China Translated

According to an article in the 21st Century Business Herald, the All China Federation of Trade Unions is on another drive, this time to push collectively negotiated wages. According to the article, the aim is to increase proportion of unionised firms adopting the collective bargaining wage system from the current level of somewhere above 60% to 80% next year. The ACFTU will of course also be maintaining its efforts to get firms without unions to set them up.

According to one Beijing-based ACFTU official there is nothing fundamentally different about this latest drive, except that “we’ve put the focus on small and medium-sized enterprises, strengthening the implementation of the collective bargaining system among SMEs”. The campaign also appears to be winning legal backing in some regions: Guangdong, for example, is currently drafting regulations that would establish a legally binding collective wage bargaining system if 20% or more of workers sought it.

I can’t help but feel that this represents yet another misguided effort by ACFTU to make itself more relevant. It will certainly add more bureaucracy and state interference into a system that is already overburdened with them, and if it’s true that SMEs are the focus, the campaign is targeting those least able to cope with extra regulation. If I believed that ACFTU was genuinely going to be acting as a conduit between workers and management, I could at least see some justification for the move as a means of improving communication, but the government-backed union seems to be wilfully misreading the current situation.

A grassroots union official notes in the Herald that union officers “‘inability to negotiate’ isn’t purely due to the fact that they aren’t good enough…often ‘whether to negotiate’, ‘how to negotiate’ and ‘how far to negotiate’ is not up to the company’s union officers. Particularly because they don’t get a lot of practical negotiating experience, company union officials naturally find it difficult to improve their negotiating ability.” Of course, if lack of practise were the main problem then more collective bargaining might solve the issue.

Sadly, the real trouble still seems to be that all too many union officials represent the government first, management interests second and worker interests very much third. Few workers trust their union officials enough to go to them with demands, or when they’re unhappy, for fear of being branded a trouble maker or worse. Frictions and signs of trouble in the workforce are thus not conveyed up to management. Neither is management thinking especially well conveyed in the other direction. Without trust between workers and union officials, putting union officers into collective wage bargaining with management seems pretty pointless. The risk is that the end result may simply be more government intervention in the workplace, with little improvement in worker satisfaction - a situation that will leave no one happy.

Duncan Innes-Ker is a senior economist with the Economist Intelligence Unit

Guest contributor, Labour markets

In 2009, the National Bureau of Statistics found itself at the center of a storm of controversy over the wage data.  The announcement of an increase in the average wage of 12% for the year was so at odds with the reality of stagnant wages for many and redundancy for many more that it sparked a firestorm of angry commentary. 

Here’s a few of the comments I found online:

‘The NBS appears to have increased my salary again, if only they had told my employer’

‘This is a harmonized statistic’

‘This statistic is only about those who work in state owned enterprises, only those who know how to eat out at the public expense every day.’

The final comment hits the nail on the head.  With the NBS taking a simple average of salaries from mainly state owned firms, the wage data fails to reflect lower and more variable wages for the many workers who labour in the private sector.

To its credit, the NBS took the criticisms to heart.  This year, for the first time as far as I can see, they have published a breakdown of wages by state owned (strictly speaking state owned + public sector, joint venture, listed, and foreign invested companies) and private (which seems to mean small private) operations.

The NBS also explain why the official data for 2009 showed such a large increase in the average wage for the state sector.  Apparently the data was biased upward by a large pay rise for public sector workers - including a 16.1% hike in compensation for teachers.  Manufacturing workers, even those in the state sector, did rather worse, with only an 8.8% increase in wages.

But the real take away from the data is quite how low wages in the private sector are.  For 2009, the average worker in a private sector company was paid just CNY18,200, compared to CNY32,700 for the average state sector employee.  What is more, the growth rate of wages in the private sector is lower, just 6.6% compared to 12% in the state sector.

The new wage data is a step forward in terms of transparency and coverage of the statistical system.  But it also underlines the gap between the insiders who have benefited most from China’s years of rapid growth, and the outsiders who have not.

You can see the data on state sector wages here and private sector wages here.

Labour markets, Social Policy, Statistics

There is going to be a lot of office space in Ningbo. According to a Savills report from last year, total office stock in the end of 2008 was 1.2 million sq. m. It’s not a small number, but it will more than double - another 2 million sq. m. is on track to be delivered by the end of 2011. We are interested in the Ningbo office market because of a project, so we had to wonder: why?

There seem to be several reasons. First, there are not one but two major “new districts” in Ningbo, government-sponsored development areas that are intended to become significant business districts. (In the case of one, the “New East City,” the intention is to form a new city center, with the city government to relocate there.) These two districts are nearby and appear to be competing with each other, and each has what a person not acclimatized to China’s property market would appear to be an overpoweringly large number of big office buildings under construction. Office rent in at least some of the new buildings, if you are the targeted kind of tenant, is zero. In others, it’s market rate, which is not very far from zero. In addition to these two districts, there is Yinzhou, a suburban district to the south that also has a lot of new offices, and of course the traditional downtown, which far from being emptied out U.S. style, is adding new buildings of its own.

Another reason is more subtle. As the city expands, older villages are being swallowed up. Their land is acquired by the government for development, and the residents given relocation housing, but 10% of the land is retained by the village to provide an income stream to the former residents, who no longer have land to farm. This land is not zoned for investment housing*, so the villages build offices. Unfortunately, in many cases they hire low-quality companies to develop the land for them, and the office space created is similarly low-quality. This results in the newly developing fringe of the city being dotted with new office towers at major intersections, with the rest of the land being occupied by one-story brick warehouses and shops, relocation housing blocks, and vacant lots. It is not pretty to the eye, and with office stock more than doubling in an already shockingly cheap market, it probably will not be pretty to office investors either.

Having said that, after looking around in “New East City,” I have to say that the quality of construction is high, the shipping and logistics positioning seems reasonable, and the phasing of development, with the essential government services such as customs coming in first, makes sense. It’s not a Potemkin village - but I don’t know about the rest of the new stuff.

*It’s actually not a zoning restriction but a land use designation - all land being owned by the state.

Don Johnson is a Senior Economist with AECOM in Shanghai.

Guest contributor, Property, Regional

Second quarter growth in China’s FX reserves was a tiny USD7bln, despite more than a USD40bln addition from the trade surplus.  Slight growth in reserves despite the robust trade surplus suggests hot money was flowing out of China in the last two months of the quarter.

Two years of stability in the exchange rate knocked hot money off the policy agenda for the government: with little chance of yuan appreciation there was less reason for speculators to bring capital into the country.  But the recent announcement of the next stage in exchange rate reform will bring hot money back into vogue. 

Either appreciation against the dollar will be rapid and one way and the result will be increased incentives to bring hot money into the country - providing the real estate and equity markets pull themselves together.  Or appreciation will be faltering with the possibility of two way volatility - in which case speculators will probably find somewhere else to park their cash.

The interest in hot money in China’s policy circles is partly a relic of the Asian financial crisis, and, to a lesser extent, the speculative attack which forced the British pound to crash out of the European Rate Mechanism in the early 1990s. 

Chinese policy markers were horrified by the ability of foreign speculators to bring the governments of Asian neighbours to their knees, and by the humiliation at the hands of the IMF and its austerity programmes that followed. 

China has a closed capital account, so the chances of a similar attack are slight.  But that does not stop the Chinese media worrying about attacks by ‘big financial crocodiles’ (金融大锷 jinrong da e) - as George Soros style currency speculators are referred to.

This is my translation of a short section from a recent SAFE Q&A on the subject:

‘Our investigations in the first half of the year reveal that the vast majority of capital flows were legal and legitimate.  We have not discovered any large organised attempts to circumvent capital controls.  Most hot money is brought into the country through small transactions. 

As for so called ‘big financial crocodiles’, as we still have controls on capital account transations,  any speculative attack would be illegal - and this means that hedge funds and other financial institutions would think twice before trying their luck.

Hot money mainly enters the country disguised as legitimate trade and investment flows.  There are many and various routes.  But typically speculators are not particularly skilled at disguising hot money flows, so it is not that hard to pick up the signs of irregular transactions: 

-Companies in the processing trade will often under price inputs and over price outputs - with the collusion of their customers - to bring hot money into the country. 

-Shipping companies will take payments early and make payments late to increase their holdings of foreign capital. 

-Service companies can charge foreign customers for transport or consultancy services that are never provided, in order to have an excuse to bring hot money into the country. 

-Foreign investment is often disguised hot money, with investment advisory companies playing the role of broker for foreigners who want to make investments in the real estate or equity markets.’

You can see SAFE’s statement here.

Exchange rate, IFIs, Investment, Monetary Policy, Property, Stocks, Trade

There are many sensible arguments to be made on whether China has a house price bubble or not. I belong to the school which thinks the whole structure of the market looks very shaky, but I do tend to agree that without a big change in some of the fundamentals (like a property tax, or interest rate reforms) a crash is unlikely. What virtually all observers can agree on though, is that calling the property market right is one of the most important questions if one is to forecast where the economy’s going to go over the next 18 months or so.

Which is why it’s so important for the government to manage the message on housing policies and mortgages. Cue the desperate scramble to stamp out the rumour that seemed to be gaining ground in the last few days that policies - notably those on third house mortgages and buying by people from outside the local region - were set to be adjusted. Even the China Banking Regulatory Commission was called in to stress that “the policy requirements and standards have not changed at all”.

Really, this should come as no surprise. It’s true that the sudden drop in housing transactions since the tough measures were imposed in April has made policy makers nervous about their potential to send the economy into a double-dip downturn. But although even the government’s rose-tinted house price index is showing a monthly drop in national prices (down 0.1% in June from May), the downturn doesn’t yet seem to have hit real estate investment, which by my calculations was rising at about the same rate in June as the average for the first half of the year. Until there’s a drop off in investment I think it’s going to be tough to sell a relaxation of policy.

Even then, the real challenge is to break the current binary situation in the property market, where sales are either feverish or non-existent. To me this suggests policy may have to be kept tighter for longer than many currently suspect - having a real estate policy that swings every six months is frankly worse than not having one at all. Worryingly, I’m not confident that the government will have the nerve to do this. Export growth is set to slow sharply in the next 18 months as the rest of the world tightens fiscal policies, just the domestic economy is cooling as a result of the housing cycle and the easing of the infrastructure investment boom. This all sounds a little bit like 2008-lite, and we all know how policymakers responded then.

Duncan Innes-Ker is a senior economist with the Economist Intelligence Unit

GDP, Guest contributor, Investment, Property, Statistics

China’s State Administration for Foreign Exchange (SAFE) has a difficult job.  They have to manage China’s massive reserves of foreign exchange - USD2.45bln at the last count and probably a few more billion when the figures for the second quarter of 2010 are released in the next few days.

SAFE is quite happy to tell the world how much FX reserves China has, but it is rather more cautious about revealing the details of where they are invested. 

A recent notice on SAFE’s website offers few details on where the reserves are stashed away, but it does provide some insight into SAFE’s thinking on the reasons for secrecy.  This is my translation of the main points:

‘The size of our foreign exchange reserves means that information about where they are invested could move global markets.  Publishing information about our transactions could lead to market turmoil. 

A higher degree of transparency could also negatively impact our ability to effectively implement our investment strategy.

The majority of countries are cautious in publication of data on their FX reserves, and do not publish information on specific transactions.  The IMF standards for data disemination in this area are not particularly stringent.’

The key point here is the second one.  If you are moving USD2.45trln in funds around, and you telegraph your movements to the market, anything you want to buy is suddenly going to get very expensive, and anything you want to sell very cheap. 

Secrecy about the composition of China’s FX reserves is partly realpolitic, but there is also a real financial logic behind SAFE’s determination to play their cards close to their chest.

You can see the full SAFE announcement in Chinese here.

International Relations, Monetary Policy, Statistics, US-China Relations

At the climate change talks in Copenhagen, discussions on the future of the global economy in the G20, and the framing of a response to increasing tensions between North and South Korea, observers have discerned a new approach to diplomacy from an increasingly confident China.

One of China’s leading thinkers on international relations is the Director of the Center for Chinese and Global Affairs at Peking University, Prof Pan Wei.  Last night, I attended a presentation he gave organised by a group called Young China Watchers, where he outlined some suggestions for thinking about international relations in the 21st Century.  This is my notes on his remarks:

‘International relations is concerned with 3 main areas:

1. Power - hard military and economic power and soft cultural power

2. Transitions between old and new powers

3. Geo-politics - strategic alliances between powers

In the 21st Century, thinking about these 3 areas  has to answer 6 new questions:

1. Why is global peace sustainable and war between great powers difficult to imagine?  Why is there now no great enemy like the Germany of the first half of the 20th Century or the USSR of the second?

2. Why is there now no grand system of global alliances?

3. Why is the USA, which accounts for 50% of global military spending, considered a power in decline, but China, with a relatively weak military, considered to be in the ascendant?

4. Why is it that in the 20th Century we only saw nations falling from the first world to the second (Argentina, Russia), but in the 21st we are seeing nations rising from the second world to the first?

5. Why is it so difficult to identify the central concern of international politics - with weapons of mass destruction, islamic fundamentalism, financial crisis, climate change, and the rise of China all competing for attention?

6. Why has no one developed a feasible grand strategy for responding to the challenges of the 21st Century?

Finding an answer to these questions demands thinking past the old theories of international relations.

One way to conceptualise the new world order is to think about different sets of issues - economic, religious, political, natural resources and so on.

For any given issue, nation states can be in conflict, cooperation, or competition.  And nation states can be compete, conflict, or cooperate on one issue, whilst at the same time having a different relationship on another issue.

There are three major implications of this analysis:

1. It is a time of peace - since the potential for cooperation or peaceful competition on some issues means conflict on other issues should not be allowed to spill over into militaty conflict

2. No scope for hegemony by a single world power - because of the mulitiplicity of issues and power assymetries in different issues: ‘it is not sustainable to destroy US$100 tents with US$10mln missiles’

3. There is no scope for grand strategies, and instead nation states need to carefully evaluate their position across different issues areas, recognise uncertainties, and be prepared to respond nimbly to changes in the situation.’

In response to questions from the audience:

Prof Pan was sceptical about the conclusions of the official report on the Cheonan incident - noting that the South Korean ship was an advanced anti-submarine ship so it seems unlikely that it could be sunk by a primitive North Korean submarine.  He thought that the decision by President’s Hu and Obama to not address the issue at their meeting on the sidelines of the G20 meeting was sensible, since there was no easy resolution.

He thought that as China’s engagement in the world increased, and its citizens found themselves in more far flung corners, the scope for Chinese engagement to protect their lives and interests increased, but he anticipated that China would attempt to resolve issues through diplomatic rather than military means.

On the outlook for foreign policy under the Xi Jinping and Li Keqiang generation of leaders, Prof Pan noted that the next generation are cautious and do not reveal what their policy stance is.  He thought they see themselves as better educated and more worldly than the generations of leaders that have come before, and keen to surpass their achievements.  The danger in this is that they will be overly bold. 

On Xi Jinping’s famous remarks in Mexico on foreign leaders that have nothing better to do than criticise China, he said that China’s leaders often made extravagent remarks at private events, that Xi Jinping was actually a rather mild mannered individual, and that this comment was not revelatory of a new assertiveness amongst the next generation of leaders.

Communist Party, International Relations

Although China’s exports to the EU and US have held up pretty well this year, all things considered, it’s clear that the fiscal consolidation just getting underway in these two big markets will make things tough going forward. New avenues to pursue export growth will have to be found, and these are likely to come increasingly from the emerging world. You can already see evidence from the trade numbers that exporters are making headway in penetrating new markets - exports to Brazil were up by an eye-popping 98% year on year in the first five months of 2010, and those to ASEAN markets by 46%.

All of which helps to explain why emerging nations like Brazil and India are beginning to join the US and EU in the interminable finger-pointing over the renminbi. India has also begun to use anti-dumping measures against China on a regular basis across a number of sectors. Is this a sign that a new front in China’s trade wars is opening up? I doubt it. India, Brazil and a few others (Mexico and Turkey spring to mind) have the mass market and the strategic global clout to get in China’s face on trade, but any other emerging nations that try throwing their weight around in this way are likely to receive a bruising reminder of Chinese-style trade diplomacy.

Take Argentina, which earlier this year imposed restrictions on imports of Chinese-made shoes, pipes and other products. China was not happy, and responded with quality control measures on soy bean oil imports that hit Argentine exports. Five months on it’s pretty clear who’s winning this argument: according to the China customs administration Chinese exports to Argentina were up by 75% year on year in January-May, while its imports from the country were down 42%. Given that few emerging markets will be willing to risk losing out on the Chinese bonanza like this, I think most will remain wary of trying to curb the Chinese import surge.

Incidentally, given the clarity of the Chinese trade numbers (regarded as some of the stronger data in China’s somewhat rickety statistical base) it is funny to see Xinhua running with the Argentinian data. These portray a far more harmonious picture, with both China’s exports to Argentina and Argentinian exports to China rising, by 39% and 19% respectively. Trade flows are also much higher than shown by the Chinese side’s data. Sadly in this case, given the background of events on the ground and the poor reputation the Argentinian government has for statistical truth-telling, I’d put more faith in the Chinese numbers.

Duncan Innes-Ker is a senior economist with the Economist Intelligence Unit

China - Latin America relations, Guest contributor, International Relations, Statistics, Trade

China’s official statistics tell a story of the rich getting richer and the poor getting, relatively, poorer.  The official data suggests that the richest 10% of the population have earnings 9 times those of the poorest.

But according to Professor Wang Xiaolu, that’s just the half of it.  Professor Wang’s original research in 2005, suggested that the richest 10% of the population had an average disposable income of CNY96,000/year, several times higher than the CNY28,000 suggested by the official statistics.  Professor Wang believes that the reason for the massive gap between official and real income for China’s rich is that the extra earnings are the proceeds of corruption, and are therefore unlikely to be reported.

According to the most recent posting on his blog, Professor Wang has now updated his research, and found much the same thing.  The ratio between the income of the richest and the poorest 10% of the population is not 9, as suggested by the official National Bureau of Statistics numbers, but rather 21.  Professor Wang notes that this massive disparity will likely have serious implications for social stability, and also strip away public support for economic reforms - which are perceived as disproportionately benefiting the rich.

In an intriguing side note, Professor Wang notes that the massive income of the very rich also helps explain the rapid growth in China’s household deposits.  This puts a new spin on the idea of China’s households as frugal savers.  If Prof Wang is correct, China’s very high household savings rate does not reflect poor and middle income households saving carefully for their future, it reflects a few very rich households parking their ill-gotten gains in the banking sector before buying a yacht.

You can see Professor Wang’s blog posting here.

Social Policy, Statistics

I have an opinion piece in the South China Morning Post today on Beijing’s latest moves on the CNY and the implications for this weekend’s G20.

SCMP subscribers can read the piece here.

Everyone else can read it below:

US Might Miss an Open Goal on the Exchange Rate at G20 Summit

China’s hapless soccer team might not have qualified for the World Cup, but when it comes to playing the game of global politics, its leaders have shown considerably more finesse.  So whilst China’s soccer eleven are polishing their boots, China’s economics A-team is on the way to Toronto for the latest summit of the G20.  There has not been this many Chinese faces arriving in Canada since Hong Kong’s reunion with the mainland.

One week ago, it looked like the latest meeting of the world’s self appointed high council on all things financial crisis would be a festival of China bashing, with the exchange rate the main focus of attention. 

Back in April, when the US Treasury delayed publication of a critical report on China’s exchange rate regime, the unspoken trade off was that China would start the yuan appreciation ball rolling ahead of this week’s pow wow.  The attack dogs in the US Congress latched firmly onto that informal deadline, threatening that if there is no movement on the exchange rate by the G20, they will take matters into their own hands.  If China had not acted last weekend, the US would have been compelled to go on the offensive at Toronto. 

The European debt crisis has Brussels gazing at its own bureaucratic navel.  But with emerging markets like Brazil and India adding their voices to the paean of protest, and rumblings of discontent from East Asian neighbors, China looked set to find itself isolated at the international negotiating table.

By signaling the end of the yuan’s 22-month peg to the US dollar, China has done just enough to calm the storm.  In the few days that have followed the announcement, the yuan has been little moved.  A 0.2% appreciation against the dollar will hardly be enough to bring the competitive shine back to manufacturers in the US rust belt. 

But China has won itself the benefit of the doubt.  The same voices that were, last week, raised in protest, are now offering a cautious welcome for Beijing’s promise of increased flexibility.  The US Congress remains on the war path.  But China has given the Obama administration the fig leaf it needs to justify its softly softly approach to dealing with Beijing, and done just enough to ease tensions in relations with other emerging markets. 

Leaders in the US and elsewhere want China to translate its words into actions - they want real change not just a commitment to change.  But for now, Beijing has moved the exchange rate to where it wants to be - off the G20 negotiating table.

A careful examination of the fine print in Beijing’s announcement on exchange rate reform, however, suggests the US would be well advised not to allow the yuan to slide too far from view. 

China’s trade surplus might have come in at a tidy USD198bln in 2009, but that is still way down from almost USD300bln in the 2008.  Beijing has taken this as evidence that the trade account is coming close to balance of its own accord, and the need for further adjustment of the exchange rate is limited.  The announcement also makes clear that what adjustment there is will be gradual, to give the export factories of the Pearl and Yangtze river deltas time to adapt.  When it comes to exchange rate reform ‘limited’ and ‘gradual’ are not the words that Washington DC wants to hear. 

Even more alarming for the US, China has made it clear that in the future, the direction of travel for the yuan against any particular currency could be down as well as up.  The new plan for the yuan might mean continued stability, or even depreciation, against the dollar, at the same time as the currency appreciates against the euro, the Brazilian Real or the Indian Rupee. 

If Brussels, Brasilia, and New Delhi find the yuan’s new flexibility means appreciation against their own currencies, they will see little reason to support the US on the need for appreciation against the dollar.  By conceding to US demands for enhanced flexibility of the exchange rate, China might have succeeded in turning the international consensus on the need for yuan appreciation on its head.  If it is the US that finds itself isolated at the negotiating table at the next G20, scheduled for Korea in November, they might regret missing an open goal in Canada.

Exchange rate, Financial Crisis, International Relations, Trade, US-China Relations