China Translated

I have an article in today’s South China Morning Post on where China is investing its USD2.4trln in FX reserves.

SCMP subscribers can read the article here and I’ve also pasted it below.

The USD2.4trln mystery

Where exactly is China investing its US$2.4 trillion in foreign exchange reserves? Most economists agree that a substantial chunk, and perhaps the majority, of those reserves are invested in US Treasuries - debt issued by the US government to finance its spending.

Until quite recently, monthly data published by the US Treasury supported that thesis. The Treasury International Capital System (TIC) - a massive data collection effort by the bean counters in Washington - showed a steady increase in China’s holdings of US Treasuries. Holdings did not increase by as much as the increase in China’s foreign exchange reserves, but they did grow steadily enough to confirm that China’s State Administration of Foreign Exchange remained the US Treasury’s best customer.

But, in the second quarter of last year, that relationship started to break down. China’s foreign exchange reserves continued to grow at a rapid pace, but the Treasury data picked up little if any increase in China’s holdings of US Treasuries.

Data from the People’s Bank of China shows that between April and December last year, China added a whopping US$441 billion to its foreign exchange reserves. But according to purchases picked up by the monthly TIC data over the same period, China’s total holdings of US Treasuries fell by US$12 billion.

That discrepancy flies in the face of common sense. China has continued to run a substantial trade surplus with the US. If Beijing’s foreign exchange managers were not reinvesting that surplus in US dollars, the brutal logic of supply and demand in international currency markets would force the yuan to appreciate against the dollar. But it has not, suggesting that China continues to park its reserves in US dollar debt.

Enter the Treasury’s annual survey of foreign holdings of US securities, which pieces together who is really buying US Treasuries. The results of the latest survey show China’s purchases of US Treasuries continued unabated. The results propel China back into first place as the biggest holder of US Treasury debt, with US$894 billion.

What the annual survey captures, that the monthly data misses, is a bias in the monthly data that attributes Treasury purchases to the place they are purchased, not the country of ownership.

Beijing’s foreign exchange managers appear to be taking advantage of flaws in the system to hide their purchases - deliberately channelling purchases through London and other centres to hide the increase in their holdings.

The motivation is probably partly domestic public opinion, which is decidedly averse to financing the profligate US government. At the same time, signalling intentions to the markets makes little sense.

For Beijing, hiding its purchases of US Treasuries plays to the nationalist gallery by hiding the fact that China continues to fork out its cash to finance the US deficit. And it keeps the financial markets guessing on where China is investing its money. If that means the rest of us also stay in the dark, that’s just too bad.

Exchange rate, International Relations, Monetary Policy, US-China Relations

China’s National Bureau of Statistics (NBS) gets a lot of stick, but in the last year they have actually acquitted themselves rather well.

First, movements in the official GDP data seem to have been a fair representation of the state of the economy - with little evidence of the political manipulation that was feared at the beginning of 2009.

Second, where there were oddities - like a mismatch between electricity output and GDP in the second quarter, the NBS did their best to explain them.

Now, the NBS is promising to publish wage data which disaggregates high and low wage earners - responding to the widespread criticism that the average wage data is biased upward by a few high earners.

This is my translation of the main points of a recent news article on the planned revisions to the wage data:

‘On the 23rd February, the head of the NBS bureau of population and employment Ping Nailin revealed that the way wage data is produced by the NBS will be revised, including showing the composition of wages and difference between high and low wage earners.

Ping said that the current approach to publishing average wage levels did not well reflect the situation in the labour market.  The NBS will conduct experiments with the new approach in 2010, with a view to a wider roll out at a later date.

Responding to questions about the popular belief that the NBS data overstates wage increases, Ping acknowledged that there were weaknesses in the wage data system, including failure to capture wage data from workers in private enterprises, and problems with the average wage level being dragged up by a few high wage earners.

Ping said that wages for employees in private sector firms have already enterered the NBS calculation.

Responding to concerns raised by netizens about wage growth in relation to GDP and the CPI, Ping noted that in almost all years since 1990 wage growth has outpaced GDP growth, and it has outpaced increases in the CPI in every year.’

We covered the popular criticism of NBS wage data in our post on New Words for 2009.

You can see the news article with Ping’s comments here.

Labour markets, Statistics

The National People’s Congress - China’s annual two week policy talking shop - kicks off this Friday.  Last year’s NPC set the course for a year of extraordinary economic stimulus.  This year, it is possible that the government will use the meeting to build consensus around support for a normalisation of economic policy.

The Economic Observer reports the outcome of an pre-meeting press conference where an official spokesman spelled out the main thirteen issues for discussion.  It’s the usual laundry list of refining macro-economic controls, expanding domestic demand, giving priority to education and health, fighting corruption, and so on.

One of the Economic Observer’s readers hits the nail on the head with a comment posted on the article:

‘Every year its the same, there’s nothing new here.  But the question is not whether these problems are old or new.  The question is when will the solutions be delivered.

We hear these problems so often that we are numb, everybody is numb.

Today a meeting, tomorrow a meeting, but when will there be a solution?’

Here’s a link to the Economic Observer article.

Communist Party

I Just finished reading an article in the official magazine Liaowang on the growing wealth of China’s super-rich, the sources of their fortunes, and the social implications of a  widening divide between the haves and the have nots.  This is my translation of the main points:

‘Mr Chen sits in his CNY200,000 chair in his CNY12m house on a fashionable street in Beijing.  This is not Mr Chen’s primary residence, but rather a home he keeps for meetings with business associates and officials.  He points to antique carvings of dragons that line the walls.  ‘I’m not an expert collector’ he says, ‘I just think they are good fun.’

Mr Chen and his type, the company directors, high level managers, and professional investors who form China’s super-rich, have attracted increasing attention in recent years.  In the West, the economic crisis of the last year eroded the wealth of the super rich, but in China this group has seen their wealth increase over the course of the crisis.

According to Forbes, in 2009 the threshold to enter the list of the 400 richest people in China was CNY2.05bn, up from CNY1.22bn in 2008, and 40 people had personal wealth of CNY7bn, up from 24 people in 2008.

China’s super-rich are concentrated on China’s East coast, especially in Beijing, Guangdong, Shanghai, Zhejiang and Jiangsu - where around 60% of China’s richest individuals live.

For China’s super-rich, the road to riches was bright and clear.  The most important route is the real estate market, with the capital market in second place.  In the US, according to Forbes, there are just 50 real estate moghuls amongst the 400 richest names in the country.  In China, that number is 154. Of China’s richest 10 individuals, 5 are involved in real estate.

Hu Run, an expert in China’s rich-list, says that in China the real estate sector surpasses manufacturing, finance, and investment as the way to the top.  Hu notes that China’s special system for controlling land rights, and the rapid pace of urbanisation explain why fortunes can be made in the real estate sector.

Becoming rich in China can also happen more quickly than in the US.  According to Hu, in China the average age of individuals with a net worth of CNY10m is just 39, and of individuals commanding CNY1bn, 43 - much younger than overseas.

In one way, getting rich quick is a sign of the vibrancy of the Chinese economy.  But in another, it points to iniquities in the Chinese economy.  One financial adviser with whom we spoke said that the super-rich clients with whom he worked typically fell into one of three categories: 1) those who relied on power to amass wealth 2) those who had ‘grey’ sources of income and 3) mining magnates and people with monopoly control over a sector of the economy.  He estimated that only about 30% of the super-rich has achieved their wealth through hard work.

The excessive concentration of wealth is an early warning signal of broader problems with the distribution of resources in a society.  Zhejiang Academy of Social Science Professor Yang Jianhua has been researching this question for 10-years.

Prof Yang notes that the experience of other countries is that in the process of development, income distribution gets worse before it gets better.  Specifically, in the income range of USD1000-3000/capita income distribution becomes more unequal, after annual income/capita exceeds USD3000 distribution starts to become more equal.  But the situation in China defies this pattern.

Prof Yang’s research into the distribution of income in Zhejiang shows that even though annual income has now reached USD6000/capita, the gap between rich and poor has not started to narrow, and in fact continues to widen.  Prof Yang notes that the distribution of income in China today does not resemble a pyramid, with a broad base narrowing gradually toward a peak, but rather an inverted ‘T’ with a massive base of people struggling to get by, and a tiny tip of people who control a disproportionate amount of wealth.

One scholar, who was not willing to reveal his name, said that today there were a growing number of cases where government officials, their families or agents controlled access to resources and used them to generate personal wealth.  This conversion of public power into private wealth is a new challenge for the anti-corruption authorities.

China’s new rich do not appear to have strong social or charitable convictions.  One financial advisor with whom we spoke said that many of the super-rich were desparately seeking government offiice, but they did so only as a means to amass more wealth or protect their interests. ‘They don’t believe in duty, only in money’ he said.’

By coincidence, I just finished reading ‘China’s Trapped Transition’ by Minxin Pei.  There is a lot in this article which resonates with Pei’s bleak vision of today’s China:

-The monopoly control of economic rents by those with political power

-An accelerating effort by this privileged group to turn their power into wealth, indicating a lack of faith in the future and an attempt to cash in as quickly as possible

-A collapse in the ideological values which might provide a check on the abuse of power

You can see the original article here.

Communist Party, Financial Crisis, Property, Social Policy

Happy Year of the Tiger to all our readers.  China Translated will return at the beginning of March.

Uncategorized

‘It’s our currency and your problem’ - that’s what then US Treasury Secretary John Connally declared when President Nixon ended the dollar’s convertibility to gold - much to the consternation of European countries, which at the time held very large quantities of US dollar debt.

Today, in the opening paragraph of a front page editorial in the official China Securities Journal, the author writes: ‘Former US Treasury Secretary Connally once famously said ‘it’s our currency and your problem’.  Now, China can say ‘The yuan is our currency and our problem’.’

The value of the dollar is still a problem for China, as a decline in the dollar threatens to erode the value of China’s FX reserves.  But as the editorial suggests, the US is not the only country in the world that can create international waves with the value of its currency.  The tone of recent announcements from Beijing suggests that China is in no mood to bow to international pressure to allow an early return to appreciation of the yuan.

China’s holdings of US Treasuries popped up in another context today.  An article in Outlook Weekly - a popular paper with Communist Party members and government officials - quotes Luo Yuanshao of the Chinese Military Academy as suggesting that one way to sanction the US for the recent decision to sell arms to Taiwan would be to sell a portion of China’s holdings of Treasury debt.

This kind of suggestion pops up from time to time, and the mood music might even be useful for Beijing as it attempts to use what little leverage it has to keep the US honest on its fiscal deficit and monetary policy.  But as Luo recognises elsewhere in the article, the economic interests of the US and China are intimately interlinked.  Engineering a collapse in the dollar would no more serve China’s interests than it would those of the US.

Here’s a link to the China Securities Journal editorial.  Here’s a link to the Outlook Weekly story.

EU-China Relations, Exchange rate, International Relations, US-China Relations

Did anyone notice a new world order emerging at the recent meeting of business leaders in Davos?  Me neither.  But we must have been looking in the wrong place, because everyone’s favourite Communist Party magazine - Outlook Weekly - saw it quite clearly.

Here’s my translation of the main points of an article on Vice Premier Li Keqiang’s trip to Switzerland, from the latest edition:

‘The summit at Davos was happily timed to coincide with two ’saying goodbye to the old and welcoming the new’ moments.  The first was the end of the 00’s and the beginning of the 10’s.  The second was the waning of the old Western dominated world order, and the dawning of a new world order, where large emerging countries will have greater power and influence.

The world is becoming multi-polar, and this process is leading to rapid reform of global systems of governance.  International power and influence is shifting from the West to the East and from the North to the South.  Western countries are being compelled to share their influence with emerging countries in the East.

After the financial crisis, the centers of global influence are the US, EU, China, Russia, Japan, India, and Brazil.  ‘One super power many strong powers’ （一超多强）has become ‘One super power six strong powers’ （ 一超六强).  The US might still be the only super power, bu the six other powers now includes four developing countries.’

The article goes on to set out China’s ‘four principles’ for global economic governance, as set out by the Chinese representative at the G8 meeting in September 2009.  These are:

1. The objectives of governance: to push forward economic globalisation, with a focus on mutual benefit and win-win solutions

2. The subject of governance: all countries should participate on an equal basis in global governance

3. The process of governance: the process should be consultative, with the interests of all countries - especially developing countries - considered

4. The system of governance - at different levels and in different spheres, to increase the representative nature of global governance, a new framework for economic governance should be constructed

Finally, the article notes that at a briefing for Chinese media ahead of Vice Premier Li’s trip, a spokesman for the Foreign Ministry added his own three principles for reform, which can basically be boiled down to a greater role for developing countries in global governance, and respect for all countries’ right to determine their own development model.

The main points and general tone of the argument in this article certainly supports the idea that post-crisis China has growing confidence about its weight in world affairs.  The authors use of the term ‘one super power six strong powers’ is also interesting.  The term ‘one super power many strong powers’ has been in China’s international relations vocabulary since the end of the cold war, expressing the hope that multiple smaller powers would be able to check the influence of the US.  The transition from ‘many strong powers’ to ’six strong powers’ might be wishful thinking on the part of China, but also indicates some crystallisation of thought in Beijing as to who those ‘many strong powers’ might be.

China - Africa relations, China - Latin America relations, EU-China Relations, Financial Crisis, IFIs, International Relations, US-China Relations

The question of whether China should buy Greek sovereign debt has been in the news this week, and has prompted some reflections from Fudan University’s celebrity economist Sun Lijian.  This is my translation of the main points from his recent blog posting:

‘A few considerations on whether we should invest our precious foreign exchange reserves in Greek debt:

First, if there is no double dip downturn in the US and EU, investment will naturally start to move away from low yielding and liquid products, into higher yielding products.  Buying undervalued products, like this Greek debt, fits in with the spirit of post-crisis investment.  This is especially true as the US dollar will continue to fall in value, and low yields on US Treasury debt will not make up for the exchange rate loss on our holdings of dollar debt.  Investing in Greek debt would help maintain the stability of the value of China’s FX reserves.

Second, if trade surplus countries don’t recycle their surplus back to trade deficit countries, they won’t support the spirit of free trade, and might encourage trade deficit countries to adopt protectionist policies.  Considering the overall interests of the Chinese economy, some diversification of reserves away from just one trade deficit country - the US, toward trade deficit countries in the EU, make sense.’

Of course, Sun’s view is not necessarily the view of the State Administration for Foreign Exchange.  The guardians of China’s USD2.3trn in foreign reserves continue to play their cards close to their chests.  But it’s interesting to hear his views on the importance of protecting the value of reserves by seeking out higher yielding investments, and the relation between recycling reserves into trade deficit countries and maintaining trade partners’ tacit support for China’s export-based growth strategy.

You can see Sun’s original posting, in Chinese, here.

EU-China Relations, Exchange rate, Trade, US-China Relations

For millions of migrant workers, Chinese New Year is a time to head home to reconnect with family and friends.  Getting there, however, is something of a challenge. 

With almost two weeks still to go before the beginning of the festivities, Dongguan Railway Station is already feeling the pressure.  Here are some photographs of scenes from the railway station, taken today. 

The caption on the top picture says: ‘Spring travel hasn’t even started, and passengers are like a wave: Dongguan Railway Station expects 87,000 travellers a day in the run up to the holiday’

Culture, Infrastructure, Labour markets, Social Policy

I recently finished reading Beijing Doll, an autobiographical novel by teenage writing sensation Chun Sue.  The back cover says that Chun is ‘the voice of a new generation’ and that her novel will ‘take readers to the streets of Beijing, where a disaffected generation spurns tradition for lives of self expression, passion, and music.’

Chun clearly sees herself as a rebel and an idealist, rejecting the authority of school and parents, attempting to live up to her own personal set of ideals.  But for Chun and her friends, the path to freedom appears to end in the shopping mall.  Here’s a section of one of the final chapters:

‘I picked out a green notebook, and went to cruise the cosmetics counters whilst G paid for it.  There were lots of things I wanted to buy, some of newest nailpolish by ZA, green eyeliner pencil, perfumed powder, Red Earth white eyeliner pencil, coloured mascara, and L’Oreal liquid foundation, which was cheaper and moister than other brands, so you don’t have to wet your face before you put it on.  Then there were Revlon Colorstay lipsticks, since I was tired of using nothing but light colours on my lips; I might as well not use any lipstick at all in that case, and save the money.’

If she really is the voice of a new generation, it’s time to buy shares in cosmetics retailers.

Culture, Retail