman Sachs: A Matter of Trust
Q. What has happened?
Local and international media (e.g. Caixin, Financial Times) have reported that a RMB 3bn three-year investment trust issued by China Credit Trust Company (CCT) is at risk of not making its principal repayment due investors on January 31 (which also happens to be the first day of the Chinese New Year). The trust assets were used to make a loan to a coal mine company for mine acquisition and related investments, but the company has still not received licenses related to two of five planned mines, and the owner of the company was reportedly arrested in 2012 for illegal deposit taking. It has been reported that ICBC referred the project to CCT, which structured the trust product as a “collective trust” rather than a “single trust” that typically is used by banks to securitize loans. The trust was sold through ICBC to approximately 700 private banking clients, and reports suggest that ICBC will not guarantee investors in the trust against losses. Our China banks team published detailed information on the trust structure, as well as shareholders and financials of the trust company (see “CCT trust product risk; potential scenarios imply slower trust/TSF growth”, January 20, 2014).
Q. What exactly is a Chinese “trust” and how is it structured?
A trust is essentially a private placement of debt. Investors in the trust must meet certain wealth requirements (several million RMB in assets would not be unusual, so the investors are either high net worth individuals or corporates) and investments have a minimum size (e.g. RMB 1mn). The appeal is a much higher yield than can be obtained through conventional bank deposits, in many cases 10% or higher, versus regulated multiyear bank term deposit rates in the low single digits. Trusts invest in a variety of sectors, including various industrial and commercial enterprises, local government infrastructure projects (via LGFVs), and real estate.
As our banks team noted, 29% of trust assets are invested in higher-risk industrial or commercial sectors.
A trust is not to be confused with a “wealth management product” (WMP). WMPs are available to a broader group of individuals, with much smaller minimum investments. They are typically sold through and managed by banks or securities brokers, with or without a guarantee of the payment of interest or principal (WMPs featuring explicit guarantees are booked on banks’ balance sheets; for other non-principal guaranteed products, implicit guarantees may be assumed by some investors). Funds from WMPs may be invested in a range of products including corporate bonds, trust loans, interbank assets, securitized loans, and discounted bills—so WMPs are best thought of as a “money market fund” or pool for other financial products.
Q. How do trusts fit within the “shadow banking” sector in China?
Trust assets total some RMB 10trn as of late 2013. Though small as a share of the total stock of credit in China (Exhibit 1), trust assets have been growing at an annual rate of over 50% in recent years. The net new credit extension from trusts approached RMB 2trn in 2013 based on estimates from our bank analysts, or more than one-tenth of broad credit flow (total social financing) for the year. (Please refer to the “CCT trust product risk” note cited above for further detail on trust asset growth and composition.)
Exhibit 1: Trusts still small as a share of total financing, but growing rapidly

Source: Goldman Sachs Global Investment Research.
Some clients have asked about comparisons between the Chinese trusts and the SIVs (structured investment vehicles, sometimes known as “conduits”) that were prominent in the US financial crisis. The SIVs were off-balance sheet vehicles generally funded with short-term commercial paper (“asset-backed commercial paper”) with a period of a few days to a few months. Initially, these SIVs invested in relatively low risk, short-term receivables, although over time exposures shifted towards more complex, longer-term structured products such as subprime mortgage-backed securities or collateralized debt obligations. As doubts about asset quality began to arise in 2007, market funding conditions for the SIVs quickly deteriorated, requiring sponsoring banks to provide liquidity support and ultimately consolidate these assets on the balance sheet, which exacerbated funding pressures as well as asset write-downs. Similarities to Chinese trusts include the linkages with banks, the off-balance sheet nature of the trusts (true for many WMPs also), and the maturity transformation aspect (though it should be noted this is less extreme in the case of trusts, where investors are often committed for a period of a year or more, than for most SIVs; even WMPs typically have commitments of 3-12 months). Important differences include the relatively simpler assets of Chinese trusts – often loans, as in the CCT example – and the fact that the Chinese banking system is funded domestically (many SIVs raised funding across borders).
Q. Why is the potential default of a trust important?
With a large volume of trust products scheduled to mature this year, who bears the losses in the event of a default could set an important precedent. In our detailed research on the China credit outlook last year (see “The China credit conundrum: risks, paths, and implications”, July 26, 2013), we explicitly identified “removal of implicit guarantees” as one of four potential ‘risk triggers’ for a broader credit crisis. If the realization of significant losses by investors causes others to pull back from funding various forms of “shadow banking” credit, overall credit conditions could theoretically tighten sharply, with consequent damage to growth.
From the perspective of policymakers, the default of a trust under the current circumstances might be seen as having less risk of contagion than some other “shadow banking” products. First, the trust is explicitly not guaranteed by either the trust company or the distributor. Second, the investor base of a trust is typically a relatively small group of wealthy/sophisticated investors (the minimum investment in the CCT trust mentioned above was RMB 3mn). This contrasts with broadly offered wealth management products, which have many more individual investors with less investment experience and more modest personal finances. Third, the particular circumstances of this trust (lending to an overcapacity sector, failure to obtain key business licenses, arrest of the borrowing company’s owner) might make it easier for authorities to portray as a special case. Put another way, if the authorities felt obliged to provide official support to this product, it is not clear under what circumstances they would be comfortable letting any trust or wealth management product default.
Q. What are the options for policymakers?
The fundamental issue for policymakers is how any losses would be distributed among 1) investors, 2) the trust company and/or distributing bank, 3) the government and government-related entities. Potential options include:
Allowing the trust to default (investors take losses). As noted above, this would call into question the implicit guarantees perceived by some trust buyers, thereby increasing the risk that new trusts or other non-guaranteed products such as WMPs face more difficulty obtaining funds, leading to tighter overall credit conditions. On the positive side, it would encourage greater focus on the underlying credit quality and better risk pricing going forward.
Trust company and/or distributing bank provide support (levered institutions take the principal and/or interest losses), making an implicit guarantee explicit. Although legally there are no guarantees of principal from either the trust company or ICBC, to the extent the trust company manager or the distributing bank were obligated by policymakers (or other reputational or legal considerations) to provide support, it could prompt loss recognition, or at the worst a need for capital raising or shrinkage of the balance sheet if losses are substantial. As such, the quality of the underlying assets and due diligence are key to determine whether and how much losses might be taken by these institutions. Investor demand for trusts might rise after such a demonstration of support, but the higher perceived liability on the part of financial institutions would presumably reduce their appetite for issuing such products in the future.
Government-backed entity provides support (government takes losses). In this case, the short-term market reaction would presumably be relief, as refinancing risks would be reduced and both banks and trusts would be off the hook. However, moral hazard for both issuers and investors would be increased, raising the risk of credit problems further down the road. Policymakers might try to minimize this moral hazard by providing support indirectly (via some government-supported entity or third party, rather than publicly and directly) and/or by providing only partial support. An example of the former occurred last year, when an “unnamed party”, possibly the local government which provided some land collateral and guarantees to the trust loans, intervened to purchase the defaulted loans of a steel plate manufacturer, enabling the investors in a CITIC WMP to be repaid fully (see “Latest China bailout reveals risk of local government’s hidden debts”, Reuters, May 7 2013).
Some mix of these options is of course possible, if the financial institutions or government provides partial support. Most observers seem to expect at least a partial bailout of the investors, reflecting a compromise between concerns about moral hazard and concerns about contagion. Unless there is a total bailout explicitly funded by the government, credit conditions in the trust sector seem likely to tighten at least modestly. Some central government level policymakers could be open to seeing a default, as it would encourage more careful risk assessment and help to contain credit growth going forward. However, other central government and many local government policymakers might be more inclined to contain the problem. Local officials in particular may feel more pressure to support key local enterprises that are major employers and taxpayers; in the current case, officials could in theory take actions such as granting mining licenses to make the trust assets more valuable.
Q. What should investors watch to track the broader market impact?
Besides the immediate news on what approach officials take in the case of the CCT trust, investors can watch other financial metrics for signs of stress. As always, interbank rates are useful as an indicator of the marginal cost of bank funding. Spreads to yields on nonbank products may reflect their perceived risk, although they could also be affected by other factors such as tight overall liquidity conditions. While we do not have high frequency data on trust yields, WMP yields have moved higher of late. Finally, data on credit volumes will be important to watch. To the extent conditions tighten, this should become visible in monthly total social financing flows (the trust portion in particular).
Q. What is the potential impact on economic growth and markets?
The growth impact of a trust default is highly uncertain, as it represents the product of two unknowns. The first unknown is the change in overall credit extension which would result from the default, and the second unknown is the sensitivity of economic growth to new credit. In work last year on the relationship between credit and growth (“The ‘credit impulse’ to Chinese growth”, April 11, 2013), we estimated a RMB 300bn change in the average monthly credit flow would have an impact of 80bp on sequential annualized real GDP growth in the following quarter (with further, gradually fading effects in subsequent quarters if the lower credit flow persisted). This is not far from the average monthly flow of trust loans in 2013 implied by our bank analysts’ estimates. So with our assumption on credit sensitivity, a hypothetical sharp tightening in funding conditions that stifled this flow of new credit (not affecting existing trusts) would imply an 80bp hit to sequential (annualized) growth the following quarter, and roughly a 50bp hit to yoy growth over the following year. Intuitively, the modest estimated impact stems from the small size of the trust sector in the overall financial system. We emphasize the very high degree of uncertainty in these calculations—this is a back-of-the-envelope illustration rather than a forecast. On the side of a smaller effect, officials could take steps to reduce the impact on trust lending or other lending channels could pick up the slack; on the side of a bigger impact, spillovers could occur to non-trust lending or to the real economy via effects on business or consumer confidence.
In the credit markets, more willingness to allow losses should lead to greater differentiation between stronger and weaker credits. This is a theme we have emphasized for some time, including in our in-depth work on the China credit outlook last summer.
A policy/credit tightening bias may put pressure on China equities in the near-term, particularly credit-dependent, investment-heavy cyclical sectors. Investors are unlikely to reward either option 1 or option 2 above, as the default option may trigger contagion and risks to growth (thus earnings as well) and the “bailout by financial institutions” option is structurally unappealing (thus risks valuation). Option 3 is probably the only outcome that would support a slight market rebound near-term, in our view, as immediate contagion is averted and listed financial conditions are protected from bearing losses—though at the cost of longer-term moral hazard.

China cannot relax war on corruption;; Western banks must also take care not to fuel illegality

China cannot relax war on corruption

Western banks must also take care not to fuel illegality

January 22, 2014 7:07 pm

When Xi Jinping became leader of the Chinese Communist party a little more than a year ago, he made the fight against corruption a central theme of his leadership. Over the past year China has seen the detention of dozens of top officials on suspicion of financial improprieties. More than 180,000 people have been punished for corruption. Mr Xi has left little doubt that he believes unchecked graft threatens the future of the Chinese Communist party. Yet two events this week raise doubts about how sincere his drive really is.
First, there is the trial of Xu Zhiyong, a human rights lawyer, which has started in Beijing. Mr Xu is part of a loose group of civic activists who are campaigning for rules requiring government officials to disclose their financial assets. The demands he is making appear to be perfectly in line with the leadership’s anti-corruption drive. But he is now on trial for “gathering crowds to disrupt public order” – suggesting that Mr Xi’s campaign has its limits.
The second event was publication of a report by a Washington- based organisation called the International Consortium of Investigative Journalists. The report claims that more than a dozen family members of China’s top political and military leaders are making use of offshore companies based in the British Virgin Islands.
Financial records received by the ICIJ reveal that more than 21,000 mainland Chinese and Hong Kong residents have used offshore tax havens in the Caribbean to store their wealth. It is unclear how much of this activity is illegal under Chinese law. But the report is a reminder that the Chinese public has been left largely in the dark about how their country’s elite has amassed its wealth – and where its money is deposited.
The scale of corruption among Chinese officials is undoubtedly one of the biggest threats to the Communist party’s long-term survival. China’s rapid economic growth is creating internal tensions because of widening income differentials. If the popular perception grows that Chinese leaders are spending more time lining their own pockets than running the country effectively, then political unrest will surely follow.
We should not dismiss the way Mr Xi is trying to deal with the problem. After all, there are limits to how quickly he can act. If he allows the anti-corruption drive to gather pace at uncontrolled speed, he may undermine the Communist party completely. This may explain why the Chinese leadership wants to set limits to the role played by activists such as Mr Xu. Still, the Chinese middle class is weary of the corruption and backhanders that have plagued the country’s commerce. Mr Xi runs the risk of alienating the public unless he demonstrates that the anti-corruption campaign is waged with a minimum of fear or favour.
In the meantime, western financial and corporate leaders need to realise that Chinese corruption is not an issue to which they can turn a blind eye, either. This is because the ICIJ suggests that western banks and accountancy firms have acted as middlemen in the establishment of offshore companies for Chinese clients.
There is still much we do not know about the offshore investments by the Chinese elite. But over recent years, several banks have fallen foul of international authorities because of their support for illegal activities. In 2012 HSBC was fined $1.92bn by US regulators after illegally conducting transactions on behalf of customers in Iran, Libya and Cuba. A decade ago a number of European banks were embarrassed when it emerged that they were handling billions of dollars of assets linked to the former Nigerian leader Sani Abacha. Whatever the challenges of doing business with China may be, western banks should make sure that they are not fuelling corrupt practices.

China households elude taxman – and official GDP bean-counters

China households elude taxman – and official GDP bean-counters
Wed, Jan 22 2014
By Koh Gui Qing

BEIJING, Jan 23 (Reuters) – China’s famously frugal households may be living larger than they are letting on.
Economists have long warned that China needs to pump up domestic spending to offset an over-reliance on credit-fuelled investment and exports for growth, and in their latest blueprint for reform China’s leaders have vowed to do just that.
Data released this week showing China’s economy grew 7.7 percent last year suggested the imbalance is worsening, with consumption unchanged at just under 50 percent of GDP, but investment growing to slightly more than half.
A growing number of economists, however, say official statistics have got it wrong. To avoid taxes, consumers routinely get employers to buy things for them, resulting in a gross underestimation of how much consumers spend and exaggerating just how lopsided China’s $9.4 trillion economy is.
“China’s consumption is not low,” said Zhu Tian, an economist at the China Europe International Business School in Shanghai, who co-authored a recent report on the subject. “It’s actually desirable,” he said.
Government estimates put household spending at roughly 36 percent of GDP, the result of a long decline from 49 percent in 1978. Household consumption in Thailand, which is slightly poorer than China in terms of GDP per citizen, is 56 percent of GDP, according to the World Bank. In the United States, households spend the equivalent of 69 percent of GDP.
But Zhu and other economists say government estimates overlook trillions of yuan in hidden household spending, particularly among China’s increasingly affluent middle class. Add that and household spending amounts to about half of GDP, and more than 60 percent when combined with government spending, according to Zhu’s study, which was published in September with Zhang Jun from Fudan University’s China Center for Economic Studies.
The implications are far-reaching, at least statistically. If Zhu and Zhang are right, not only do consumers represent a larger part of China’s economy than thought, but estimates of China’s vaunted household savings rates may be inflated, investment’s dominance may be overstated and China’s economy may be larger than current estimates.
The government may also be due a lot of income tax.
Zhu and Zhang go even further, saying that their findings challenge the notion that consumption is inadequate, a problem analysts and policymakers, including the World Bank, have blamed on inadequate social safety nets such as unemployment and health insurance.
REFLEXOLOGY AND SING-ALONGS
Collecting data on consumption is challenging in any developing country because so many of the things people buy are informal services not captured by tax authorities, such as foot massages, karaoke sessions or food from street vendors.
“All of these issues with statistics are common to fast-growing economies,” said Bert Hofman, chief economist for East Asia and the Pacific at the World Bank in Singapore.
China’s statistics have drawn their fair share of brickbats from economists, who have resorted to a host of exotic alternatives – from consumption of salt to sales of imported Audis – to gauge the true health of the second-largest economy.
China’s National Bureau of Statistics declined to comment, though it has in the past conceded it may be underestimating consumption. It plans to revise the way it calculates GDP as early as this year.
“After the correction,” said Hofman, “China will look a lot more normal – more balanced, some would say.”
In the meantime, economists say poor data collection paints an excessively bleak picture of consumption. One problem is sample size: China’s statisticians base their estimates of household spending in this nation of 1.35 billion people, or 402 million households, on surveys of just 100,000 households.
Then there is the way they add up expenditures. Take housing costs. China tallies data on how much households pay in rent, but uses outdated values to calculate the value of housing to home owners.
PERQUISITE REPUBLIC
But the list does not end at rent. To compensate for lower wages, companies in China routinely lavish employees with gifts ranging from mobile phones and household appliances to luxury cars and vacations.
“This happens all the time, and of course it is not the right way,” said Helen Qiao, an economist at Morgan Stanley in Hong Kong.
By taking part of their pay in undeclared perks, employees lower their taxable income and companies reduce their taxable profits. Perks are particularly popular among those Chinese with the biggest tax liabilities – its wealthy.
And while these items are for personal use, once a company pays for them instead of a private household, the expense is classified as a business cost and left out of consumption and GDP.
Omissions like that missed 7 trillion yuan ($1.2 trillion) worth of household spending in 2009, Zhu and Zhang estimate in their report. Morgan Stanley’s economists calculated last year that government statisticians missed roughly $1.6 trillion in spending in 2012, meaning household consumption was actually equivalent to 46 percent of GDP.
But even at 50 percent of GDP, China still needs to get households to consume more domestic services if it wants to create a viable and growing middle class, said Kevin Lai, an economist at Daiwa Securities in Hong Kong.
“You can forever keep investing in new capacity, but where is the demand?” Lai said. “At the end of the day, you need to find demand to feed that capacity.”
To Zhu, however, China’s consumption levels are already healthy; it is Beijing’s emphasis on boosting consumption that needs re-examination.
“All the talk about China investing too much and consuming too little is meaningless,” he said. “The focus of change should be on improving equity and the efficiency of investment, not stimulating consumption.”

China abandons its pursuit of growth at all costs; Beijing knows the stakes are too high to allow for anything other than a gradual change of dosage

China abandons its pursuit of growth at all costs

January 22, 2014 4:54 pm
By David Pilling
Beijing knows the stakes are too high to allow for anything other than a gradual change of dosage
If Hu Jintao was a growth junkie, Xi Jinping wants to put China’s economy on a methadone programme. Under Mr Hu, the former president, Beijing was addicted to economic expansion. China defied the collapse in external demand that followed the 2008 Lehman Brothers crisis by ramping up spending on roads, ports and smelters through a huge expansion of credit funnelled into the economy via compliant banks and local governments desperate to meet centralised growth targets. The economy grew at near double digits even as exports slowed dramatically and the current account surplus shrank from 10 per cent of output to just 2-3 per cent.
As with heroin, though, the ecstatic highs had side-effects. The economy became ever more dependent on quick fixes. It took more and more inputs – in the form of easy credit and cheap raw materials – to produce each unit of gross domestic product. Debt, some of it unrepayable, rose sharply. Capacity ballooned beyond demand.
Mr Xi, who took over the presidency in March last year, has served notice that enough is enough. From now on, China will not pursue expansion at all costs. The quality of growth will be emphasised. There have been several indications of a change of heart. Short-term interest rates have been allowed to rise almost 3 percentage points and credit growth has been slowed from a hair-raising peak of 23 per cent to a (still hardly abstemious) 18 per cent. The cost of material inputs, from electricity to water and land, will be subject to market forces.
Local governments are – at least according to official propaganda – from now on to be judged not by the speed of growth but by the progress they make in other areas, including cleaning up bad debts. When it comes to borrowing, the government has come clean, up to a point. Two audits have been published detailing the rise in public debt. Even the more sanguine one admits to a near 70 per cent rise in local government obligations in just two and a half years, or 40 per cent if contingent liabilities are excluded.
Implicit in this change of direction is a trade-off between growth and economic efficiency. The government is expecting growth of about 7.5 per cent in 2014. In previous years it has made its forecast deliberately low and then come in triumphantly above expectations. This year, if anything, it could go the other way. By the end of 2014 growth may be slowing towards 6 per cent, even if the result for the year as a whole is still likely to be 7 per cent or above.
A shift from the inefficient state sector entails risks but anyone who stands in the way could end up on the wrong side of the ‘law’
Very high growth is not as important as it once was. China’sworking-age population
has begun to shrink. Although many university graduates find it hard to get the jobs to which they aspire, unemployment for the economy as a whole is not likely to be a problem. If higher-quality growth is now the aim, the means is to allow the private sector a bigger role. The hope is that if the banking sector is liberalised and private companies are allowed to compete against inefficient state-owned enterprises, capital will be allocated to better-run corners of the Chinese economy.
Arthur Kroeber of GaveKal Dragonomics reckons that if every renminbi funnelled to the state sector were transferred to private enterprise, productivity could be as much as doubled. By that “magic trick” growth could be maintained even as levels of investment – still running at 6-7 percentage points above GDP – were cut. In practice, the transition is unlikely to be so smooth. This implies that, if the government does not revert to the norm of the Hu years by opening the credit spigots when the going gets tough, growth will slow faster than some are currently bargaining for.
Beijing will take things steadily so as not to provoke a crisis. In late December it gave local governments permission to roll over debt. Many have borrowed short-term in order to finance long-term projects, some of which will not turn a profit for years, if ever. Local authorities have been told to lengthen their debt maturities. That suggests they are being chivvied to put their finances on a sounder footing. Much attention has been paid to local government debt, much of it off balance sheet. But corporate borrowing may turn out to be a bigger problem. According to the Chinese Academy of Social Sciences, if state-owned enterprise borrowing is included, total government obligations rise to 151 per cent of GDP. In one of the first visible signs of stress, loans to a near-bankrupt coal company that were bundled up and sold to retail investors as a wealth management product are on the verge of default. ICBC, the world’s biggest bank by assets, which distributed the investment vehicle, has so far refused to stand behind the $500m issue.
A shift from the inefficient state sector – which actually expanded during the Hu years – to the private sector entails risks. It is also bound to tread on some powerful toes. Opposition, though, is likely to be muted given Mr Xi’s crackdown on corruption. Anyone who stands in the way could end up on the wrong side of the “law”. Some onlookers, in their perennial hunt for crisis, are waiting for the Chinese economy to blow up. The outcome, however, may be more benign: slower growth of somewhat better quality.

Can China Innovate Without Dissent?

Can China Innovate Without Dissent?
By STEPHEN L. SASSJAN. 21, 2014
ITHACA, N.Y. — Will China achieve technological dominance over the United States, surpassing us in scientific and engineering innovation?
A lot of people seem to think so. China’s recent landing of an unmanned spacecraft on the Moon, its advances in renewable energies and high-speed rail, its increasing number of patent filings and its vast spending on research and development have contributed to a perception — held across much of the world, according to a Pew Research Center poll conducted last summer — that China is poised to overtake America as the world’s leading power, if it hasn’t already done so.
Concern that China — home of landmark innovations like printing and gunpowder — might reclaim its legacy as a land of invention is voiced at even the highest levels of the American government. In 2011, Steven Chu, the energy secretary at the time and a Nobel-winning physicist, remarked on China’s dominance in the production of low-cost solar-energy cells, urging, “We really can and should take back this technology lead.”
Americans shouldn’t be so worried. Yes, China has demonstrated skill in moving to higher-value manufacturing, and excelled at improving existing technologies, while producing them more cheaply. But it has not excelled in true innovation. (The first modern solar cell was invented in the United States.)
No one knows this better than the Chinese themselves. Before he stepped down as president in 2012, Hu Jintao directed that vast sums be spent on supporting scientific innovation to “achieve the great rejuvenation of the Chinese nation.”
But as a scientist who has taught in China, I don’t believe that China will lead in innovation anytime soon — or at least not until it moves its institutional culture away from suppression of dissent and toward freedom of expression and encouragement of critical thought.
Almost all the paradigm-shifting innovations over the past few hundred years — from Michael Faraday’s generating electricity by moving a copper wire through a magnetic field in London in 1831 to the invention of the transistor at Bell Laboratories in New Jersey in the 1940s — have emerged in countries with relatively high levels of political and intellectual liberty. Why is this?
A first reason is cultural: Free societies encourage people to be skeptical and ask critical questions. When I was teaching at a university in Beijing in 2009, my students acknowledged that I frequently asked if they had any questions — and that they rarely did. After my last lecture, at their insistence, we discussed the reasons for their reticence.
Several students pointed out that, from childhood, they were not encouraged to ask questions. I knew that the Cultural Revolution had upturned higher education — and intellectual inquiry generally — during their parents’ lifetimes, but as a guest I didn’t want to get into a political discussion. Instead, I gently pointed out to my students that they were planning to be scientists, and that skepticism and critical questioning were essential for separating the wheat from the chaff in all scholarly endeavors.
A second reason is institutional: Much of American innovation started with the bright ideas of a few individuals, working in an industrial, government or university laboratory, or perhaps a garage in Silicon Valley. While government support for R&D is essential, innovation is typically the product of a bottom-up approach. A classic example is the letter Albert Einstein wrote to President Franklin D. Roosevelt in 1939, arguing that nuclear fission could be the basis of a powerful bomb, which led to the Manhattan Project.
In 2006, I led a group of scientists from Cornell to discuss possible collaborations on nanotechnology with colleagues at Tsinghua University in Beijing and Shanghai Jiao Tong University. Over meals, Chinese colleagues told me that scientific research was initiated in a top-down manner.
A third reason is political. Free societies attract foreign talent. England gave birth to the steam engine in the 18th century in part because of Denis Papin, a Huguenot who had fled France for greater religious tolerance in England. His idea of using steam and atmospheric pressure to do work, taken up by Thomas Newcomen and James Watt, powered the first Industrial Revolution.
During a trip to China last fall, I couldn’t help but notice not only the lack of access to several Western news sources, but also the cynicism about the news in general. Those “in the know” distrusted what they were told by state news agencies like Xinhua and CCTV.
The case of Xia Yeliang, an associate professor of economics at Peking University, who was dismissed, supposedly for speaking out against one party rule, does not inspire confidence in academic freedom.
While in Beijing, my wife and I visited the 798 art district in the city’s northeast. During our stroll of galleries and studios, I asked about the artist and dissident Ai Weiwei, whom we had met in Berkeley, Calif., in 2008. The woman I spoke with said that it was too dangerous to try to visit him, because there were so many police around his compound.
The significance of China’s vast spending on R&D cannot be overstated, particularly at a time when the United States has made short-sighted cuts to the budgets of the National Institutes of Health, the National Science Foundation and other agencies that finance research.
Perhaps I’m wrong that political freedom is critical for scientific innovation. As a scientist, I have to be skeptical of my own conclusions. But sometime in this still-new century, we will see the results of this unfolding experiment. At the moment, I’d still bet on America.
Stephen L. Sass, professor emeritus of materials science and engineering at Cornell University, is the author of “The Substance of Civilization: Materials and Human History from the Stone Age to the Age of Silicon.”

Beijing’s Plans to Fix Traffic Problems with ‘Congestion Fee’ Stuck in Slow Lane; Many cities around the world have hit car users with fees that lessen congestion and pollution, but officials in China’s capital have been slow to copy the idea

Beijing’s Plans to Fix Traffic Problems with ‘Congestion Fee’ Stuck in Slow Lane

01.22.2014 19:20

Many cities around the world have hit car users with fees that lessen congestion and pollution, but officials in China’s capital have been slow to copy the idea
By staff reporter Liu Hongqiao and intern reporter Zhang Xia
Beijing) – At a press conference in Beijing in December, Steve Kearns of Transport for London, the city’s public transport operator, displayed two photographs. Both showed London streets, one at the end of 19th century, the other at the end of 20th.
“It’s hard to imagine that these two pictures are separated by only 100 years, judging by the primitive modes of transport we used before,” Kearns said, a reference to the horse carts in the first picture.
But despite the advances in technology, modern-day traffic problems mean the horse-powered vehicles in the first pictures required the same amount of time to cross London as the autos in the second.
In 1999, around 185,000 vehicles entered the City of London in Britain every day, and traffic was so bad that the average speed was just 15 kph. However, after a congestion charge was introduced in February 2003, the number of autos in the city within a city fell dramatically.
Many other cities around the world have adopted the congestion charge as a means of combating traffic-related problems. Experience from these cities shows that the congestion charge has helped improving local traffic situation, help raise funds to build public transport and aid the environment by reducing emissions.
In light of these success stories, research has begun into imposing the scheme in chronically congested Beijing. In December 2010, the city’s government proposed “studying the implementation of a congestion charge scheme on certain roads and putting it into practice over a given period.”
However, three years on, the capital’s traffic and pollution problems are worse than ever and there is no date set for implementing a congestion charge. The number of vehicles on the city’s road has increased from 4.69 million in 2010 to 5.4 million last year.
In October, there were renewed calls for a congestion charge program as part of the government’s promise to fight pollution from vehicles between 2013 and 2017. Other major cities in China are considering similar moves, although none has taken such a step.
Double Win
A congestion charge is essentially an economic method of regulating traffic by imposing fees on vehicle users that travel a city’s more crowded roads. Charges vary by city. London and Stockholm, in Sweden, charge according to region. Singapore targets individual roads. These zones tend to overlap with low-emission zones, which control traffic flow by imposing strict limits on vehicle emissions.
Data from the Stockholm government shows that during a seven-month trial in 2006, traffic flow fell by 20 percent and air quality improved by around 10 percent. The city’s air quality has improved immeasurably in recent years, with the congestion charge being perhaps the biggest reason for this. Residents who initially opposed the charge now strongly support it.
Milan is another success story. Silvia Moroni, of from the Italian city’s environmental bureau, says traffic and emissions have both fallen since a congestion charge was introduced in 2012.
For years, traffic jams have been the subject of much debate among Beijing’s Net users, who list it as one of their three main sources of frustration, along with air pollution and sandstorms. Reports from a government-backed institute, the Beijing Transportation Research Center, show that the capital’s traffic problems have worsened since the 2008 Olympics. Data collected in November revealed that traffic during morning and evening rush hours increased 4.3 percent and 6.1 percent, respectively, from the year before.
Transport expert Wang Quanlu, from the U.S. science and engineering research center Argonne National Laboratory, said that a congestion fee kills two birds with one stone. “Not only will it reduce traffic congestion, but it also improves the city’s air quality,” he said.
Because the quality of vehicles and oil is much lower in China than abroad, less auto use would result in even greater benefits here than elsewhere.
Research Requirement
Many foreign countries have ways to analyze transportation and its impacts on urban areas, Wang said. This information can be used to create congestion charge schemes that are appropriate for an individual city. However, Chinese cities lack such data.
A 2011 report from the independent Beijing Zhonglin Assets Co. Ltd. said that Beijing suffers economic losses of 105.6 billion yuan each year due to traffic congestion, or 7.5 percent of its GDP. This included environmental damage of over 45 billion yuan.
Despite these figures, academics are still debating the full extent of environmental damage caused by vehicle emissions. Professor Xie Shaodong, of the Department of Environmental Sciences at Peking University, said that not enough research has been done to yield a figure.
“The policymaking of foreign government is based on scientific analysis,” Xie said. “Before a policy is officially launched, a huge amount of time is spent conducting research to assess the environmental and economic benefits. Before we make policies, do we also make the relevant assessments?”
Footing the Bill
Despite the fact many believe a congestion charge would have positive results, some experts say that the severe overcrowding of Beijing’s public transport is an obstacle to such a imposing such a fee.
Beijing has been very ambitious in its plans to expand public transport links. The city government wants public transport as a share of total transport to rise to 52 percent by 2017, from the current 44 percent. This pales in comparison to London, where public transport accounted for 85 percent of all transport even before the vehicle charge was introduced.
Gunnar Soderholm, an environmental official in Stockholm, said a good public transport system is a prerequisite to introducing a congestion charge. Ding Yan, an environmental protection official in Beijing, shared similar concerns. “Although the Beijing public transport system is developing at quite a rate, it is still not capable of supporting the city’s huge population.”
Then there are reports that officials want to raise the price of public transport. Government subsidies for public transport rose to over 18 billion yuan last year, and plans are apparently in place to introduce higher rush hour fares for subways.
Wang says it is simply not sustainable for the government to keep subsidizing public transport, saying: “Eventually someone will have to foot the bill.” He said that if the funds raised from a congestion charge can be set aside to improve the public transport – as was the case in London – then the government would be relieved of a huge financial burden.
A Difficult Fit
Many experts Caixin interviewed said it would be difficult for Beijing and other Chinese cities to copy the success that London, Stockholm and other foreign cities have had with the congestion charge, especially considering their traffic problem and urban planning situations.
Zhao Jian, an economics professor at Beijing Jiaotong University, said that “Beijing’s congestion problems are so deep-seated that there is traffic practically everywhere.” He said a congestion charge in the capital would not be feasible in practice and would not produce the desired results.
Ding said the layout of Beijing’s roads would cause problems. Years of poor urban planning mean the city lacks the structure of foreign cities, a structure that lends itself to a congestion charge. He also predicted that difficulties in pricing would arise. If the fee was too low, it would have no effect. If it was too high, it would alienate all but the wealthiest people.
Congestion problems are a symptom of the country’s rapid urbanization. The Energy Foundation, a U.S. non-governmental organization, estimates that by 2023, there will be 200 vehicles per 1,000 people in China. Beijing reached this target three years ago. This indicates not only will traffic deteriorate in the likes of Beijing, Shanghai and Guangzhou, but it will also worsen in smaller cities as well.
Gong Huiming, who directs the program, is concerned. “In 10 years, more than 600 second- and third-tier cities will face the kind of congestion Beijing has now,” referring to the country’s smaller cities and those in its western regions.
“But how many of those cities have Beijing’s technological, managerial or financial capability? My biggest worry is that the authorities will waste the revenue generated from the charge.”
Ding, however, was more concerned about the public backlash if the government fails to achieve its goals with a congestion fee. “If the air pollution is still this bad in a year or two, how can the whole scheme by justified to the people?”
 

Authorities in Beijing have ordered high-end clubs in public park grounds to close or downgrade to an acceptable level, a move to curb officials’ extravagance.

Fancy clubs in parks closed
BEIJING, Jan. 15 (Xinhua) — Authorities in Beijing have ordered high-end clubs in public park grounds to close or downgrade to an acceptable level, a move to curb officials’ extravagance.
Business at two clubs in Beihai Park called Yushantang and Shanglinyuan, known for their luxurious decorations, expensive meals and services, has been suspended, according to a statement issued by the Beijing Municipal Commission for Discipline Inspection of the Communist Party of China (CPC) on Wednesday.
Two other clubs in the grounds of Zizhuyuan and Longtan parks have been ordered to lower their prices so ordinary people can afford their services, it said.
There are 24 private clubs or high-end recreational venues in public park grounds in Beijing. The clubs have been ordered to move out of the parks when their leases end. The parks should not allow such clubs to operate within the grounds, as required by Beijing Municipal Government.
The move, led by the commission with support from landscape, cultural relics and park management government departments, targets “unhealthy practices in clubs” and has been incorporated into China’s “mass-line” campaign.
The “mass-line” campaign was launched by the CPC Central Committee in June to bridge the gap between CPC officials and members, and the general public, while cleaning up undesirable work styles such as formalism, bureaucracy, hedonism and extravagance.
Public opposition towards private clubs has been on the increase. They are often unlawfully built with public resources, sometimes in historical buildings, and frequented by the rich and powerful.
Xinhua reporters found last month that a single dish on Yushantang’s menu cost as much as 10,000 yuan (1,654 U.S. dollars), or two months’ salary for the average local.
“The meals there are meant for officials and the wealthy, not for us,” said a senior citizen who was exercising in front of the club.
Jiangxi Province, Changsha in Hunan and Nanjing in Jiangsu, launched similar campaigns this month.
In a circular released by the Central Commission for Discipline Inspection (CCDI) and the steering group of the CPC’s “mass line” campaign in December, officials are ordered to shun high-end clubs to avoid extravagant practices and power-for-money or power-for-sex deals.
Kong Fanzhi, chief of the cultural relics bureau of Beijing, said fancy clubs in parks and historical buildings clearly invaded on public resources for the privileged.
“Parks and historical sites are public treasures, which should be open to the general public, rather than the privileged few,” said Kong, also a member of the Beijing municipal committee of the Chinese People’s Political Consultative Conference, a political advisory body.
He said clubs in historical buildings went against cultural protection regulations.
Zeng Yuanji, also a political advisor and deputy head of the graduate school of the Communication University of China, suggests authorities investigate why such clubs were built inside public parks in the first place under the supervision of park management departments.
“The fundamental root for the misconduct should be found out and eradicated to curb corruption,” he said.
Chinese President Xi Jinping on Tuesday stressed that the anti-graft fight is vital for the Party’s integrity in the long term, urging independent and forceful supervision from disciplinary agencies.
“Preventing the Party from being corrupted in its long-term rule of the country is a major political mission. And we must do it right,” said Xi, also general secretary of the CPC Central Committee, when addressing the third plenary session of the CCDI of the CPC. The session closed Wednesday.

Big Web Crash in China: Experts Suspect Great Firewall

Big Web Crash in China: Experts Suspect Great Firewall
By NICOLE PERLROTH
Updated, 10:30 p.m.
SAN FRANCISCO — The story behind what may have been the biggest Internet failure in history involves an unlikely cast of characters, including a little-known company in a drab building in Wyoming and the world’s most elite army of Internet censors a continent away in China.
On Tuesday, most of China’s 500 million Internet users were unable to load websites for up to eight hours. Nearly every Chinese user and Internet company, including major services like Baidu and Sina.com, was affected.
Technology experts say China’s own Great Firewall — the country’s vast collection of censors and snooping technology used to control Internet traffic in and out of China — was most likely to blame, mistakenly redirecting the country’s traffic to several sites normally blocked inside China, some connected to a company based in the Wyoming building.
The Chinese authorities put a premium on control. Using the Great Firewall, they police the Internet to smother any hint of antigovernment sentiment, sometimes jailing dissidents and journalists; they blacklist major websites like Facebook and Twitter; and they block access to media outlets like The New York Times and Bloomberg News for unfavorable coverage of the country’s leaders.
But the strange story of Tuesday’s downtime shows that sometimes their efforts can backfire.
The China Internet Network Information Center, a state-run agency that deals with Internet affairs, said it had traced the problem to the country’s domain name system. One of China’s biggest antivirus software vendors, Qihoo 360 Technology, said the problems affected about three-quarters of the country’s domain-name system servers.
“I have never seen a bigger outage,” said Heiko Specht, an Internet analyst atCompuware
, a technology company based in Detroit. “Half of the world’s Internet users trying to access the Internet couldn’t.”
Those domain-name servers, which act like an Internet switchboard, routed traffic from some of China’s most popular sites to an Internet address that, according to records, is registered to Sophidea, a company based, at least on paper, in that Wyoming building, in Cheyenne. It is unclear where the company or its servers are physically based, however.
With so much Internet traffic flooding Sophidea’s Internet address, Mr. Specht said he believed it would have taken less than a millisecond for the company’s servers to crash.
Until last year, Sophidea was based in a 1,700-square-foot brick house on a residential block of Cheyenne. The house, and its former tenant, a business called Wyoming Corporate Services, was the subject of a lengthy Reuters article in 2011 that found that about 2,000 business entities had been registered to the home. Among them were a company controlled by a jailed former Ukraine prime minister, the owner of a company charged with helping online poker operators evade online gambling bans, and one entity that was banned from government contract work after selling counterfeit truck parts to the Pentagon.
Wyoming Corporate Services, which helps clients anywhere in the world create companies on paper and is designated to receive lawsuits on their behalf, moved its headquarters 10 blocks from its former base last year. Gerald Pitts, the Wyoming Corporate Services president, said in an interview on Wednesday that his company acted as the registered agent for 8,000 businesses, including Sophidea, though he did not know what the company did.
Technology experts say Sophidea appears to be a service that reroutes Internet traffic from one website to another to mask a person’s whereabouts, to make it easier to send spam for example — or to evade a firewall, like the ones that Chinese censors erect.
Sophidea’s managers are not publicly listed. Wyoming is light on business regulation. The state requires only that companies file a short annual report disclosing assets that are physically located in Wyoming and the name of one person submitting the report. According to Wyoming state records, Sophidea’s director is Mark Chen, with no associated contact information.
Mr. Pitts, of Wyoming Corporate Services, said he could not provide any further information for the company without a legal order.
But for less than a millisecond on Tuesday, the company’s operators may have been surprised to find that a huge portion of the world’s Internet traffic was firing at their servers and that their Internet address was the subject of much speculation within the Chinese media. Several Chinese newspapers named Sophidea’s Internet address as the “No. 1 suspect” in a cyberattack.
By late Tuesday, some technologists surmised that the disruption might have been caused by Chinese Internet censors who tried to block traffic to Sophidea’s websites because they could be used to evade the Great Firewall and mistakenly redirected traffic to the Internet address.
That theory was buttressed by the fact that a separate wave of Chinese Internet traffic Tuesday was simultaneously redirected to Internet addresses owned by Dynamic Internet Technology, a company that helps people evade China’s Great Firewall, and is typically blocked in China.
According to D.I.T.’s website, its clients include Epoch Times, a newspaper affiliated with the Falun Gong movement; Voice of America; Radio Free Asia; and Human Rights in China, an activist group based in New York.
Bill Xia, a Falun Gong adherent who founded D.I.T. after emigrating to the United States, said in an email that the problem could have been caused by a “misconfiguration” in the state’s firewall, which controls traffic across multiple Internet service providers in China. “Only the Great Firewall has this capability ready,” he said.
Greatfire.org, an independent site that monitors censorship in China, echoed that theory in a blog post.
One thing is certain, said Mr. Specht of Compuware: Chinese Internet users’ and companies’ trust in the Internet has been shaken. “Already Chinese Internet users do not have too much trust in the Internet,” he said.
Amy Qin contributed reporting from Beijing.

Argentina restricts internet shopping to curb capital flight

Argentina restricts internet shopping to curb capital flight

January 22, 2014 6:22 pm
By Jonathan Gilbert in Buenos Aires and John Paul Rathbone in London
Even as it seeks to regain access to international capital markets, Argentinaimposed new restrictions on online shopping on Wednesday in its latest attempt to curb capital flight and prevent a possible balance-of-payments crisis.
Anyone buying goods through international websites such as Amazon.com must now sign a declaration and produce it at a customs office, where the packages are collected. In addition, Argentines are only allowed to buy two international items annually, free of tax, up to a $25 total. Beyond that, they must pay a 50 per cent tax.
Jorge Capitanich, the head of Argentina’s cabinet of ministers, said the measure was to defend national interests by substituting national production over foreign goods. “We must ask ourselves if we want Argentine industry, Argentine workers,” he told reporters.
However, analysts said it would have little effect on stanching the country’s continued outflow of foreign reserves, which have fallen $1bn this year to stand at $29.5bn on Monday. Argentina had $40bn in reserves at the start of last year.
“The measure is a only Band-Aid,” said Ricardo Delgado, director of local consultancy Analytica Consultora. “It only addresses the symptoms of the fall in reserves, not the cause, which is high inflation.”
Private estimates put inflation at more than 28 per cent, against the official government rate of 11 per cent. High inflation has also pushed up the value of the black – oe “blue” – market exchange rate to almost 12 pesos per dollar, versus the official rate of 6.9.
The government said it is planning measures to clamp down on the blue market exchange rate, “although obviously I’m not going to say what they are before it happens,” Mr Capitanich said on Wednesday.
Argentina first introduced currency controls a week after Cristina Fernández was re-elected president by a landslide in 2011. Since then it has redoubled efforts to restrict transactions in foreign currency, including a recent 35 per cent tax on credit-card purchases made abroad.
“People are accustomed to taking refuge in the dollar, especially when they see the peso is overvalued,” said Gastón Rossi, a former vice-minister for the economy under Ms Fernández and director of LCG, a Buenos Aires consultancy. “They always find new ways to dollarise.”
People are accustomed to taking refuge in the dollar, especially when they see the peso is overvalued,” said Gastón Rossi, a former vice-minister for the economy under Ms Fernández and director of LCG, a Buenos Aires consultancy. “They always find new ways to dollarise
– Gastón Rossi
The online sales restriction comes as Argentina seeks to regain access to international capital markets through a process dubbed “financial normalisation”, 12 years after it defaulted on $100bn of international bonds.
Argentina, a G20 member, has agreed in principal to compensate Spanish oil company Repsol for the 2012 nationalisation of its majority stake in Argentine energy company YPF. It settled $677m of arbitration claims last year and is holding talks with the IMF on overhauling its statistics and so avoid censure and possible expulsion from the fund. This week, it also re-opened talks with the Paris Club to reschedule Argentina’s approximately $6.7bn of bilateral debt, not including accumulated interest.
On Tuesday, however, Axel Kicillof, the economy minister, said any Paris Club agreement remained months away and that Argentina would not submit to “any conditions”. Paris Club debt restructurings typically involve a simultaneous IMF program.
The sluggishness of the normalisation process is “ineffective against the growing stress on the balance of payments,” Siobhan Morden, head of Latin America strategy at Jefferies in New York, wrote in a note to clients on Wednesday. The nub of the problem, she said, is: “How do you motivate long-term capital flows under an unstable economic environment?”
Many had expected Argentine policy making to become less centralised in the figure of the president and more pragmatic after the government suffered a trouncing in October’s mid-term election, Ms Fernández shuffled her cabinet and appointed Mr Capitanich, an experienced state governor, as cabinet chief. But recent policies show little change of course, analysts say.
“There were expectations of change,” Mr Rossi said. “But it has become absolutely clear that the concentration of power has not been modified.”