Morgan Stanley Report: Policy Shifts Towards Boosting Private Demand in China

Please take a look at the second article in the link below:

http://www.morganstanley.com/views/gef/index.html

This article summerizes some key messages of the current Central Economic Work Conference. I bold some interesting points which have something to do with our class:

1. Focus on carrying out existing public investment projects while tightening approval of new projects;

2. Push ahead with energy conservation and retrenchment of over-production capacity;

These two points clearly state that the central government is determinant to deal with the over capacity problem.

But I am particularly interested in the following statement:

3. Accelerate urbanization by easing the controls imposed by the current household registration system over rural-urban labor mobility;

This is to say, the Chinese stylized “HUKOU” system may change to some extent and with a more flexible labor mobility, we can carefully predict a more difficult situation for the government to stablize the housing prices.

Please refer to the analysis of Morgan Stanley following the key messages and see whether you have new ideas about the signal sent by the conference.

By Minxiao

My personal view on “THE COST OF CHINA’S EXCESS CAPACITY”

http://www.ftchinese.com/story/001030012/en

Inspired by the blog “Sunnybear” and discussion held in class, I have some bold personal view about the article.

In my view, the main conclusion about China’s economic policy that “the result may well be a crisis in the trading system” is consequently somewhat overvalued.

The article is based on the clash between the rising saving rates in USA, which is the reason of declining USA deficit and the China’s economic policy. However, it is exactly the case in the USA. Since the second quarter of 2008 US savings have declined from 12.7 per cent of GDP to 10.4 per cent of GDP.

In any country, of course including China, it is quite easy to point out capacity in one or some industries–this measure necessarily means that cases may be below and above average.

Therefore, citing only some particular examples cannot reach the conclusion that China is suffering from the problem of overcapacity. This same mistake applies within individual industries. For example, the situation of Chinese chemical sector mentioned in the report is a normal market situation.

Regarding the true over capacity, the Chinese government has clearly stated the necessity of rationalizing this structure. On the other hand, regarding the criticism of China’s “high-savings, high-investment economy”, some econometric theory has proved that investment is a crucial element in economic growth. The case of Singapore has demonstrated that this model of development can achieve higher levels of GDP per capita than the US.

Finally, about the “crisis in the trading system”, it is just the opposite case in Europe. From August 2008 to August 2009, the EU moved from a trade deficit of $26.0bn to a surplus of $1.1bn. This shows a basis for a reduction and not an increase of trade tensions.

Jiayin

China State Administration of Taxation: income of re-renting houses should be taxed

This annoucement just released on Nov. 26 and I don’t find any English version of the news until now. So I just attach the Chinese version and summerize some information as below:

http://finance.ifeng.com/money/wealth/consume/20091126/1511732.shtml

The Administration paid attention to a gradually frequent phenomenon in the renting market that many renters re-rent their apartments to the third party and earn income from the differential renting prices. And this decision is proposed specifically to regulate the taxation of  those who re-rent their renting apartments.

The information in the news is a little bit difficult for me to translate into English, so I have already sent this link to Professor Xie and hopefully he can lead the talk next week for details.

Minxiao

China stepped into the real estate bubble?

From the discussion held in the class and the article: http://www.ft.com/cms/s/0/a3c20b6a-ca74-11de-a3a3-00144feabdc0.html?ftcamp=rss&nclick_check=1

I have major concern that :

Real estate has become the critical problem of China economy. The entity economy has not modernized yet, while the whole economy has got involved in the asset bubble.

The rocket-rising housing price and the decreasing tax from the entity have made the local government more and more rely on the land finance. For example, land revenue of Beijing accounts for the one-third of local financial revenue, which means that if the stream of the land revenue is cut off, the local fiscal revenue will shrink dramatically. What’s worse, more and more cities are replicating the path of Beijing. Therefore, it is common that whatever the local government says to control the housing market, the consumers usually ignore the spam comment.

And the crazy phenomenon happened in the real estate market indicates that while the purchasing power of rmb is decreasing within China, the keen in the real estate market will not retreat. The soaring financing product prices and the difficult environment for the entity economy make more an more people leave far away from investing in the entities. And what they did will lead to a vicious circle: leaving the entities, rushing into the capital market, blowing the bubble, bubble burst, issuing more currency and then blowing the bubble again–the declining entity economy just ruined the foundation of the capital market.

The rising housing price is far beyond the real wealth of the economy and the trillions of real estate cannot be cashed, if so, the bubble will burst quickly. In fact, the real estate is very fragile; the local finance is just like relying on an iceberg. The data of Guangzhou, August showed that 20 out of 27 prime lots in 2007 have not started construction yet, 1 prime lot is abandoned and 6 are almost denied.

Real estate is exactly the crux of problems in China economy, combined with huge moral pressure, public pressure and market pressure–If the all-time-high housing price keeps going up, What China economy will pay is not only the cost of bubble burst, but also the cost of reconstruction of the whole economy. 　　

 

Jiayin

Does People’s Bank of China really hint an appreciation of RMB?

Let’s continue the topic of the exchange rate of RMB. Soon after the class of last Thursday, I checked some major Chinese news website and other media about the message of the central bank’s hinting to appreciate RMB. Like what FT guessed, some of the news also pointed out the central bank of China was signaling a further appreciation of Renminbi, although the opposite opinions took the majority.

It is interesting that on Wednesday and Thursday, around the time when FT first proposed this issue, the Shanghai A Share shifted from uprising to downturn after more than a week’s climbing, somehow reflecting people’s concern that a stronger RMB might hurt Chinese economic recovery. However, the stock started to rise again on Friday and the performance of the market seemed to break the rumor instantly.

These days I am waiting for the latest news or announcement of the APEC leaders’ conference to grasp some signal of the RMB appreciation issue but the formal declaration was postponed because of some slight disagreement between China and America on the official terms. Despite of this, I could see that the appreciation of RMB is not a main measure that Chinese government would like to take in the following months. China’s President Hu Jintao spoke during the APEC CEO Summit that to expand the domestic consumption was still the first task to combat the shrinking of international trade, without mentioning alternatively to appreciate RMB, in Singapore Nov. 13.

A detailed report of this could be found at: http://www.chinadaily.com.cn/china/2009-11/13/content_8969771.htm

Hu also mentioned other ways to balance the surplus of Chinese trade reserves, including increasing the import of “advanced technologies and equipment, key spare parts as well as important energy resources and raw materials”. He also added other policies such as tax-cut, reform of the medical care and the housing market to expand the individuals’ consumption. Obviously China is making effort to change the current imbalance of its international trade, but not relying on a stronger RMB.

From the US side, President Obama was surrounded by concerns of protectionism towards other emerging markets, like Mexico and Russia, as well as China so that he did not have many opportunities to raise the topic of appreciation of RMB. Only during a conference held on the sidelines of APEC’s weeklong annual forum, Ron Kirk, the US Trade Representative hinted indirectly that China should make more efforts to reduce its trade surplus by appreciating Renminbi. Therefore, the pressure from the outside on revaluating RMB is not as heavy as I have expected. But President Obama may still reiterate this issue during his first visit to China from today.

See the news below to get more information on the standpoint of the US: http://www.chinadaily.com.cn/world/2009-11/14/content_8972538.htm

Until now, although few evident seems to support the guess of FT that the People’s Bank of China hinted a appreciation of RMB, nobody could forecast what would happen in the next six months or even closer. Because the reality may urge the exchange rate of RMB to rise since the bubble in the Chinese financial market starts to gather, as what was concerned about by the central bank of China. The risk of a new round inflation also begins to emerge from the data on the increase of asset prices and the speedup of money supply uncovered by the central bank recently. Hence, although it is still difficult to say when the RMB is about to appreciate, we may carefully expect a clearer picture of the trend at the end of this year.

By Minxiao

Analysis on China’s current strategies of exploring energies

with articles referred to FT, November 4, 2009

“Burning ambitions: China’s great oil grab– Beijing takes on the west in a 21^st century race for resources”

http://www.ft.com/cms/s/0/a3a9b840-c8ca-11de-8f9d-00144feabdc0,dwp_uuid=f6e7043e-6d68-11da-a4df-0000779e2340.html

Background: With a sustainably fast growth of economy, China is expected to desire more energy, including oil, than any other countries in the decade. As an energy that my affect most industries’ development, oil consumption and exploration have been China government’s major concerns. Currently, China is expected to consume 8m barrels oil each day, which figure will probably double in the next decade.

China’s overseas investment: Central Asia and Africa are two areas that China mostly concern. Among them, China’s energy companies performed especially well in Central Asia and have acquired large shares of energy assets for self-utilization. Kazakhstan is a good example of China’s success of overseas investment, and nowadays China’s oil output from Kazakhstan has reached the level of 300,000b/d, more than one-quarter of China’s total foreign production. Compared to firms from other western countries, China’s firms are more willing to take the risk and invest large amount of money in building pipelines in these areas.

On the contrary, China’s investment in Africa is not quite smooth. China firms’ presence is much smaller and political obstacles seem to be significant. The two sides are disputing on the process of oil-for-infrastructure, and therefore, China’s ambitions in Africa encounter problems.   

 Challenges and Possible Problems:

1: China’s aggressive overseas investment may be regarded as threats to local countries. Current situation is that China’s energy firms are more willing to hire Chinese labor and equipment, which causes local governments’ and citizens’ dissatisfaction.

2: Competitions are fierce. On one hand, China’s government-based firms are facing challenges with experienced international energy groups, such as Royal Dutch Shell and ExxonMobil. On the other hand, the three biggest state-owned oil companies—China National Petroleum Corporation, Sinopec and China National Offshore Oil Corporation—have their own economic interest, and internal competitions among them are getting more intensive.

3: There are increasing voices on energy independence, and China’s overseas purchase may cause further international fight on energy resources.

Chances and Suggestions to China’ energy firms:

1: Current recessions has largely decreased the price o f overseas purchase, and most of emerging countries need large amount of loans for development. It would be a great chance for China’s firms to invest larger assets, sophisticate its portfolio, and diversify the investing markets.

2: The competition relationship between western oil companies and China government-based firms can be changed to strategic cooperation. The current campaign built by BP and CNPC in Iraq has realized such relationship: BP is in charge of technological part and CNPC will keep down costs.

To sum up, current recessions create chances as well as challenges for both oil-producing countries and oil-demanding countries, also for both western energy giants and China energy firms. If all parties can find ways of utilizing energies most efficiently, it would be helpful for international trade, and further help the global economy step out of current recession.

Renminbi at heart of world trade imbalances

This is the title of an article in the latest Financial Times, which reflects the very hot topic of recent discussion about the revaluation of RMB and this is also supposed to be a major issue covered in our class.

You may click the link to read the original article: http://www.ft.com/cms/s/0/66dc0964-c7d9-11de-8ba8-00144feab49a.html 

However, the discussion seems not to be simple at all, since from different perspectives, the conclusions on whether RMB should appreciate or not are utterly different. Obviously, from the website of our class, Professor Xie and his colleagues insist that RMB exchange rate should be kept within a reasonable interval and in the class, he said that the current level around 1:6.82 was good and should be held on for a while. Of course, he provided us with several convincing reasons.

Obviously, we can see many other counterpart opinions. Martin Feldstein, a professor of economics at Harvard University wrote an article named “Why the renminbi has to rise to address imbalance” in Financial Times on Oct. 30 (this is why I say this topic is so hot). He pointed out that “China’s policy of expanding domestic spending while depressing the renminbi will lead to its economy overheating, particularly its manufacturing sector. Allowing the renminbi to rise would shift demand in China from manufacturing to services and prevent inflation.” And his main focus was on the global imbalances caused by the undervalued RMB exchange rate: “A stronger renminbi would thus reduce China’s domestic imbalance and global imbalances.”

You may also refer to the original article: http://www.ft.com/cms/s/0/fd4b4852-c4db-11de-8d54-00144feab49a.html?nclick_check=1

Although at this stage of economic recovery, it is not very proper to talk about inflation caused by overheated capital inflows, we have to understand why many people are so eager to ask for a further appreciation of RMB. Just like what the Harvard professor said, the global imbalances are serious problems for the sustainable development of economies both in developed countries and emerging markets. In the first article I cited in today’s Financial Times, the IMF said that “rebalancing must involve a broad range of emerging economies if solid global growth is to be sustained over the medium term.” The author also said that although some rich countries in trade surplus-such as Germany and Japan-have raised their currency value against dollars, as their aging populations save for retirement, their efforts seem to contribute little to the global rebalancing.

However, I would say a currency policy should and must be considered as a domestic policy of one country first and I think it is because of the domestic concerns make Chinese government show a reluctant willingness of appreciating RMB. Mr. Lyons said in the first article that “there is a concern that if they (some East Asian countries) let the exchange rate rise, it will attract a lot of hot money but hit confidence”, which is already happening in Brazil. Therefore, the RMB exchange rate regime has become a worldwide issue not only relating to China’s own development but also to the rebalancing of the global economy. The government has to make a tradeoff between the two directions and let us see what will happen in the next stage.

written by Minxiao

China Daily: US calls for balanced trade at meeting with China

(Agencies)
Updated: 2009-10-29 15:15

http://www.chinadaily.com.cn/china/2009-10/29/content_8869089.htm

This  article highlights the hot issue in the world today, especially between the two big countries, China and US. In my view, how can it be fair trade when Americans themselves consume much more than they produce, espesly asians tend to consume less than they produce to save for rainy days. Americans don’t even want to buy their own products due to either too expensive or too bad and want others to buy from America. America has trade probems not just china, but others asians or and others too. If it wasn’t China Americans would have living standard of brazel due china produce cheap products and loans for Americans to sustain americans high living standard, price out most productions of the world, consume too much resources and energy at the cost of others, deprive so americans can live like kings and queens and contribute little but lot troubles.

               

                                                                                                                                  Re-editted by Jiayin