May, 2011 Compiled by Yimin Zhang, University of Shanghai for Science and Technology and distributed free of charge

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China News in Brief

May, 2011
Compiled by Yimin Zhang, University of Shanghai for Science and Technology and distributed free of charge.


World News: China Partly Lifts Veil on GDP Data

China's publication of a new kind of economic data brings it closer in line with the way other major economies report growth, but also exposes continuing problems with the quality of its statistics, analysts said. The headline figure when China reported its economic data for the first quarter of this year on Friday was the 9.7% growth rate in gross domestic product. That figure, as with all of China's quarterly GDP numbers in the past, compared output in the report period with output in the same three months of last year. But the National Bureau of Statistics on Friday also published, for the first time, data on how GDP compared with the previous quarter. This number, adjusted to account for seasonal differences and multiplied to give an "annualized" rate, is how the U.S. and most other major economies report GDP data. By this measure, the bureau said, GDP in the quarter grew 2.1%, or 8.4% on an annualized basis.

Big economies use adjusted quarter-on-quarter data because they provide a more real-time picture. A statement on the bureau's website April 8 said: "Year-on-year data does not provide up-to-date information on changes in the economy. . . . The development of quarter-on-quarter indicators will make up for that shortcoming and provide better information to policy makers and analysts." Economists generally agree that the move represents progress. But the bureau failed to publish historical data for the measure -- important for understanding where the current number fits into past trends. Arthur Kroeber, managing director of Beijing research firm Dragonomics, said, "The failure of the NBS to produce comparable historical data, or to clearly explain their methodology, detract from progress that is made."

Source:Orlik, Tom: World News: China Partly Lifts Veil on GDP Data, Wall Street Journal [New York, N.Y] 16 Apr 2011: .7.

China slow to silence roaring tiger of inflation

Wang Qishan, Chinese vice-premier, this week became the latest senior official to identify the fight against inflation as his government’s most important task this year. “The most pressing problem we face right now is the problem of inflation,” Mr Wang said in an interview on The Charlie Rose Show in the US on Monday. “In order to do this, we have to use monetary policy, fiscal policy and at the same time economic restructuring,” he said. Wen Jiabao, China’s premier, used a more colourful turn of phrase recently when he described inflation as a tiger that, once freed from its cage, is nearly impossible to put back.

But the policy measures taken by Beijing in its fight against inflation do not reflect the kind of life and death struggle suggested by comments from the country’s leaders. For one thing, Beijing is encouraging double-digit wage increases – of up to 40 per cent a year in some places – as a way of reducing the country’s wealth gap and shifting the country away from over-reliance on cheap, labour-intensive manufacturing industries. The government has also allowed several increases in tightly regulated energy prices in recent months, which feed directly into higher prices of most other consumer items.

There are a number of reasons why Beijing’s actions are a lot less forceful than the rhetoric of senior officials would suggest. Firstly, analysts say there is no real consensus over the actual causes of inflation among the various government departments responsible for economic policymaking. For example, the central bank and banking regulator argue inflation is a direct result of the huge liquidity overhang created by the credit-fuelled, post-financial crisis stimulus package. Other government agencies, such as the powerful National Development and Reform Commission, argue inflation is a result of transport and infrastructure bottlenecks as well as profiteering and price manipulation. Until recently, many Chinese officials argued inflation was mostly being imported.

With no clear consensus on the causes or the severity of the problem, China’s leaders are trying a wide range of policy initiatives without fully committing themselves to any of them. Since last October, the central bank has raised interest rates four times and increased the proportion of deposits banks must hold in reserve eight times. Last Friday, the NDRC fined Unilever RMB2m ($308,000) for suggesting to Chinese media that it might raise detergent and soap prices, saying the Anglo-Dutch consumer goods giant had “intensified inflationary expectations among consumers” and “seriously disturbed market order.” Analysts describe the fine as an example of “killing the chicken to scare the monkey”, and believe the government is more likely to use such public shock tactics than direct price controls, especially considering growing evidence the economy is starting to slow.

Source: Jamil Anderlini in Beijing: China slow to silence roaring tiger of inflation, The Financial Times, Published: May 11 2011 18:13

A changing Chinese economy could slow this export driven juggernaut

From the industry's standpoint, rising Chinese labor rates is an issue but not a game changer- at least not yet. While the Chinese economy must create millions ol new jobs a year, it's plagued by one of the world's lowest birthrates thanks to its one child policy. Yet China also has one of the world's fastest aging populations. A demographic nightmare. Raw material prices are rising driven, in part, by the Chinese as they improve upon and build new infrastructure - highways, airports, seaports, rail and sewage facilities. And, at some point, China must undertake a massive environmental cleanup - decades of effort and billions from the treasury.

At the same time, its manufacturing sector must shift to make more products for its burgeoning middle class. They want what we have be it smart-phones, cars or carbon fiber bikes. In this age of global communication, the Chinese have seen the future and they like it. That shift alone offers ample opportunity lor U.S. brands to make inroads into China's consumer market. In this mix expect change within our industry. Some production may shift to a highly efficient Taiwan. Some production may return to the U.S. And countries like Vietnam, Cambodia and India may get a closer look from suppliers. But China is changing and it's in our best interest to keep our eye on it.

Source: Anonymous: A changing Chinese economy could slow this export driven juggernaut, Bicycle Retailer and Industry News 20. 8 (May 15, 2011): 38.

China economy: Slowdown could be sharper than expected

China's struggle to rein in inflationary pressures appears to have had little success so far, even as recent data series show the broader economy slowing. Further monetary tightening is likely to be required over the remainder of the year, constraining the outlook for GDP growth. The example of policy action taken in 2008 points to a risk of over-reacting to inflation and causing a sharper-than-expected downturn. This comes amid renewed concern over the outlook for the global recovery, which poses a risk to China's external sector too.

Keeping inflation under control is now the government's main policy challenge. Booming demand and strong liquidity growth have contributed to the acceleration in price increases--the Chinese current-account surplus leads to a large monetary inflow in the absence of a free-floating currency. But rising input costs are the main threat. The large pay rises that firms are having to offer in order to keep workers are putting upward pressure on consumer prices, as well as raising manufacturing costs. Increasing labour costs will also have a particularly strong impact on prices for labour-intensive agricultural products. Rising global commodity price pressures, especially for oil and other energy products, are another factor contributing to increasing input costs. Food prices in China are on an underlying long-term upward trend as agricultural land becomes scarcer and the cost of other farming inputs increases. Given these pressures, the small drop in the headline rate of year-on-year inflation from 5.4% in March to 5.3% in April seems unlikely to mark the start of a sustained fall in inflation--core inflation is now at its highest-ever level.

The government therefore has little choice other than to step up its monetary tightening measures. In mid-May banks' reserve requirements (the deposits that banks are required to hold as reserves) were raised to a record 21%, the eighth such move since October. Interest-rate increases, a blunter tool than a rise in reserve requirements, have been implemented four times since October. The likelihood is that further interest-rate hikes will be required in the second and third quarters.

First-quarter GDP data showed economic expansion holding up well, with growth of 9.7% year on year. More recent data series show that the campaign against inflation is affecting the real economy. Industrial production was up by 13.4% year on year in April, the lowest level since November last year, and markedly below the 14.8% increase reported for March; and the M2 measure of money supply was up by 15.3% year on year, the slowest growth since November 2008. Loan growth, at 17.5% year on year, is running only just ahead of the estimated 16% rate of increase in nominal GDP. But inflation risks have by no means subsided, and there may be other unwanted side-effects to efforts to cool the economy. An additional issue likely to have an impact on industry over the summer is looming power shortages. Against the backdrop of the economy entering a soft patch just as monetary policy is focusing on tackling inflation, there is a risk that the government may tighten policy too much.

Moreover, upside risks to inflation remain high.The main danger concerns the volatility of food prices, the largest component of China's consumer price basket--local agricultural prices are vulnerable to oil costs (as agriculture is fuel-intensive) and to the vagaries of the weather. Overall, a significant slowdown in China's economy is likely over remainder of the year--we expect growth of 9% in 2011 as a whole. But a sharper slowdown is quite possible, particularly if policy has to tighten by more than expected to rein in inflation, or if the global recovery proves weaker than expected.

Source: EIU ViewsWire: China economy: Slowdown could be sharper than expected, May 17, 2011
How China boomed by trial and error

What is the secret of China’s success? While the US, Europe and Japan have been struggling, China’s economy has doubled in size in real terms every seven to eight years for the past three decades. Part of the answer is simply that if a poor country gets its act together, it has the potential to grow much faster than a rich one. China was wretchedly poor in 1980 – poorer than Afghanistan or Chad, with half the per capita income of Niger or Ghana. It is far from wealthy today, with per capita income of about $10 a day. (No westerner would envy the income of a rural Chinese peasant.) And so the potential to catch up remains large, with China’s economic clout a matter of population rather than wealth.

And yet it is impossible to dismiss China’s economic achievement so easily. So what is the recipe for growth? If I was forced to sum it up in one phrase, I’d say “trial and error”. After Deng Xiaoping took power in the late 1970s, local experiments were tolerated, and if they worked, they were allowed to spread. The “household responsibility system”, which gave rural farmers the right to profit if they were able to generate extra crops, was used in 1 per cent of collectives in 1979 and was almost universal by 1983, largely as a result of benign neglect from Beijing. Another experiment was the establishment of special economic zones. These areas were designed to encourage foreign investment and industrial development, without requiring the entire economy to be thrown open to market forces.

The contrast with China’s earlier Maoist system could scarcely be greater. During the “Great Leap Forward” Mao personally redesigned China’s system of agriculture. Everyone had to implement Mao’s insane schemes at once, and any suggestion that his ideas were failing was ruthlessly suppressed. Tens of millions of people starved. Deng Xiaoping described economic reform as “crossing the river by feeling for stones”. The waters of economic change are swift-running, and perhaps China will lose its footing. But I suspect that if China does slip, it will do so because it runs into a problem that it cannot solve step by careful step.

Source: Tim Harford: How China boomed by trial and error, The Financial Times, May 13, 2011
China’s central bank is new key player

The PBoC raised reserve requirement ratios (RRR) for banks last week for the fifth time this year, following 10 such moves in 2010. Interest rates on deposits and loans have been raised four times since October, and will probably be raised once or twice more. The growth of conventional bank retail loans has halved since the start of last year, and traditional corporate loan growth has dropped from 30 per cent last summer to 12 per cent in the first quarter this year. Elsewhere, the renminbi has risen a bit, capital ratios have been increased, and regulations introduced to damp the property market.

The switch to a “prudent” monetary policy has resulted in a sharp contraction in construction volume this year, along with a 10 per cent annual decline in property sales, a further decline in real estate price inflation, a flattening in the reported consumption of steel and other materials, and a 20 per cent fall in car sales. It beggars belief that the Chinese monetary and financial policies, especially the most recent shift in monetary policy, haven’t played a critical role in global markets.

And this is now where the plot gets even more interesting, for three reasons. First, the tightening measures are not all that they seem. The RRR changes are designed to mop up liquidity flowing in through the external accounts. In real terms, deposit interest rates are minus 3 per cent, while lending rates are barely positive. Overall, the credit intensity of gross domestic product in China – the amount of credit generated to produce one unit of GDP – has more than tripled, from 1-1.3 a few years ago to 4.3 in the first quarter of 2011. Second, the effects of tightening on the economy have been limited to real estate and construction. Third, it is probable that the current policy shift is drawing to a close, amid calls in China for tightening to end, or at least for some of the more restrictive property regulations to be reversed.

Source: George Magnus: China’s central bank is new key player, The Financial Times, May 16 2011
Prepaid card rules a swipe at corruption

People purchasing large amounts of prepaid cards will soon have to reveal their real names. The latest move is aimed at preventing money laundering, tax evasion and bribery, according to an official document published by the State Council, China's Cabinet, on its website on Wednesday. Issuers of prepaid cards should register customers' identities if they purchase at least 10,000 yuan ($1,500) in cards, or if the prepaid cards carry the names of the people who will use them. In addition, the value of anonymous cards should be below 1,000 yuan, while cards bearing the names of their users should not surpass 5,000 yuan.

At the end of 2009, a combined 1.1 trillion yuan worth of prepaid cards were circulating in China, with a stored value totaling nearly 40 billion yuan, according to a report filed in July 2010 by China Union Loyalty Co Ltd, a Shanghai-based provider of prepaid cards. Loose regulations had given rise to corrupt practices as well as disrupted the order of financial and tax rules, said the official document.

Accepting prepaid cards or gift certificates will be regarded as equivalent to taking bribes in cash, according to a Party document published early this month by the Central Commission of Discipline Inspection, the Party's top anti-corruption watchdog. In addition, the People's Bank of China, China's central bank, and the Ministry of Commerce will launch an inspection on all prepaid cards circulating in the country by the end of this year, said the document.

Source: Yan Jie : Prepaid card rules a swipe at corruption, China Daily, 2011-05-26
Banks given capital adequacy ratio timetable

The China Banking Regulatory Commission (CBRC) on Thursday required six major banks to submit the results of their capital-adequacy ratio (CAR) calculations before June 3. The CARs are based on new standards highlighting the risks related to government-backed loans and the property market.

In a closed-door meeting with the banks, Chen Ying, deputy director of the CBRC's international department, highlighted three major sources of lending risk in the current situation. They are government-backed loans to businesses - including loans through local government financing vehicles and loans to railway, road and other infrastructure construction projects - property loans, and medium and long-term lending. Chen said for the government-backed loans, an adjustment factor of 1.25 will be multiplied with other relevant factors. When calculating the CAR, lending risks through local government financing vehicles will be weighted from 100 to 300 percent, with the risks of loans to railway, road and other infrastructure construction projects weighted at 110 percent, and property lending risks weighted at 150 percent, said Chen. Operational risks will also be included in CAR calculations for the first time, and the calculation of credit risk will be classified in eight grades, from four previously. "The new CAR calculation method that reflects more concern over the risks of government-backed loans will put greater pressure on lenders," said Chen.

Zhan Dongsheng, a spokesman for Agricultural Bank of China (ABC), told China Daily earlier that the bank's lower-than-required CAR at the end of the first quarter was mainly due to new calculation methods applied by the CBRC to counter the risks of loans made through local government financing vehicles. ABC reported a CAR of 11.4 percent at the end of the first quarter, 0.1 percentage points lower than the official requirement for major banks.

Source: Wang Xiaotian: Banks given capital adequacy ratio timetable, China Daily, 2011-05-27
Interest rates on inter-bank market break 5%

Interest rates on the inter-bank market, after days of increasing, rose sharply again on Wednesday, China Securities Journal reported. The rise shows the effectiveness of the recently issued tightening monetary policies. Collateral repo rates and inter-bank lending rates of all terms broke 5 percent, according to the report. According to data from Wind Info, weighted average interest rates of one day, seven days, 14 days, 21 days, one month, two months, three months and six months pledged repos were all just over 5 percent. Interest rates of one day and seven days pledged repo increased by 0.5173 and 0.5447 percentage points compared with the previous trading day, the newspaper reported.

Source: Qiang Xiaoji: Interest rates on inter-bank market break 5%, China Daily, 2011-05-27
China inflation edges lower to 5.3%

Inflation in China moderated slightly in April but remained stubbornly high despite government efforts to restrain rapid price rises. The benchmark consumer price index rose 5.3 per cent in April from a year earlier, less than the 5.4 per cent clip in March, but still above most forecasts. It was also well above Beijing’s full-year target of 4 per cent. China’s statistics bureau said politically sensitive food prices rose 11.5 per cent from a year earlier in April, up from 11 per cent in the first quarter, despite Chinese media reports of steep falls in vegetable prices hurting Chinese farmers. There were some signs that government efforts to cool rapid growth were starting to take effect. Producer price inflation rose 6.8 per cent in April from a year earlier after increasing 7.3 per cent in March. Industrial output came in at 13.4 per cent higher than a year earlier, considerably lower than the 14.8 per cent year-on-year increase in March.

Since October, China’s central bank has raised interest rates four times and increased the proportion of deposits banks must hold in reserve eight times.

Source: Jamil Anderlini in Beijing: China inflation edges lower to 5.3%, The Financial Times, May 11, 2011

Industry uses sea as giant 'trash can'

Pollution has further damaged China's coastal waters through oxygen depletion caused by excessive growth of algae and waste discharge, according to a report released by the State Oceanic Administration (SOA) on Friday. Oil spills, pollutants carried by rivers into the sea, marine environmental disasters and ecological and environmental deterioration also threaten China's oceans, said the 2010 China Ocean Environment Report. Although 94 percent of the waters under China's jurisdiction meet the country's first standard level for seawater quality, about 48,000 square kilometers of coastal areas still fail to meet the fourth level, the worst standard, said the report, which was based on more than 2.5 million items of data collected in 2010 from 9,800 ocean-monitoring stations.

"Pollutants coming from the land, including industrial wastewater, sewage and chemicals used in agriculture, contribute the most to coastal water pollution," said Ma Jun, director of the Institute of Public and Environmental Affairs, a non-governmental organization. "We have noticed that many heavy-polluting enterprises in China have moved to coastal areas to avoid residents' complaints and government punishment," Ma said. The contaminated sea areas in China are mainly distributed in coastal waters surrounding large and medium-sized cities, the report said. The ecological functions of some regional ecosystems have been damaged. "People should stop using the ocean as the biggest trash can," Zhao said

Source: Cang Wei: Industry uses sea as giant 'trash can', China Daily, 2011-05-14

Battery plant boss detained for E China lead poisoning

The legal representative for a battery plant in east China's Zhejiang province was detained Monday after more than 300 people, including 99 children, were found to have elevated levels of lead in their blood. Investigations found that the metal was improperly disposed of by Zhejiang Haijiu Battery Co in Deqing county, said a spokesman with the county government. Meanwhile, eight officials from the local government, the environmental protection bureau and the health bureau are being investigated as lax supervision has also been blamed for the poisoning, according to the spokesman.

More than 2,000 people have received blood tests since May 1, and 332 of them, including 99 children, were found to have excessive amounts of lead in their blood. So far, 53 people, including 27 children, have been hospitalized, he said. Authorities have ordered a thorough safety check for all 273 battery factories in Zhejiang. Haijiu Battery Co Ltd was founded in May, 2003. The company mainly produces lead-acid batteries for motorcycles. It has about 1,000 employees and an annual output of 9 million batteries.

Source: Xinhua: Battery plant boss detained for E China lead poisoning, 2011-05-17

China faces worst drought in 50 years

Chinese authorities will step up the release of water from the Three Gorges Dam in a bid to tackle a drought in southern China which has put pressure on drinking water, crops, shipping lanes and electricity production in what is traditionally China’s most water-abundant region. The monsoon rains that usually flood southern China’s middle Yangtze river in spring did not come this year, and officials say rainfall in Hubei, Jiangxi, Anhui, Jiangsu and Zhejiang is at its lowest level in more than 50 years.

“Such large-scale scarcity in southern China is very serious and the scale is much larger than before,” said Zhang Ximing, a water resources specialist at the World Bank who recently returned from drought-stricken Jiangxi. While droughts are not uncommon in China, water shortages have steadily worsened during the past decade, as increased agricultural irrigation and worsening water contamination have hit supplies. China’s available water per capita is just a quarter of the world average and the lowest of any large economy, according to the World Bank.

Water releases from the Three Gorges reservoir, which is upstream from the drought areas, will be increased by 10-20 per cent today, according to the State Flood Control and Drought Relief Office. Water has already been released at a rate of 10,000 cubic metres per second since last Friday, causing the level of the reservoir to fall by one metre every two days, say dam operators. In Hubei and Hunan provinces, the drought has threatened drinking supplies for more than 1m people. In neighbouring Jiangxi province, Poyang Lake, China’s largest freshwater lake, has hit a 59-year low and rice transplants around it have stopped. Bulk shipping carriers were banned on May 11 from using a 228km stretch of the Yangtze because of low water levels. The state’s efforts have even included cloud seeding to induce rain artificially, which resulted in light rainfall in some parts of Hubei province over the weekend.

Source: Leslie Hook in Beijing: China faces worst drought in 50 years, The Financial Times, May 24 2011

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