China Translated

Last year, CNY9.5trln in new loans propelled the Chinese economy through the global financial crisis, its growth trajectory bent but unbroken.  This year, it is time to count the cost, and with inflation in abeyance, concern has focussed on risks associated with the massive quantities of loans issued to local government investment vehicles.

The China Banking Regulatory Commission has recently concluded a review of the extent and quality of loans to these murky institutions.  The headline figure of CNY7.66trln in loans, with CNY1.7trln (23%) at danger of default has been widely reported. 

At first sight, CNY1.7trln in potential bad loans is nothing much to worry about.  With total loans in the Chinese banking system currently adding up to more than CNY50trln, even if all those loans do go bad it would still add just over 3% to the total for non-performing loans. 

That, however, is not the end of the story.  An article in the latest edition of Caixin has a few more details, revealing that CN2trln of the total are regarded as sound, with the local government investment platform well placed to repay both capital and interest.  But CNY4trln of the loans will only be able to be repayed if the borrower receives additional credit.  If some of those loans go bad too, that would add a few more percent onto the non-performing loans total.

Even with this extra wrinkle, it looks to me like annoyance rather than apocalypse.  I’m sure that the Chinese government would regard even 10% non performing loans on the banks’ balance sheets as a price worth paying for pulling the economy back from the brink of the financial crisis.  It is certainly a considerably smaller number than in the early 2000s, and even then the government was able to clean up the mess without too much difficulty. 

You can see the Caixin article here.

Banking, Financial Crisis, Regional

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