China Translated

I took a trip around Jiangsu’s idustrial base last month, visiting a number of factories in Wuxi and Suzhou. Amid sweltering temperatures, of over 40 degrees celsius (not the ideal time to be looking at blast furnances perhaps), several themes came through strongly, but perhaps the one that caught my eye the most was the trend in wages. Several of the managers we talked to said that they were looking at wage increases for 2011 that were roughly 50% higher than in 2010-so if they had gone up 8% in 2010, 12% was expected in 2011, or 15% if this year saw a rise of 10%. As this post from the Plastics News China blog, which notes that companies looking for tough-to-find employees (like plastics injection press operators, construction workers and cooks) are having to offer wages 30-50% higher than normal, shows, our experience seems to be the new norm rather than a fluke.

Against that bakground it was interesting to find this piece from the Jiangsu Merchant newspaper. It notes that the provincial government-mandated basic guideline for pay increases has been set at 10-12%. A suggested floor increase of 4-6% was also offered, but for the first time the government has refused to set a guideline ceiling for wage rises. According to the paper “The reason the upper guideline was abolished this year, is that the relevant government departments hope to provide more space to raise salaries in those companies with a comparatively low rate of base pay.”

It was also revealing to see, given the recent outbreaks of labour activism and debate over the role of the ACFTU, that the announcement of the guidance on pay growth was issued not by the Labour and Social Security Ministry alone, as had been the case in the past, but by the provincial ACFTU and the provincial chamber of commerce (qiyelianhehui). Perhaps ACFTU’s role is being deliberately promoted…

Jiangsu is obviously just one province, and a relatively advanced one at that, but developments there are likely to be broadly reflective of those in the wider Yangtze delta, whose labour markets are quite closely integrated. Wage pressures there will filter out across the region. It is worthwhile remembering that it was only five years or so back that (as Professor Yasheng Huang is fond of pointing out) pay rises for less skilled Chinese workers were not happening at all. Perhaps all of this will be positive for the rebalancing story, promoting a shift in income from company profits to workers wages, and from investment to consumption. I’m optimistic…

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

Guest contributor, Labour markets

Inflation has eased down the list of people’s concerns recently as the CPI has come in below expectations over the last few months. Monetarists who feared last year’s explosive credit growth would fuel inflation in 2010 have waited in vain for a price spike. However, as the blue ear crisis of 2007 highlighted so clearly, inflation in China is more often than not a food-driven phenomenon, and on that front there is room to start getting nervous.

First we have the international picture. Wheat prices have soared thanks to weather conditions that have devastated harvests in Russia and the Ukraine. Although the market may be hyperventilating on this issue, and prices could well drop back as people realise that most key wheat markets have good stocks to draw down, wheat prices are certainly likely to stay elevated relative to last year. While grain prices in China do not always follow those on the world market, the latter are certainly likely to exert some influence (if only because smuggling starts to rise if the difference grows too large). This goes all the more for soya beans, which China is a big importer of, and where poor prospects for the US harvest are pushing up prices.

Meanwhile, at home China is suffering from an unusually extensive flooding season that has hit much of the Yangtze delta, and more recently north-eastern Jilin province. The latter is particularly worrying. Jilin is one of China’s bread baskets, accounting for roughly 13% of China’s maize crop in 2008. As one of the officials combating flooding efforts along what is known as the 2nd Songhua River (a stretch of the massive Songhua River) recently put it: ”This [region] is Jilin’s hinterland. The 2ndSonghua River affects around 73% of Jilin’s land area, and this is the province’s key region for foodgrain production. It’s very important”.

Details of how much floods have affected harvests are difficult to come by. The government has been sounding reassuring notes, but then it does that whatever the actual situation on the ground. In any case, such positive notes sound a bit tinny against a recent move to curb the regular auctions of maize from the state reserves. Bizarrrely prices actually fell after this move, possibly because officials exerted influence over bids so as to reassure the market. However, the restrictions on supply will clearly push up prices on the secondary market, and given how much the authorities tend to dislike rapid grain price rises this suggests that stockpiles may be running worryingly low.

With corn, soya beans and wheat all experiencing upward price trends, it is surely only a matter of time before this begins to feed through into wider food inflation. We are still unlikely to see a repeat of the frothy food prices witnessed in 2007-08, but it looks like inflation will soon be back at the top of people’s concerns.

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

Agriculture, Guest contributor, inflation

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

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

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

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

Lately China’s sustainable development goals have been in the news again following the announcement of a sudden jump in energy intensity of production. China has been tracking this interesting metric – which is linked not only to energy use and carbon production but also to technological improvement and movement up the industrial value chain – for some time (warning: apparently nobody outside the relevant departments really understands how it is calculated) and it is said to be a particular focus of Premier Wen Jiabao. Energy intensity had steadily declined 14% from 2005 and was almost on target to meet the 2010 goal of a 20% reduction, but took a sudden 3% (annual) jump in the first quarter. Heavy industry, responding to the tremendous infrastructure push of last year’s stimulus package, is seen as the culprit. Following the news Premier Wen got all medieval, promising in widely published reports to take an “iron hand” on the issue.
For deeper analysis, see the excellent Green Leap Forward.

China’s top leadership has been increasingly visible on alternative energy, low carbon development, pollution control, climate change and other sustainability issues, and Wen seems to be making the energy efficiency target a line in the sand. I think we can safely assume that this is not because senior Chinese leaders are lying awake at night worrying about snail darters and burrowing owls, but because they see these issues as serious potential threats to continued economic development and social stability.

Last week, the Chinese Academy of Sciences published a report of a speech given by the Vice Director of the Chinese Institute of Engineering Du Xiangwan called, “After 2050 China Will Enter a Stage of Green, Low-Carbon Energy Development.” The speech was notable to me for its clear description of the importance of changing China’s current energy use – followed by a set of energy goals that can could perhaps be described as realistic: In his description of China’s energy mix in 2050, renewable energy, including hydropower, has taken a position as a major (but unquantified) component, but coal still occupies 35% to 40% of the total, natural gas has 10%, and nuclear has 15%.

Here’s the report’s description of the issue and China’s strategic approach:

Our Nation Must Move Towards Green, Low Carbon Energy Sources
The tasks of China’s sustainable development of an energy development strategy can be summed up as “scientific, green, low carbon energy strategies,” and can be further summarized as speeding up the transition of regulations and controls, strengthening the primacy of energy efficiency, implementing controls on total energy use, guaranteeing appropriate demand, optimizing a diverse structure, carrying out “green and low carbon,” leadership from science and technology, and a high efficiency economic system.

Proposing such a strategy stems from the challenges faced by China’s energy resources. Du Xiangwan said that China very quickly will become the world’s largest energy consumer. “If China’s energy consumption is maintained at an average growth rate of 8.9%, by 2020 China’s energy consumption will reach 7.9 billion standard tons of coal, which is half the world’s current energy consumption.”

He pointed out that this kind of economic development model would obviously run into very severe restrictions. To support society and the economy’s scientific development, it is necessary to put forth total consumption control standards for fossil fuels, and to plan for the overall speed, structure and consumption model of development. Furthermore, China’s current crude energy exploitation and use results in severe environmental problems.

“No matter how much climate change is disputed, China’s energy must move towards green and low carbon,” Du Xiangwan said.

The original speech is here.

Don Johnson is a senior economist with AECOM

Energy, Environment, Guest contributor, Industry, Statistics

Apparently the number of marriages in China shot up last year, despite all the economic turmoil. According to this report on the China Popin website (quoting the Beijing Morning Post), 12.1m people got hitched in 2009, a rise of 10.4% over 2008.

China’s marriage market seems very volatile. In the last ten years the number of marriages being recognised has plunged by as much as 5.1% in a single year (2005), and risen by as much as 14.8% (2006). Average growth over the last 10 years has been about 3.4% annually.

I’m no demographer, and I guess it could all be to do with lucky years, but I’d love to know whether the boom in weddings last year had anything to do with the stimulus. Were people encouraged to do the deed because credit for that expensive ceremony (not to mention the car and house that poor guys need to bring to the table these days) was cheap? Did all those weddings and young couples redecorating new apartments serve as a powerful tool to help get the economy out of its doldrums?

I guess the question now is whether, with people being limited to one housing mortgage per family in most places, we will see couples divorcing to buy that extra flat? Something along those lines seems to have happened before - divorces shot up 25.2% in the housing boom of 2004. (They were up by a more modest 8.8% last year to 2.5m). Let’s keep fingers crossed that the cost of divorcing as the economy slows and credit conditions tighten will help keep all last year’s lovebirds together…

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

Guest contributor, Social Policy

Honda parts suppliers in Guangdong, Taiwanese rubber producers in Kunshan, computer parts firms in Pudong, sewing machina makers in Xi’an… employee strikes seem to be one of the hottest fads of the summer in China. Although media coverage within China has now been toned down under guidance from above, the press outside of China has been latching onto the story with vigour (see this FT article for example).

The question many are asking is whether all this unrest is going to push up wages and lead to inflation. The answer to both questions is probably yes, but there’s nothing to get too worked up about yet. For starters, strikes are (with the exception of the scale of the Honda disruption) quite normal as I mentioned before. We’re basically back to where we were in 2007-08 when the export sector was thriving and firms were scrabbling around trying to find workers, so workers were doing their best to exploit their strong bargaining position. It’s true some of the pay rises being announced are pretty impressive, but the media figures need to be treated with a pinch of salt.

I find it very difficult to believe, for example, that Foxconn is really going to be doubling the pay of all its workers–it would make them hugely overpaid relative to their skill level, although with somewhere between 300,000 and 600,000 workers being employed by Foxconn’s parent Honhai in China it really would be a bombshell for the market if it happened. The China Labour Bulletin’s Geoff Crothall notes that there seem to be strings attached to the pay deals they’ve announced.

Besides, the pay rises announced this year, as well as the increases in the minimum wage (which seem to be averaging between 15-20% this year), need to be seen in the context of the pay freeze that was in place for most regions last year. Meanwhile many firms are offering much lower increases, especially in services, where competition is still tough for places. KFC’s Shenyang unit recently settled on a 5% annual pay rise deal with a minimum monthly salary level of Rmb900 a month (although one stressed KFC worker complained that they were really short of staff as ”as soon as interviewees hear [the pay level] they run”). With economic growth set to cool in the second half, some of the upward pressure on wages may ease as we head into 2011.

The elephant in the room in all of these pay stories is the All China Federation of Trade Unions. Experts in the labour field say it’s been doing a terrible job managing worker-management relations, and that many in government and the Communist Party have been criticising its failures. It’s hard to generalise across the country, of course, and some branches do much better than others, but it wouldn’t be surprising to see some reshuffling at the ACFTU or policy rethinking if the rash of strikes continues, or escalates.

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

Communist Party, Guest contributor, Industry, Labour markets

One of the greatest challenges China faces as it tries to move up the value chain is the shortage of high quality universities turning out people with the skills needed for the new economy. It’s a subject that clearly bothers a lot of academics and policy makers, but as far as I can see it doesn’t tend to get the sort of press coverage that many of China’s other pressing problems do–perhaps I am just reading the wrong papers. In any case, it was interesting to see it addressed by Caijing in a recent interview (in Chinese - it doesn’t seem to be translated in their English version yet) with Yang Fujia, the current chancellor of the UK’s Nottingham University.

Professor Yang is clearly well placed to talk about the issue. His background is in nuclear physics, but he has previously headed up Shanghai’s prestigious Fudan University, and he holds numerous other mainland academic titles, not least as a fellow of the Chinese Academy of Sciences.

Using his international perspective to compare China’s system with those in the UK and US he draws out a number of criticisms, for example of the enormous spread out campuses that seem to be proliferating in China, which he argues lead to much time being wasted getting between A and B. He also lays into a couple of bugbears that I’ve seen mentioned in other discussions of the university system: the demands on teachers and research students to hit quantitative targets for being published (which distract them from the task of getting on with worthwhile research), and the lack of contact between teachers and students–he is a big fan of the UK’s tutorial system.

However, the bulk of the interview is taken up with a criticism of the current system through which the Party and the government control universities. He notes that in the UK universities run themselves under their own set of rules and regulations, with the only requirement from the government being that these do not breach national laws. By contrast, in China everything is looked after by the Ministry of Education, but this crimps flexibility and few people seem to pay much attention to the rules that the Ministry imposes. Meanwhile, the system encourages university leaders to pay more attention to the Ministry, which appoints them, than to the needs of the professors and students that they are in charge of.

It is refreshing to see weaknesses of the state- and Party-dominated education system discussed so openly in the domestic media, but I fear that Professor Yang’s calls for reform of the system (he wants universities to be overseen by committees representing in equal proportions Party members from the faculty and student bodies, the university leadership and external representatives) may be optimistic. I’m reading David Shambaugh’s China’s Communist Party: Atrophy and Adaption at the moment, which notes that one of the lessons the Party drew from the collapse of the Soviet Union was the need to maintain tight control over universities. I suspect that the government will find it very difficult to manage that while giving the universities the independence that they need to thrive.

Duncan Innes-Ker is a senior economist with the Economist Intelligence Unit, based in Beijing

Guest contributor, Labour markets, Social Policy