China Translated

The Shanghai Composite Index (SCI), China’s benchmark equity index, fell 6.7% today, ending at 2667.75.  The index has fallen 23% from its August 4th peak and crashed through the 3000 and now the 2800 barriers which were expected to trigger government support.  After the markets closed, I spoke to someone who works in Shanghai to get their view on why the markets are falling so sharply.  The main points they made were:

First, the economic data so far in August is as expected, so the falls in the markets are the result of falling confidence, not a change in the fundamental performance of the economy or listed companies.

Second, the main driver of falling confidence is concern that the new loans that have provided ample liquidity to the markets in the first half of the year will dry up in the months ahead.  This concern was reinforced by an article in Caijing today suggesting new loans for August might be just CNY200bn (down from CNY355bn in July).

Third, Premier Wen Jiabao remains publicly committed to an ‘appropriately relaxed monetary policy’ but there are market rumours of a divide within the top level of the government which means it is more difficult for the Premier to implement his preferred policy.

Finally, press reports of weaker than expected Christmas orders for manufacturers in Guangzhou provided a negative economic data point and reinforced weak investor sentiment.

Another factor that has been mentioned in the press is the coming wave of IPOs.  China Metallurgical Group will start subscriptions tomorrow and aims to raise CNY16bn.  IPOs are a massive drain on liquidity as investors scrabble to subscribe.

An article published on the Economic Observer website after the markets closed today quotes one investor as saying that IPOs along with lower levels of new lending are the main reason for the collapse in the markets.

The article notes that between the end of June and the end of August, 106 companies have raised capital amounting to CNY300bn from the mainland’s markets, either through IPOs or through new share issues.  The Economic Observer believes that this drain has been more than the market can bear and has contributed to the slide.

With more companies lining up to raise capital in the weeks ahead, including CNR (a train manufacturing company), Vanke (real estate), and China Everbright Bank, the markets may have further to fall.

You can see the Economic Observer article here.

Banking, Investment, Monetary Policy, Stocks

Today I made a brief appearance on Fox news to discuss the outlook for the Chinese economy in the second half of the year.  You can see a clip here.

Financial Crisis, GDP, Monetary Policy

China’s stock markets have continued to veer wildly up and down as investors waver in between hope that relaxed monetary policy will sustain another rally and fear that valuations are unrealistically high.  More than a million retail investors have  opened trading accounts every month this year since January.  Anyone who bought into the market after the middle of June (and more than 2m new retail trading accounts were opened in July) has lost money. 

With so many retail investors, there is a growing number of investment pundits who offer their advice on the markets on television, in newspapers, and on the web.  One such is Zhu Daming, whose blog focusses on the mainland’s stock markets (as ‘Daming’ translates as ’speak your mind’ it’s possible its a pen name).  This is a rough translation of his latest post which discusses where the Shanghai Composite Index is headed:

‘At the end of July the markets entered into a prolonged period of correction.  The Shanghai Composite Index (SCI) fell from almost 3500 down to around 2800.  In my view, 2800 is the bottom for the markets in this period of adjustment, and a fall below 2800 will trigger policy support from the government.

The origins of the sudden fall in the SCI lie in the government’s micro-moves to adjust monetary policy.  Even more, they lie in the fear of anti-inflation policies that have left the matrkets as cold and shivering as a cicada in winter.

Today, Shang Fulin, the head of the China Securities Regulatory Commission (CSRC), has said that the movements on the markets and the developments in the real economy are identical, and factors promoting the healthy development of the markets are gathering in strength.  In many people’s view, Shang’s words indicate that the CSRC will intervene to support the markets at the current level.  In my view, the CSRC should act decisively to support the markets if they fall below the current level.

The first reason is that 2800 is the level of the markets before the current wave of Initial Public Offerings (IPOs) started.  One of the reasons for the fall in the markets is that the CSRC misjudged the pace of IPOs and the markets couldn’t take the weight.  That is especially true of the State Construction IPO, which people are calling a second Petrochina.

The second reason is that the economy is still recovering.  The markets are the weathervane of the economy.  If the government allows the markets to fall too much, it will erode consumer and investor confidence and damage the recovery.

Third, there are arguments against regulators intervening in the market.  One reason is that the current falls are correcting the violent rise on the markets in the first half of the year.  But that correction has its proper limits, and if psychological factors start driving the markets outside of those limits there is a strong case for intervention.

[...]

Inflation is still a long way away.  Industrial overcapacity means the problem facing us is rather deflation.  So we ask those who manage the markets to stick with a relaxed monetary policy.  That’s what the markets need.  And to intervene decisively if the markets fall again.’

The difference in appraoch to the regulation of equity markets in the USA or EU and in China is striking.  In the USA and EU it is accepted that there is no proper level for the markets.  Shares are worth how much people are willing to pay for them, not how much the regulator judges they should be worth.  So the regulator would not step in to support the markets at a particular level. 

In China, as Zhu Daming makes clear, investors have every expectation that the regulator can and will step in to support the markets at a certain level.  The question for investors then becomes not how much a particular share is worth based on the expected future performance of the underlying company, but how much it is worth based on a best guess as to the future intentions of the government.

Original article here.

Financial Crisis, Monetary Policy, Stocks

It’s been a wild ride on China’s equity markets.  Back at its peak in October 2007, the Shanghai Composite Index (SCI) was over 6000.  By the beginning of this year it had fallen to about 1800.  In the first seven months of the year, liquidity and confidence drove a rise back up all the way to 3500.  But in the last couple of weeks the market has veered wildly up and down.  The market ended today at about 2,950.

The Chinese government pays pretty close attention to the value of the equity markets, and sometimes intervenes directly in the markets in ways that would be unusual in the UK or USA.  One of the milder forms of intervention is newspaper articles in the official press talking up the markets.  This is my rough translation of the main points from one recent article in the China Securities Journal.

‘The Shanghai Composite Index is following a positive trend, but in the last ten trading days, a sharp fall from 3500 to 2800 has bruised investors’ confidence and panic fills the air.

Against a background of economic recovery and with the government’s supportive policies still in place the sudden fall in the market can only reasonably be explained by a change in investors’ expectations. In a situation where expectations were too high and investors move to take profit, a sharp correction in the markets can naturally occur.

At a time when warmth is returning to the national and global economy, there is no chance of continuous downward slide on the markets of the sort we saw last year.  The equity markets remain an ideal investment opportunity.

In the first half of the year, with a recovering economy and supportive macro-economic policies, it was difficult to say which shone more brightly, the recovery in the equity markets or in the real economy.  As we entered the second half of the year, some of abundant liquidity from the real economy started to leak into the equity markets and expectations became too elevated.  With prices high, there was a higher level of risk, but the sudden downward turn still took investors by surprise.

The experience in developed countries is that the capital markets and the real economy have to stay in step.  Sudden rises on the capital markets that are not consistent with changes in the real economy will sooner or later be brought back to earth.

For most of the first half of the year, movements in equity prices were consistent with movements in the real economy.  But from June onwards the equity markets were excessively optimistic about the prospects for the real economy.

Looking forward to the next period on the markets, the ongoing recovery of the real economy, and the maintenance of an appropriately relaxed monetary policy will be two main factors supporting stability of the equity markets.’

The not-so-subtle message is that the government thinks that movements in the SCI after June reflected excessive optimism.  At the beginning of June the SCI was at 2650 so equity prices might have a bit further to fall before the government steps in with any more substantive support.

Original article here.

Financial Crisis, Monetary Policy, Stocks

China’s National Bureau of Statistics (NBS) is having a difficult year.  First came the disparity between GDP (growing) and electricity output (shrinking).  The NBS explained that this was because some energy intensive but low producivity industries had been hard hit by the downturn. 

Now the NBS is under fire because of data on average wages.  The NBS data, published in July, showed wages growing 12.9% yoy in the first half of the year to CNY14,638.  This was a big surprise to lots of Chinese people who have either found themselves redundant, with reduced hours, or lucky to hold onto their job at the same salary.

I think there’s a perception amongst some people in the USA and Europe that there is no awareness of or discussion of social or economic problems within China, and that the sword of truth and shield of justice are wielded solely by heroic foreign commentators. 

In fact, on a range of issues, there is a lively and informed debate within China, with newspapers, think tanks, and civil society holding a range of different views.  Our post on environmental issues a few days ago illustrates that this is true for subjects like the trade off between pollution and growth.  It is also true for the question of economic statistics.  The 21st Century Business Herald has an article in today’s edition about the problems with the NBS data on wage growth.  This is my translation of the main points:

‘Huang Xiao has lost face.  Huang works at the Beijing office of the National Bureau of Statistics.  All of her friends and relaives want to know how the NBS calculates the national average wage.

In July, the NBS announced that the national average wage for the first half of the year had risen 12.9% to CNY14,638.  When she went home for a break Huang found herself besieged by her friends and relatives: ‘how have you increased our wages?’ they asked, sarcastically.

‘Everyone asked me how we could have worked out a 12% increase in wages?’ said Huang.  ‘They said that their wages had not increased, and  neither had the wages of anyone they knew - the economic downturn had seen to that.  So how could we have calculated that average wages had increased?’

Huang felt embarassed, like she was the cause of the ‘NBS got me a job, NBS increased my wages’ jokes on the internet (Chinatranslated note: these jokes refer to the disparity between the high official employment rate and growth in average wages and people’s real-world experience that it is tough to get a job let alone a wage increase - hence the line ‘被就业’ ‘被增长’ which mean something like ‘the NBS has got me a job’ and ‘the NBS has got me a pay rise’).

Huang eventually worked out that the reason why the NBS had suggested that wages were increasing was because of the sample set they used.  The sample included big state owned enterprises and collective firms (which have been the main beneficiaries of the government’s stimulus plan and which have not shed jobs), but did not include smaller and private firms (which have not received so much support and which have been the first to shed jobs and cut wages).

At a work conference held on the 1st August, Ma Jiantang, the head of the NBS, was frank about the need to improve the quality of official statistics.  He said: ‘our statistical data can not yet meet the demand of government and the public, and reliability can not yet satisfy people’s demand.’

Original article in Chinese here.

Financial Crisis, GDP, Labour markets, Social Policy, Statistics

Today I made a TV appearance on CNBC, commenting on issues with China’s GDP statistics and the outlook for growth in the second half of the year. You can see the clip here.

GDP, Statistics

Who is driving the new wave of investment in China’s property sector? In a recent article, Caijing provides an interesting character sketch of the new generation of property investors, looking especially at investors in the Shanghai luxury residential market. These are the main points from the article translated by me:

‘In the past, outsiders accounted for 70-80% of investment in China’s luxury housing market. Today, Shanghaiers are making 50% of the investments.

Aside from the rich Shanghai residents, there are also investors from Zhejiang (a neighbouring province). Zhejiang’s private sector businesses are looking for somewhere to park their capital and the Shanghai property sector is a good bet.

Zhejiang businessmen have seen their export markets dry up and so they don’t want to make investments in building more production capacity. If they have cash on hand they are putting it to work in the stock markets, property markets, buying shares on the Hong Kong exchange, buying steel.

One commentator from the Shanghai Academy of Social Science said that the flow of new bank lending and businesses own capital into the property sector had a lot to do with the lack of investment opportunities in the real economy.

One property sector insider told us about his relative, a business woman in Zhejiang. She had ended the lease on her factory, paid off her workers, sold her equipment, and invested everything in the Shanghai property sector, aiming to get a quick return and then take her profits and restart her business when external demand has picked up.

Another Zhejiang businessman, a shipbuilder, has recently pulled CNY20m from his equity investments and put it into property investments.’

I think there’s a few interesting take aways from these anecdotes. First, the new boom in the property sector is being driven in part by speculation. Second, concerns about overcapacity in the industrial sector might be overdone. Business people continue to make rational proft maximizing decisions about how to run their business. They won’t build a new production line if there is no demand for their products. Three, business people are also investors with a dynamic and resourceful approach to managing their portfolio and a willingness to shift their productive resources to where the returns are highest. That might mean bubbles in the equity and property sector markets when there are no investment opportunities in the real economy, but it also suggests that business people will shift resources back to their enterprises when the time is right.

Banking, Financial Crisis, Industry, Investment, Property, Regional, Stocks

One of the big unknowns about how China is dealing with the economic crisis is the situation of migrant workers.  At the beginning of the year, reports of 20m unemployed migrant workers conjured dark visions of social unrest.  Fast forward several months, and the National Bureau of Statistics has published a note suggesting that the vast majority of migrant workers have in fact found work, and the ones that have not have industriously started their own micro-enterprises.  An unemployed horde laying waste the social order or happy workers returning from the fields to the factories?  The truth lies somewhere in between.

Huong Trieu is a PhD student at the University of Michigan, focusing on access to public services for migrants in China.  She has spent the last 6 months conducting field research amongst migrant communities in Beijing, and will spend another year performing research in Shanghai, Zhejiang and Guangdong.  She was kind enough to answer Chinatranslated’s questions on the migrant worker situation.

Chinatranslated: We hear a lot about how migrant workers are being affected by the economic crisis, you have spent a lot of time interviewing migrant workers over the last few months, what’s your assessment of the impact of the crisis on their lives?

Huong Trieu: This really depends on which city these migrant workers are located in. Since Beijing is not a large exporting city, its economy is less affected by the economic crisis. So migrant workers in Beijing are less affected. Unlike coastal cities where migrant workers are concentrated in factories, migrant workers in Beijing mainly work in service industries. When you walk around Beijing, you’ll notice job postings on restaurants, hotels, salon and so on, which suggest that there is actually a labor shortage.

The situation in Guangzhou is quite different.  Migrant workers in Guangzhou are affected by the crisis because most of them work in factories and some of those factories have less work or have closed down. One surprising discovery  from my conversations with scholars and social security bureaucrats in Guangzhou, is that many medium and large firms are not laying off workers. While these firms have cutback hours for many workers, they do not want to lay off workers because they are waiting for orders to rebound. They want to keep these workers on the payroll because it is difficult to hire and train new workers.

For migrants who have returned to the countryside due to economic crisis, many are not too worried. As migrant workers, they lead a very transient life style. It is not the first time that they have lost a job and returned to the countryside. They are optimistic that jobs will rebound, especially given the current government stimulus package. They still have land in the countryside, plus their expenses are very low. Housing and food are not a concern because their houses are paid up front, and they usually have enough food to subsist for at least 1.5 years. However, if they cannot return to the city within that time, social instability is definitely a concern.  Migrants are exposed to new ideas and living conditions in cities, so a prolonged stay in the countryside where they are excess labor with little upward mobility could potentially lead to unrest.

Chinatranslated: The migrant experience is different in different parts of the country.  You have been conducting research in Beijing, Guangzhou, and Shanghai, what are some of the similarities and differences between life for migrant workers in these three important centers?

Huong Trieu: There are important similarities in the migrant experience across the country. Migrants are relegated to the poorest living conditions because their wages are often a fraction of the local population. They are often doing work deemed undesirable by locals or the so called “3-D” (dangerous, dirty and difficult). Plus they are treated as outsiders in their host cities, ‘waidiren’, in terms of social policies.

Despite these general similarities, major differences do exist between cities. In Guangzhou, Dongguan, Shenzhen, migrants mostly work in factories. While conditions may be abysmal in these factories, most workers do have labor contracts which stipulate minimum wage, overtime pay, labor safety and social insurances. With the passing of the 2007 Labor Contract Law, workers are more aware of their rights. Even though workers are still at a disadvantage because enforcement of the labor contract law is a problem, the fact that these workers are employed in the formal sector means that there is an opportunity for them to use legal action to address their grievances.

In contrast, in Beijing and Shanghai many migrant workers work in the informal sector. They do not have labor contracts because they are usually working in small enterprises such as restaurants, hotels and so on. They may also be entrepreneurs themselves, selling knickknacks, operating 3 wheel carts, or performing household repairs. As a result, they do not have social insurances and are at the whim of city developers who can designate their home or workplace for demolition within a 1-2 month period.

As a result, migrant workers in Shanghai and Beijing are at a major disadvantage when it comes to disputing about their rights. Another point to keep in mind is that when you have a large number of workers in a single factory, it is much easier for workers to organize. So you see more worker protests and strikes in Guangdong. In contrast, you rarely see large protests in Beijing and Shanghai among migrant workers because they are working in a large number of small, disaggregated enterprises.

Chinatranslated: Your research is focused on access to public services for migrant workers, could you briefly outline the access migrant workers and their dependents have to education and healthcare, and how the costs and the benefits of the services they receive differs from the native population?

Huong Trieu: On education, migrant children are supposed to receive free, compulsory education in public school in cities, but all schools have quotas for migrants due to limited resources. Migrant children need to take qualifying exams to attend public schools. Good public schools are very hard to get into because the space is very limited. Even local residents have a hard time securing spots for their children in good schools because they need to have enough resources to buy an apartment in that particular community.

What is more, under the current education system, all migrant children need to return to their hukou place (home town) to take the college entrance exam. This is a not a national, standardized exam. Each locality has its own curriculum and therefore a different exam. So many of these migrant children are sent home to their grandparents when they reach middle school age because attending schools in their host cities would be useless if they want to pursue a college education. If these children plan to go attend vocational schools, they do not need to return to their hukou place.

On healthcare, there are three types of public insurance available in China: urban employee basic medical insurance, urban resident basic medical insurance, and rural new cooperative medical system. In the new healthcare reform released in April 2009, migrants can choose between urban employee basic medical insurance and rural new cooperative medical system (RNCMS). A 2006 State Council report showed that only 10% of migrant workers have any type of health insurance. I believe this number is much higher today because the 2007 Labor Contract Law has pushed many enterprises to provide social insurance for their workers. Plus the rapid roll out of RNCMS has also captured some of this migrant population.

In my interviews, many migrant workers have signed up for RNCMS at their hometown. While many of them do not have any experience using this new system, they are relieved to have some health insurance coverage. For many migrants, unless it’s an emergency, they would wait and return to their native place to seek medical treatment, partly because overall medical costs are lower and partly because they can get reimbursement from their health insurance in the countryside.

In China, all medical costs need to be paid in full and then reimbursed. To get a medical procedure done, you need to put down a deposit to secure an appointment. Depending on the procedure, it can be a couple of thousand to tens of thousands yuan. In many respects, migrants cannot afford to get sick. In host cities, local residents can apply for social assistance, but migrants cannot because local social assistance bureaus are not responsible for them. They would need to return to their hukou place to apply for social assistance.

Chinatranslated: Migrant workers have been a feature of Chinese society since the beginning of the reform period.  How are the latest generation of migrants different in their attitude and expectations from previous generations?

Huong Trieu: The biggest difference between older and younger generations of migrants is that the younger generation is less tied to their native places. While many migrants still come to cities through social networks, they may not always stay within this social network. They may choose to socialize and live with friends made outside their native place network.

In Beijing, there used to Zhejiangcun, Anhuicun, Henancun where migrants from a single province would live in the same settlement, but these no longer exist, partly because the city government have demolished them and partly because people have chosen to live with people from other provinces.  Migrant villages still exist in Beijing, mostly outside the 5th ring road, but not by native place anymore. These villages have become a melting pot of people from all over China coming to Beijing looking for better opportunities.

This younger generation of migrants does not see Beijing or Shanghai as their last destination. They are young, and they want to see the country. They are willing to move wherever their next job takes them. They do whimsically think about going back home eventually when they strike rich.  But if they do get rich then they can buy an apartment in Beijing or Shanghai as well, they need not return to their native place. This is very different from the older generation who sees their last destination to be their native place (laojia). They have built 2-3 stories homes in their villages with earnings from earlier sojourns in the city. Even though they are still working in the city to support their children through higher education, they plan to retire to their village with future financial support from their children.

Agriculture, Financial Crisis, Labour markets, Law, Regional, Social Policy

The environmental cost of China’s very rapid industrialisation and urbanisation is increasingly evident.  With the cost of pollution a daily reality in people’s lives, the trade off between economic growth and environmental protection is the subject of lively public debate.

This is a translation of an article on the subject in a middle-brow weekly magazine called Xinmin Zhoukan (New People’s Weekly).  It doesn’t contain any startling policy revelations.  But I find it interesting for the light it shines on the way China’s chattering classes think about environmental issues, and for the authors colourful vocabulary:

‘Do you want GDP growth or do you want to stay alive?

In a few years time, future generations are going to look back and judge us, just like we look back and judge the generation of the cultural revolution.  They are going to think we were foolish beyond belief.

Rapid GDP growth has certainly brought added zest to our lives.  But in many places, spiralling growth and spiralling pollution has left the land stinking like rotten meat, people wandering like refuges in a war zone.

It’s like in a dirty kitchen.  The soup in the spoon might have the beautiful taste of chicken, ginseng or swallows, but everywhere else is all chicken entestines, ducks arses, fetid oil and other disgusting inedibles.

Chemical waste, nuclear waste, metal slag, but we labour on undaunted.

We are like the frog that stays in the slowly heated water till it boils to death.

In the past, China was the kind of place where if you saw something was wrong you would say it, and if someone needed help you would stretch out your hand.  Now, China is the kind of place where if you see something wrong you stay silent, and it someone needs help you hide your hand in your sleeve.

If a neighbour needs help we don’t offer it.  If we need help we can’t go to the man above because he’s probably the cause of the problem.  We can only complain to the man at the top, and then we are contented with the slightest hint of compensation.

That’s the culture in which the rivers run with filth, the hills are barren, and the air is blurry with smog.

Why can’t we go to the courts to sort the problem out?

The justice system is twisted like a snake.  Getting judgements on environmental issues is no easy matter.  As everyone knows, the manufacturing companies that cause the pollution are often the pets of the local government and the pillars of the local economy.  Can you really expect the courts to punish the pet and knock over the pillar?

Confronted with ‘GDP’, ‘law’ tends to run home like a snivelling school boy, nose driping with snot.’

Powerful stuff, and from what I can see New People’s Weekly is not a particularly radical publication.  I don’t follow environmental issues closely but think this speaks pretty loudly for a growing awareness of the causes and consequences of environmental pollution, and the awareness that an attitudinal shift from Chinese people will be required to address the problem.

Original Chinese article here.

Environment, Social Policy

China’s coordinated fiscal and monetary response to the slowdown was very effective and enabled the mainland to recover faster and stronger than the EU and US.  But as the focus shifts from funding the recovery to exiting from the extraordinary period of stimulus, co-ordinating fiscal and monetary policy may be slightly more complicated.  I have an article on the subject on the WSJ China website which you can read in Chinese here.

The main points from the article are:

With revenue below expectations and spending above expectations the Ministry of Finance (MoF) has to rely on borrowing money from the bond market to close the gap in the public finances.  Unfortunately, in July, three MoF bond auctions failed as the markets were unwilling to buy bonds at the yield (interest rate) the MoF was willing to offer.

The reason is that as the People’s Bank of China continues to fine tune monetary policy, there is uncertainty about the future direction of interest rates.  Participants in the bond markets do not want to buy a low yielding bond from the MoF today if there is a chance that interest rates will continue to rise and they could buy a higher yielding bond tomorrow.

In its latest auction, the MoF solved the problem by 1) auctioning less bonds and 2) paying a higher yield.  But this does not solve the underlying problem of co-ordinating fiscal and monetary policy as the government moves toward an exit from the stimulus. 

In the short term , uncertainty about the future direction of interest rates will mean the MoF has to pay a premium on market rates if it wants to shift its bonds.  In the longer term, the cost of the extraordinary period of relaxed monetary policy will be the higher interest rates necessary to control the inflation that would otherwise emerge.  As a consequence, the MoF can look forward to higher interest payments on the bonds it will need to sell to plug the holes in the public finances in the months and years ahead.

As a side note, a researcher with one of the government think tanks recently suggested that the MoF would be running a stiimulative fiscal policy (ie borrowing money to fund public spending) for the next three years.  This would mean the future fiscal cost of today’s easy monetary policy would be even higher.

Banking, Financial Crisis, Fiscal Policy, Investment, Monetary Policy