Tag Archives: China

[REVISED] Who Touched My RMB?

It’s always interesting to see how economic predictions and financial manipulations fail in China. The ridiculously high population/resource ratio turns China into a hungry giant that can easily overturn any rules: the Wall Street tycoons lost to Chinese housewives during the “gold battle”; Chinese government tried to stop the housing market’s craziness but ended up being one of the biggest obstacle to the success of taming the market. The list goes on and on.

And now it’s the RMB issue again. Bear with me if this topic is becoming increasingly boring for you. As the RMB’s behavior is totally going against the theory, it’s tempting to looking into the reasons behind all the weirdness.

Ever since the year of 2005, RMB has been appreciating internationally while depreciating domestically.


Picture source: XE


Picture source: Trading Economics

As explained clearly in this about.com thread, the value of a currency should be synchronized domestically and internationally. On one hand, when the exchange rate of RMB goes up, in theory, the demand of RMB will increase, leading to a decrease in the amount of liquidity, therefore the inflation will be alleviated, and eventually the value of RMB will go up. On the other hand, a higher value of RMB attracts investment from oversea, which will lead to a higher demand of RMB in the foreign exchange market and therefore drive up its exchange rate. However, historical data suggested differently: internationally up, domestically down. Why?

It’s a known fact that RMB was long undervalued in the foreign exchange market because of the government’s intervention. As Beijing gradually loose the leash, the exchange rate is bound to increase. So it must be the inflation, which comes from within the country, that’s causing the mismatch problem.

About the inflation, the government claims that “there exists measurement error that skews the statistical data”, and “the CPI data doesn’t fully reflect the reality”. Of course these official speech is too ambiguous to be believed, let alone the “CPI misreporting” can be interpreted both ways. As I see it, this inflation is due to the governments’ over-manipulation to the economy.

This manipulation is not the usual fiscal and monetary policy we’ve seen everyday. The level of governmental intervention in China is much higher than that. Since it’s difficult to explain this in theory, I’ll demonstrate it with China’s “land finance” example.

By constitution, all lands of China are owned by the central government. Therefore, Chinese government has control over the real estate pricing. To stimulate the local economy, local governments make huge spending every day, which almost always yields to budget deficits. To compensate the deficit, the most effective way is to sell the lands that are owned by the government. This is when things get crazy: since the government has control over the lands’ price, it can sell a certain piece of land at an extremely high price. And thanks to the heated housing market, there’s always a buyer. As a result, the price of houses almost doubles every year. House owners’ pockets are therefore inflated. The liquidity drastically increase in the market, and hence the inflation.

This kind of government intervention to the economy is not something foreseeable from the textbook, and the “land finance” is merely one piece of the puzzle. In a not-so-liberal economy, the government’s overexertion of its power to gain short-run benefit is clearly bringing problems to the economy. The mismatch of RMB value is one such example. What’s next? How to prevent these problems from happening in the future? Beijing needs to give better answers to these questions.

(Revised) China’s Stimulus Package for Growth

In the past few months, the market focus has been on the Federal Reserve’s exit strategy and the slowdown of China’s economic growth. Regarding the latter one, the world-second largest economy grew at 7.4% in the first quarter, a level significantly below the double-digit growth many years ago and the 7.7% growth last year.

Since the country has set a target of 7.5% economic expansion for 2014, the below-expectation performance triggered further concern about its growth momentum. In response to that, China’s State Council, the government’s executive body, unveiled a stimulus package in early April to boost growth, including additional spending on railways, upgraded housing for low-income households, and tax relief for small businesses.

Although the package is considered as a mini one compared to the four trillion yuan ($650 billion) program rolled out in late 2008 amid the global financial crisis, it would still impact its overall economy in many ways.

Stimulus 1: Additional Spending on Railways

The government would further develop infrastructure through accelerated railway construction, particularly in the nation’s central and western regions, and more aggressive financing. Some operations in the public interest would be subsidized and 150 billion yuan ($24.6 billion) in bonds would be offered by the government to finance construction for the railways. Relatively, the stock prices of companies in the railway sector rallied, as shares of China Railway Group surged 5.1% and China Railway Construction Corporation’s shares jumped 7.2%.

Personally, I think the spending will have a double-sided effect. Positively, tremendous infrastructure construction will boost growth effectively, and the emphasis on development in the central and western region will lead to more balanced economic landscape across the country. Negatively, as China is undergoing a significant transition from being overly dependent on investments and exports to relying more on domestic consumption, the massive government-led investment project might impede structural reform, and the increasing credit along with financing might pose additional risk in the credit market.

Stimulus 2: Upgraded Housing for Low-Income Households

The government would also spend more on slum clearance and upgrade of poorer urban areas. It added that the China Development Bank, a lender for key government policy projects, would set up a special arm to issue bonds to support new homes.

In my view, this measure could be a complement to the railway construction because of its focus on ordinary people’s well-being. It is a tradition that Chinese people care a lot about their housing and treat it as one of the most important measures of their living standard. If the housing upgrade can be implemented effectively, it could ease social instability and stimulate domestic consumption in the mid- to long-run.

Stimulus 3: Tax Relief for Small Businesses

The government would extend existing tax breaks to small businesses until the end of 2016 and raise the threshold for taxing smaller businesses, which have been struggling as economic growth slows.

I do believe that small businesses will benefit from decreasing tax burden, but this measure might not address their problem radically, which is largely due to the lack of financing. State-owned banks mainly offer loans to large, state-owned enterprises, putting small and medium businesses in a significant disadvantage in market competition. So in addition to regulating state-owned banks, the incorporation of private capital for lending and in-depth financial reform is also indispensable.

In conclusion, as the market force is set to play a fundamental role in the overall economy, it is the quality rather than the quantity of growth that should be strengthened. Therefore, the new leadership should be committed to structural reform with emphasis on wealth increases of ordinary people so as to unleash domestic consumption and underpin growth stability.

(Revised) Interest rate liberalization in China

China’s top officials made New Year resolution to bring about economic overhaul. At the Boao Davos Forum, Premier Li Keqiang emphasized that the government won’t panic in the face of slowing growth. Some analyst says that the slowing growth means that difficult reforms will be put off indefinitely. But easier one such as the interest rate reform is unwinding. The People’s Bank of China is in its final stages of winning approval for a bank deposit insurance system.

Interest rate liberalization in China is long overdue. But once it is implemented successfully, it will put money in the pockets of ordinary Chinese savers, make the banks evaluate risks more carefully, and direct lending to privately owned firms that complain of China’s largest banks ignoring them.

Yet steering the banking system of the second large economy in the world to a new direction is not an easy task. Currently, the PBOC targets a measure of bank credit called M2 and instructs China’s giant state-owned banks about their lending practices. For instance, the PBOC has told banks to halt loans to troubled real-estate developers and industries marked by overcapacity.  By contrast, other central banks take a less direct role by setting benchmark rates that offer a guidepost to banks as they lend.

 PBOC is hiring new brains to deepen their understanding of how to transform to a central bank more like other central banks. Ma Jun, until recently Deutsche Bank ‘s top China economist, was hired as the Chinese central bank’s new chief economist. He proposed a plan to liberalize the country’s financial system in steps within three years. First it needs to establish a central bank-blessed interest rate (China’s interbank rate) that would set a benchmark for lenders. That would give China the equivalent of the U.S. federal funds rate. During a first stage of reform, the PBOC should keep its intentions about the interbank market quiet and target a broader measure of money supply, known as M3. If the interbank lending system stabilized, China could shift fully to a monetary policy where the PBOC would set the interbank market rate, and banks would be free to charge what they like for deposits and loans.

But for such a plan to carry out, there are several caveats that must be factored in.

First of all, will PBOC be willing to give up control of lending by state-owned banks? Ma Jun must bear in mind the fact that it is much more easy for PBOC officials to send directives than to maneuver in a much more complicated market like Federal Funds Market.

Secondly, the biggest obstacle lies ahead for interest rate liberalization is what is known as the local government debt issue. Lots of local governments of China have been facing the risk of default on the colossal debts borrowed from state-owned banks. These debts were used to fund local governments unplanned and outrageous investment in infrastructure in order to boost local GDP growth, which is closely tied to the evaluation of local governors performance.

If the interest rate freed up too quickly, there is fear that the interest rate will be too high and local government will have to borrow more new debts to payback old debts. The huge default risk will put China’s economy in a perilous situation.The growing inability of local government to finance their debt is considered one of China’s biggest financial weaknesses. Unless there is a safer way to settle down local debt problem, I am afraid the interest rate liberalization agenda will be postponed.

Is Chinese medicine gaining credibility in U.S. hospitals ?

I just saw an article on WSJ saying that the Cleveland Clinic, one of the country’s top hospitals, is now dispensing herbal medicine, a practice that is well established in China and other Eastern countries but has yet to make inroads in the U.S. because of a lack of evidence proving their effectiveness. Chinese herbal therapy center was recently opened by the Cleveland Clinic.The aim to establish this new clinic is to  fills in the gap of western medicine has on chronic-care. While acupuncture programs have sprouted across the U.S., there are only a handful of herbal clinics.  According to Jamie Starkey, lead acupuncturist at the Cleveland Clinic who got the herbal clinic started, this might be due to little scientific research outside Asia on using herbs as medicine. Ms. Starkey says she had to translate studies to convince the Integrative Medicine’s former medical director that an herbal clinic could be effective.

If you want to practice Chinese Herb in U.S., you need to get a license. But the license doesn’t allow the license holder to claim she treats diseases. She can only say that Chinese herbs can stop or alleviate pain.  Chinese herbal medicine is still being critically evaluated. “In the past it wasn’t even considered seriously,”A doctor at Cleveland Clinic says. “At this point there is a thinking, ‘Some of the things we’re doing now aren’t very effective. Should we really be looking at alternatives a little more seriously?’ I think the verdict is still out.” 

I don’t know what is ultimately preventing the Chinese herb’s widely usage in U.S. But lacking scientific research of the herb’s effectiveness is not convincing me. Chinese medicine exist for at least 2000 years and 1800 years before the invention of Western medical system. This is a practice that has been well tested and established. To speak frankly, those test is not done in medical lab with white mice and restricted conditions, but with 1.4 billion Chinese people living in an ever changing environment today.If it is not effective, how can the 1.4 billion people live in China before the invention and introduction of western medical system?

Chinese medicine established through practice and experience, not through theory and experiments, which is what western world definition of science is. Chinese traditional medical theory think the illness is part of us, so it must be cure with the help of our body. Medicine is just a mitigator or facilitator,  that can help our body restore its normal state.  It goes against the western medical system’s idea that if one part of our body is ill, we must fight with that part and even remove it from our body. This is, from Chinese perspective, as if we are fighting with ourself.

But I guess the ultimate reason why Chinese herb cannot go into U.S. is because it is so effective that it could be a huge threat to the existing system.




Foreign Auto Makers look to China

Given that China’s economy has been slowing, the biggest growth engine that it has been pursuing is to get reluctant customers into the market. The price of owning a car in China extends well beyond just the monthly payment. Along with this payment comes heavy taxes and parking costs, which are a major reasons for customers’ reluctance.

China has remained a crucial sales and profit region for global giants like Volkswagen, General Motors, and Toyota. However, the problem lies in the fact that Chinese consumers’ interest in cars is slowing along with economic growth in China. Another barrier adding to this problem is the growing number of Chinese cities that are curbing auto sales in order to fight traffic congestion and pollution. Despite these complications, “many foreign car makers remain optimistic, pointing to the number of new buyers coming to the market. Three out of four new cars are purchased by first-time buyers, according to research firm J.D. Power and Associates”. Optimism is key and in terms of these auto makers’ plans, strategy will go a long way. More growth in auto sales will come from targeting smaller cities that still have high demand for individual mobility.

Many global auto executives met this weekend at the Beijing International Automotive Exhibition with the plan of offering lower-priced vehicles to the young, professional Chinese population- thus, aiming to bring a new demographic into auto sales. Honda aims to release a new sedan at 70,000 yuan ($11,272). GM plans to release a new version of the Chevrolet Cruze with a smaller engine in order to meet China’s energy efficiency requirements. Also, China’s largest car maker, Volkswagen, will release five models for Chinese consumers.

However, some feel that the odds are still against foreign car makers targeting the Chinese population. Analyst Lin Huaibin from consulting firm IHS commented that “It’s almost certain growth in car sales will slow. When people feel the pinch of economic slowdown, they will cut spending”. I feel that auto demand in China has the potential to expand, but some areas are more plausible for growth than others. In big cities like Beijing, regulations on air pollution are tightening and there are also caps being placed on the amount of licensed vehicles in the city. The amount of time it takes to actually obtain a license plate is definitely another force acting against foreign car makers. On the other hand, if these car makers target Chinese cities with smaller populations and strong economic performance, they will see more success.

The Inception of Cross-Market Stock Investment in China and Hong Kong

The new-established administration in China is ambitious to progress structure reform for sustainable growth. With the claim that the market force will be allowed to play a fundamental role in the overall economy, a key task on the to-do list is the opening-up of its strictly controlled capital markets.

Recently, the country made a big move by initiating the so-called Shanghai-Hong Kong Stock Connect, a pilot program of cross-market stock investment. It allows mainland investors to trade shares of select companies listed in Hong Kong, while permitting Hong Kong investors to trade designated stocks trading in Shanghai. More specifically, investors in Hong Kong can plow up to 13 billion yuan ($2.1 billion) a day into mainland shares, with a maximum of 300 billion yuan. Mainland investors can send up to 10.5 billion yuan a day to Hong Kong, capped at 250 billion yuan. Purchases will be limited to dual-listed stocks and designated blue-chips, and mainland participants will initially have to be either institutional investors or retail investors with 500,000 yuan ($80,650) in securities and cash.

The inception of the program significantly boosted the two markets, with the Shanghai Composite Index ending the day up 1.4%, the biggest gain in the region, and Hang Sang Index (Hong Kong) climbing 1.5% to its highest close since Jan. 2. Both markets are rebounding after sharp falls in the first quarter on concerns of China’s economic slowdown.

Definitely, the cross-border integration will be a mutually beneficial cooperation for both China and Hong Kong.

On the side of China, the Shanghai market has been long-depressed shown by the negative year-to-date performance of the Shanghai Composite. The program will inject vigor into the bear market by introducing foreign capital. In particular, since shares of companies dual-listed in Shanghai and Hong Kong are usually cheaper in Shanghai, mainland investment will be appealing to global investors who can easily trade those dual listed companies in Hong Kong.

On the side of Hong Kong, Hong Kong Exchanges and Clearing Ltd (HKEx) has been struggling to lift trading volume and further capitalize on China’s growing opportunities, despite that the market has comparative advantage of mature accounting practices and transparent regulations. As mainland investors are set to invest in iconic Chinese companies listed in Hong Kong such as Lenovo and Tencent, Hong Kong’s role as the primary gateway to China will be strengthened along with increasing market confidence.

In the long run, the move is expected to push forward the internationalization of the Chinese yuan and bolster Hong Kong’s position as an offshore yuan center by integrating capital domestically and internationally.

One-child Policy = Incredible Resources?

According to news from Beijing Auto Show, there are millions of Chinese under 30 who are only children, a legacy of the country’s one-child policy. And these children have parents, grandparents, aunts and uncles who are eager to see them get a good start in life, says Ford Motor Co. chief of sales and marketing Jim Farley. In contrast to many Americans under 30 who are burdened with college debts or wrestling with a sluggish job market, China’s young consumers “have incredible resources,” he says.

I haven’t thought about this before! But it’s unfair to say like this! China has the largest income gap among people and ordinary people face a struggling life especially in big cities, particularly for young adults. 

According to The Atlantic: China, like the United States, has an income inequality problem: the country’s GINI coefficient, a measure which tracks economic equality, was 0.474 in 2012, making it more unequal than countries like Peru and the Philippines. Often, inequality in China is blamed on the country’s high rural population—39 percent of China’s citizens worked in the agricultural sector in 2008, a number much higher than that of developed economies. The situation isn’t lost on China, either. Prime Minister Li Keqiang has unveiled a plan to urbanize the country, betting that doing so would help balance China’s economy.

Due to unbelievable high housing price in China, Chinese cities were dominated by welfare-oriented public rental housing provided by either the government or public employers. Severe housing shortages, residential crowding, and poor housing conditions were common problems in cities. Over the last two decades, Chinese cities have experienced an unprecedented housing privatisation, as the Chinese government has sold public rental housing at deeply discounted prices, encouraged developers to provide new private housing and ended public housing provisions. Meanwhile, house prices have skyrocketed in cities, with the national average house price increasing by 250% in the decade between 2000 and 2010. The house price-income ratio classifies much of China as “severely unaffordable”. In big cities like Beijing and Shanghai, a modest apartment can cost multiple millions of yuan to purchase, and thousands of yuan to rent, making housing affordability the top concern of most low- and middle- income households.

I know it is true in US a lot of students have loan in order to go to college, But in China, poor people cannot even get educated to have the chance to go to college, let alone to have a loan from the government. Chinese people are rich, Chinese people are poor. Chinese rich people buy the luxury brands and cars but the poor cannot afford even Mcdonald’s.

Auto Sales in China: Multiple Players, Multiple Strategies

China, the most populous country in the world, is always a critical market for auto makers. In spite of the fact that its economy is slowing down, many people are still bullish about the potential of auto sales in the country because of the increase of middle class, as well as the government’s goal of boosting domestic consumption for economic growth.

Both domestic and foreign auto makers displayed their latest (probably coolest as well) cars along with gorgeous models to attract potential buyers’ attention at this week’s Beijing auto show, and many of them are really ambitious about their China business. For instance, Toyota Motor Corp., the world’s largest auto maker by sales, aims to take the third spot in the country in terms of market share by bringing 15 new car models to Chinese consumers by 2017 and doubling its sales to two million cars over the long run. Similarly, Volvo Car Corp. said it expects China to overtake the U.S. and become its biggest market this year based on a statement issued Sunday, in which the Swedish company said it sees sales of at least 80,000 in China, up from 61,146 in 2013.

So what kind of strategies are auto makers adopting for sales growth? In my observation, the top three concepts are branding, patriotism, and youth-targeted design.

First, branding is essential for every single auto maker. Most buyers in China are not industry experts and cannot tell the difference between two similar-level cars based on technical factors. Therefore, what really helps a particular auto maker stands out is branding. Simply speaking, manufacturers have to think how to make their cars look both reliable and fancy to consumers, instead of being overwhelmingly focused on technical excellence.

Second, patriotism can be an effective selling point of domestic brands. Makers like Geely Motor Corp. and Great Wall Motor Corp. are trying to persuade buyers, especially those elders, to remain loyalty to Chinese brands. However, I think those domestic manufacturers have to increase quality and enhance industry structure to stimulate sales radically.

Third, youth-targeted design is emerging to be a dominant theme. Unlike many Americans under 30 who are burdened with college debts or wrestling with a sluggish job market, China’s young consumers have “incredible resources”, which is derived from the one-child policy in the country. As a result, many top auto makers like Mercedes-Benz showcased what they described as sport-utility vehicle coupes — SUVs with fast-looking roof lines that look to be borrowed from a sports car to attract young buyers.

In conclusion, I think there is not a best strategy for all auto makers, and they have to target the right buyers based on their unique selling points such as design, price, momentum, etc.

(Revised) China GDP Grows Even Slowers

China’s gross domestic product growth in the first quarter decreased to 7.4% that is the slowest level in 18 months. The continuous economic slowdown of the world’s second-largest economy really makes people worry as China plays a more and more important role in the global market.

Since about three years ago the government started to emphasis the development of financial market and innovation of technology instead of relying on export and governmental investment. Therefore, some economists treated the slowdown of China’s economy as an inevitable sign during the transition. “It’s a move in the right direction,” said ING economist Tim Condon. He thinks 2013 was not a good year for restructuring in China, but the situation could be better in2014. However, China’s GDP growth has fallen to 7.4%, compared with the double-digit growth few years ago. Should we worry about the further slowdown of China’s economy?

There are signs of slowdown in many areas. Due to the control over housing market, the fixed-asset investment that covers machinery, land and buildings slightly increased to 17.6% in the first quarter, which is less than the 17.9% expectation. The growth of retail sales struggled to keep the same level as before. However, the anti-extravagance campaign introduced by the government could seriously affected officials’ consumption of luxury goods such as cars, yachts and tourism. Moreover, bad news also came from its financial market. The local government debt level has become an increasing danger. Defaults also happened on trust loans and corporate bonds since the start of 2014. As more and more problems exposed, Chinese government should really take some measure to stop the trend of slowdown before it is too late.

In the long term the aging population will also be a threat the economy. Right now China still has millions of people trying to get into big cities from rural areas and keep a relative low labor cost. However, the society has shown a very sign that the graying dependents are ballooning because of decades of One-Child Policy. Once the country gets older, not only the economy will lose its vitality but also the social culture would change and seek safety and stability instead of risk and acquire.

Premier Li Keqiang said that China needs to keep economy growing at a speed of 7.2% in order to provide enough employment. Before the figure reaches the bottom line, the government announced a plan of economic stimulus in April. It includes the construction of railroad and rural area.  Other measures such as tax reduce and governmental investment in the market could also be expected as the following steps of the government. On the other hand, the market gave a positive response to the measures of government. The stock markets in Shanghai and Hong Kong went up after the announcement.

Therefore, the economics reform could no longer be an excuse for the slowdown as the GDP growth has almost reached the bottom line. It is time for the government to take actions to activate the economy and labor market as well as recover the growth to a safe level.

Chinese real estate market start to collapse (Part 2)

The local governments relay on the prices and sales of houses to increase their GPD target, so they have incentive to support the real estate bubble and maintain the house prices. However, the new Chinese centre government limited loans provided by bank to those developers, this policy was determined by the centre bank in Beijing and no other local branches can disobey that. Thus the local government can’t help the real estate firms much even if they wished to.

However, a large scale bankruptcy of real estate development firms may not be acceptable. Reported in WSJ, (the current number bankruptcy) this is acceptable as long as not too many companies go broke at the same time and doesn’t result too much disruption, Mr. Chan added. In other words, they don’t want a “Lehman Brothers” moment. The real estate regulation is sure to be more influential to those developers who don’t have much fund support. Said by John Allen, chief executive officer of private investment firm Greater China Corporation in a later speech. “Bankruptcy is one of the healthiest things around. You want to get rid of the weak players.”

The current goal of Chinese centre government is to regulate real estate market and try to “shrink” the bubble, no one wants to cause a larger bubble or burst the bubble so early. The current situation is favored by Beijing, small real estate firms go bankruptcy in a moderate rate. According to WSJ, now that measures by Beijing to rein in the availability of credit and cool the housing market are beginning to bite, some developers are feeling pinched.

In 2010, Beijing start its curbing on lending to real estate developers, the centre government trust that the house market will be cooled in several years. For real estate property developers, the fund is most important thing for their sustainability. With enough fund, the house prices can stay high, without enough fund, the developers must sell their houses at a lower price because they must recollect the fund and pay the debt. The actual effect of policies from Beijing was quite effective. According to the chart from WSJ below, the difference between sold and construction has becoming larger. And the surging number of constructed houses stopped and went down at from the end of 2011.

No doubt that the downward trend of house market has already began, but there will still be few more years before the market returns to its normal health. The next question for Beijing is: how to minimize the harm caused by the burst of bubble.