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Happy holidays and best wishes for the new year to all our readers!
The drafting of the 12th 5-year plan will be one of the main policy issues to watch in 2010. With that in mind, here are some points from another Outlook Weekly article entitled ‘6 major areas for the 12th 5-year plan’:
‘On the one hand, there’s a lot of positives from the 11th 5-year plan. GDP and trade have both increased significantly. On the other, it’s difficult to be optimistic about the current economic model. Investment’s share of GDP has risen from 35.3% in 2000 to 43.5% in 2008. Consumption as a share of GDP was 51.8% in 2005, in 2008 it had fallen to 48.6%. Reliance on foreign demand and the consumption of energy and raw materials have both increased.
The current economic model is difficult to sustain. The imbalance between investment and consumption, between industry and services, and between foreign and domestic demand, are increasingly pronounced. China is entering a period of weak external demand and rising trade tensions, reliance on foreign demand as a driver of growth is not an option.
For various reasons, the share of consumption in China’s GDP has remained low, including compared to other developing countries like Brazil (75.7%), India (64.9%) and Russia (67.7%).
Increasing consumption requires systemic reform, but with that reform, it is possible we will see the share of domestic consumption in GDP increasing 10-15% in the next 5-years.
Increasing the pace of urbanisation will be an important component of boosting domestic demand. One government researcher with whom we spoke said ‘in the modernisation of the economy, it is industrialisation that provides the supply, and urbanisation that provides the demand.’
Under normal circumstances, when GDP/capita hits $3000 a country has an urbanisation rate of about 60%. In China, GDP/capita has hit $3000, but the urbanisation rate lags behind at 45%. Industrialisation has raced ahead and urbanisation has lagged behind, this is why China has a problem of excess supply and inadequate demand.
One government researcher we spoke to said that if the 12th 5-year plan could break up the separate urban and rural social benefits systems, China could add 10-15% to its urbanisation rate over the course of the plan.
The 12th 5-year plan will also be a chance to improve the level of public services, with three particular areas for focus. First, increasing the supply of public services. Second, employing enhanced public services to address the contradictions in society. Third, paying special attention to employment services.
Finally, the 12th 5-year plan will have to address the issue of governance. The existing governance model, which encourages local government to pursue GDP growth and investment at all costs, is one of the reasons why some of the more forward looking objectives in the 11th 5-year plan have not been achieved. One government researcher with who we spoke said: ‘the biggest challenge facing us in the 12th 5-year plan is not changing the economic model, but rather changing the governance model.’
A few interesting points I took away from this. First, the suggestion of a somewhat ambitious target on raising the level of domestic consumption in GDP. A 10-15% increase seems even more ambitious when you consider that domestic consumption’s share in GDP has, remarkably, fallen over the course of the last plan.
Second, the attention to public services and especially breaking down barrier between access to services in the city and countryside - which I take to be a reference to ending the system whereby migrant workers are not entitled to the same level of social services as the local population. This would be a major step forward for the effective management of an accelerated process of urbanisation.
Finally, the point about governance reform is, as the author suggests, crucial. Changing the economic system means changing the incentives of the people who govern that system. As many of those people benefit from the opportunities for graft and corruption that are intimately linked to the current economic model, this will be easier said than done.
In 2010, China’s 11th 5-year plan will run its course. The debate about the aims and objectives of the 12th 5-year plan has already begun. In an editorial in the latest edition of the official Outlook Weekly, the author argues that population control will be an important component of the plan. This is my translation of the main points in the editorial:
‘The discussion on the place of the development of the population in the 12th 5-year plan has already begun.
The key issues are continuing to control population numbers; paying more attention to the quality of the population; and optimising the demographic structure. We need to accelerate the move from being a country with a big population to being a country with an able population.
Continuing with a low stable birth rate is still the first task of our plan for China’s population. The basic situation of our country is that with a large population, the average ability is low, and as a result society and the economy are not stable.
The stability and development of China depends on maintaining the low and stable birth policy in place. If this national policy wavers, the consequences will be deep and far reaching. Every level of government and the party should continue to implement the population control policy.
Improving the quality of the population is also an important objective. The number of disabled children being born is not small, and this is related to the falling number of married couples who take a medical check before they decide to have a child. We need to step up work to address this problem of birth defects. Providing nutritional supplements to village women during their pregnancy will be an important line of defence.
Another important objective is addressing the imbalance in the ratio of male and female children. This was a focus of the 11th 5-year plan but efforts have clearly been insufficient. In particular, we need to clamp down on the activity of checking the sex of unborn children and aborting unwanted girls.
We also need to address the issue of an ageing population. China will be the first country to face the problem of an ageing population whilst still going through the process of development.
At the same time, we need to face the issue of migrant workers. On the one hand, migrant workers need to be brought into compliance with population control policies. On the other, they need to be able to enjoy the same rights and benefits in terms of public services and worker protection that the local population enjoys.’
I think for lots of foreigners, the one child policy is one of the least palatable and most alien aspects of China’s social policy. There are certainly enough horror stories about the way in which the policy is carried out. I don’t follow this closely but I had the impression there were moves toward relaxing the policy - in part in response to the problem of an ageing population. This editorial - in a publication that is widely read by local party officials - appears to suggest the reverse.
There are also some positives in the story. Extending access to public services and legal protections to migrant workers would certainly be an important step forward for improving the quality of life for a large section of China’s population, and making a move from the countryside to the city possible for many more.
Every year at the beginning of December, China’s top decision makers gather for the Central Economic work Meeeting, aiming to set a course for economic policy in the year ahead.
Last year’s meeting rolled out the CNY4trn stimulus package. This year’s meeting, which took place over the weekend, has provided few surprises. But the conclusions do suggest that next year China will follow a more balanced set of economic policy priorities.
Growth at any cost is yesterday’s news, today and tomorrow’s news is growth alongside far reaching structural reform and attention to the build up of inflationary pressure.
The Central Economic Work Meeting ended with the publication of a lengthy statement. Attention in the press has rightly focused on the subtle changes in policy orientation in the body of the text.
But these statements always start with a lengthy preamble, setting out who was at the meeting and their place on the Chinese totem poll. This is my translation of the opening paragraph - which introduces the participants in the meeting and their titles:
‘General Secretary of the Chinese Communist Party, National President, Chair of the Central Military Commission Hu Jintao; Member of the Politburo and Head of the National People’s Congress Wu Banggou; Member of the Politburo and State Council Premier Wen Jiabao; Member of the Politburo and Chair of the People’s Political Consultative Conference Jia Qinglin; Member of the Politburo Li Changchun, Member of the Politburo and Secretary of the Secretariat of the Central Committee, Vice President Xi Jinping; Member of the Politburo and State Council Vice-Premier Li Keqiang; Member of the Politburo and Secretary of the Central Discipline Inspection Committee He Guoqiang; and Member of the Politburo and Secretary of the Central Committee on Government and Law Zhou Yongkang attended the meeting.’
And here’s a link to the complete statement.
A few weeks ago, the People’s Bank of China’s third quarter monetary policy report received a lot of attention because of a slight change in the wording on the future direction of exchange rate policy. This is my translation of the relevant sections of the second quarter and third quarter reports, so readers can see for themselves the difference in the wording.
In the second quarter report, the relevant section reads:
‘Continue to develop a market based interest rate, and perfect the CNY exchange rate mechanism. Accelerate the development of the benchmark interest rates in the money markets, make great efforts to improve the capacity of the financial system to price risk, allow a greater degree of market control in the establishment of the interest rate.
Pay close attention to the exchange rate movements of major currencies, according to the principles of self initiative, control, and gradualism, continue to perfect the CNY exchange rate mechanism, maintain the basic stability of the CNY within an appropriate and balanced level.
Continue to develop exchange rate control reform, take further steps to facilitate outward investment by domestic organisations, in a stable manner expand the opening of financial markets, actively develop the foreign exchange market, enhance exchange risk management tools.
Steadily push forward the work of the cross border CNY trade settlement experiment. Take further steps to improve the efficiency of foreign exchange reserve use, make every effort to improve returns.’
In the third quarter report, the relevant section is:
‘Continue to develop a market based interest rate, and perfect the CNY exchange rate mechanism, strengthen and perfect foreign exchange controls. Continue to push forward the development of a benchmark interest rates in the money markets.
According to the principles of self initiative, control, and gradualism, taking account of international capital flows and trends in the movement of major currencies, perfect the yuan exchange rate mechanism.
Actively develop the foreign exchange market, enhance exchange risk management tools, improve the ability of financial organisations to price and manage risk. Continue to push forward the work of the cross border CNY trade settlement experiment. Take further steps to facilitate overseas investment by domestic organisations, in a stable manner expand the opening of financial markets.’
The main differences are: 1) the sentence on the ‘basic stability’ of the exchange rate is present in the second quarter report but absent in the third quarter report 2) the third quarter report has a new clause on ‘taking account of the movement of major currencies’.
The first difference could certainly be interpreted as a sign that a return to appreciation is more imminent, but how strong a signal it is given it appears on page 46 of a 47 page report is open to question. The second difference is ambiguous. One interpretation would be that the US should halt the slide in the dollar before China will consider appreciating the CNY - which would push appreciation further into the future.
You can see the original second quarter report here and the third quarter report here.
Exchange rate, International Relations, Monetary Policy, Trade, US-China Relations
I attended the Urban Land Institute’s Shanghai “release party” for their annual Emerging Trends in Real Estate (Asia Pacific) report this afternoon. The report, prepared with PriceWaterhouseCoopers, is based on detailed interviews with real estate movers and shakers about their feelings and plans for the coming year, and it’s always valuable. Tonight there was a panel discussion about some of the report’s findings applied to the China market which was equally interesting. Some random opinions follow, all paraphrased from notes I took on the smartphone, so don’t take them too literally, please. Since I didn’t get all the panelists’ names, I will refer to them by affiliation only. If I can find the names I will add them.
[CBRE]: Buyers in residential real estate have shifted from foreign to domestic. There are now a lot of buyers in Shanghai who are Shanghai residents and people from other provinces. [I assume he was talking about upper level Shanghai projects]
[Tishman Speyer]: There has been a lot of activity and big price rises, but a lot of it has been as a result of the government ordering the banks to increase liquidity, and it’s our sense that this can’t continue. By next year the economy will have to find other engines.
[Morgan Stanley]: There are a lot of residential real estate developers who have been sitting on a lot of capital, who are just now beginning to use it. So next year we will see an increase in supply.
[Various]: But demand, probably not, because prices are already very high from the perspective of a lot of buyers. So there may be a supply/demand mismatch.
[Tishman]: But there is still strong fundamental residential demand. You are looking at 200 million new urban residents a year.
[Morgan]: There is strong demand from the mid- and upper- level market in Beijing for good housing. At first, the residential real estate market in China was focused on whether you owned a house or not. Then it was focused on how big your house was. Now it’s increasingly focused on how good your house is. So the market is still there for well designed projects.
[Morgan]: There may be local bubbles in some locations. We are hearing about how people are evading real estate borrowing rules based on whether you are purchasing a first or second home, with brokers’ help. But the residential real estate fundamentals are still good.
[Morgan]: In [Shanghai's Pudong financial center] Lujiazui, rents used to be up around RMB15/m2/day, then they were around 6-7 RMB, now they’re - where are they now? [CBRE]: Still there [Morgan]: Well, they’re still there now, but next year they’ll be much higher. [N.B. The event took place in the high profile creative industry park Bridge 8's new phase II project, and in a tour beforehand the developer quoted the same price for space in their phase I. Bridge 8 is a great project, but it's not expected for Class A office towers to be at the same price level as refurbished garment factories.]
[CBRE]: Class A space in the tier 1 cities used to go exclusively to international firms, now it increasingly also goes to local firms: local law firms, design firms, etc. As we see the market for class A space expand, that market will benefit.
[Moderator]: What specific cities and asset classes do you like?
[CBRE]: Tier 2 cities: Chengdu, Dalian, Tianjin… In terms of asset classes, residential obviously, maybe retail, we have one client who is interested in industrial [little chuckle]…
[Tishman]: Tier 1 cities are where the international firms are based, they have the deepest markets and the most liquidity, so you want to be there; some tier 2 cities such as Chengdu…
[Morgan]: I would rather talk about regions than cities. We think the Bohai is very attractive [the area around the Bohai sea including Tianjin, Dalian, Yantai, etc.], the Yangtze River delta around Shanghai, and Shenzhen and the whole Pear River delta, which is all developed like Southern California now. [Approvingly] I was in Shenzhen last week and these days you can’t tell where Shenzhen ends and Dongguan begins, it’s all contiguously developed…
This just scratches the surface and is focused on the points that particularly caught my attention. I was surprised overall at how positive the panelists were, as you can tell I was quite taken with how the Morgan Stanley panelist in particular was so bullish about real estate in many sectors. Despite hearing many very perceptive statements I confess at the end when they considered taking questions for the audience I was tempted to pose the question, “Are you all nuts?” Perhaps it was best for all that in the end they had no time.
Seriously, I hate to go up against such a powerhouse collection of financial talent, but for people trying to invest and develop in a global recession which has not yet clearly bottomed out, they seemed very confident, and unconcerned about issues such as how long the stimulus can continue, its effects on assets and bubble formation in residential real estate, the mismatch between the admittedly huge residential market and the housing which is actually getting built, oversupply in commercial markets, etc. A very interesting evening overall.
- Don Johnson
To accompany the Obama visit, China’s official Outlook Weekly ran an article on the US China relationship. This is my translation of the main points:
‘Since the end of the cold war, the US China relationship has been difficult to characterise. For a brief period around 1997, the US used the term ’strategic partners’ but that foundered when many in the US pointed out that interests in some areas were opposed not aligned.
President Bush tried out ’strategic competitors’ but dropped that pretty quickly and settled for describing the relationship as ‘complex’.
An official in the Obama administration has floated the idea of ’strategic reassurance’ to describe the relationship. But that does not appear to have been echoed by others in the administration, perhaps because it is a concept that is difficult to define.
All of this difficulty with definitions is the result of the conflict in the US between the desire to cooperate with China and the desire to contain China.
In a recent speech, President Obama said that in the 21st Century, one country’s safety and economic development cannot be at the expense of another, international relations is not a zero sum game, one country should not fear another country’s success. Obama insisted that the US welcomes China playing a greater role on the world stage, and that the US will not try to contain China.
China and the US are ready to advance a positive, cooperative, and comprehensive relationship. But the US must abandon its dual approach to cooperating with and containing China. People hope that faced with the rapid rise of China, the US will supply a wide ocean for us to swim in.’
I saw the joint press conference between Obama and Hu on the television, and to me the body language seemed decidedly unfriendly. In particular，there was a moment toward the end when Obama looked toward Hu and they caught each others eye. There was an opportunity for a moment of shared understanding. Instead Hu swung his head sharply back to face the audience.
This article seems to have a more positive tone, welcoming the subtle realignment in US China policy which Beijing reads into Obama’s words.