October 23, 2008
By: Jim Yardley and Keith Bradsher
For three decades, China has fueled its remarkable economic rise by becoming the world's workshop and unleashing a flood of low-priced exports. But faced with a possible global recession and weakening demand for Chinese exports, the question now is whether the ruling Communist Party can prevent the financial crisis from derailing the country's economic miracle.
This is a pressing question not just for China but for the rest of the world. Many economists say continued Chinese growth is vital to the global economy as the United States and Europe face severe downturns. Yet to navigate the crisis, many analysts say China will need to recalibrate its economic model, stoke domestic investment with heavy government spending and promote policies to increase consumer spending in a nation famous for high savings rates.
The global financial crisis is expected to be the main focus of a summit meeting of Asian and European leaders in Beijing this week.
It is also arising at a politically resonant moment for China. This is the 30th anniversary of the policy changes that propelled China's economic rise, a milestone that has raised inevitable questions about the future shape of reform. At the geopolitical level, China would seem well positioned to expand its influence as it sits on $1.9 trillion in foreign exchange reserves and could benefit from widespread calls to reorganize Western-dominated global financial systems.
But for now, most analysts say China's top priority is simply protecting its own economy. Chinese leaders say the domestic financial system is largely insulated from the global crisis but also warn of serious pressures at home and from abroad. Economic growth is at the lowest level in five years, unemployment is a growing concern and scores of factories are closing in the country's export region. Domestic stock exchanges have lost 65 percent of their value and real estate sales have plummeted.
Many economists believe China can avoid a serious downturn, but a significant slowdown would pose a political challenge for the Communist Party, which derives much of its legitimacy from delivering economic growth. Conventional wisdom holds that China's output must grow at a minimum of 8 percent for the economy to produce enough jobs to meet demand, and many economists expect growth to drop below that level next year.
Just last week, thousands of unemployed workers protested outside closed toy factories in Guangdong Province, the country's export hub. Slightly more than half the country's toy exporters shut down in the first seven months of this year, mostly very small companies that struggled to cope with new safety standards as well as weakening Western demand, according to China's customs agency.
If the growth rate "goes below 8 percent in 2009, I think they will be quite concerned," said Kenneth Lieberthal, a China specialist at the Brookings Institution in Washington. "They are always concerned about job creation."
Already, Chinese leaders are preparing a response that could resemble the government spending spree from 1998 to 2000 that is credited with helping China avoid the worst of the Asian financial crisis. Former Prime Minister Zhu Rongji poured billions of dollars into projects like flood control, road building and new airports to pump economic output. Much of that infrastructure is now considered essential to China's competitive advantage as a manufacturing exporter.
Today, improvements are needed in railroads and the electrical power grid. But China's most conspicuous needs are the softer side of a modern economy — a health care network, lower tuition and fees for schools and universities and improvement in the rudimentary social safety net, economists say.
Such steps are seen as crucial if China is to give consumers — especially working-class urban residents and the 800 million people still classified as peasants — the confidence to spend rather than increase their savings.
"China's infrastructure is excellent - compare it to India," said Xu Xiaonian, an economics professor at the China Europe International Business School in Shanghai. "It's getting harder for the government to find ways to spend money productively. It's stimulus for the sake of stimulus."
David McCormick, the U.S. under secretary of the Treasury for international affairs, said during a telephone interview that Chinese officials understood that the sheer size of their economy, combined with weakening demand overseas, meant increasing demand for goods and services within China would be in the country's own interest. "They can't count on exports being such a driver of their economy going forward," he said.
To date, the most significant new measure is the land reform announced Sunday after days of mixed signals. Full details of the program are still unclear, but the plan allows farmers for the first time to lease or transfer land, a landmark step in what is still nominally a socialist country. Economists believe the measure will lift the rural economy, though few predict sudden benefits. To raise rural incomes more rapidly, the top Chinese economic planning agency on Monday increased the minimum purchase price of wheat by up to 15 percent beginning next year.
But transforming the countryside and creating a nation of consumers is likely to be a more difficult process than China's transformation into a manufacturing giant. In recent years, President Hu Jintao and Prime Minister Wen Jiabao have eliminated the ancient agricultural tax and increased spending on rural initiatives. Yet the rural-urban income gap has continued to worsen. Today, China still has more than 500 million people living on less than $2 a day; nationwide per capita income is only about $2,000. The social safety net remains so inadequate that most peasants save their spare earnings to protect against a medical crisis or as a thin cushion for old age.
Andy Rothman, a longtime analyst at CLSA Asia-Pacific Markets, an investment bank, said that the government had been promoting domestic consumption for years but that by necessity it was a gradual process and not one that could provide a quick fix to a global slowdown.
"This isn't something you want to move ahead at light speed," Rothman said. "China trying to step into the breach by handing out credit cards to 800 million peasants would be a disaster just a few years down the road."
From a geopolitical standpoint, China would seem to have an opportunity to fill a void created by a weakened West, especially given the country's huge foreign exchange holdings. President Asif Ali Zardari of Pakistan visited Beijing earlier this month in search of financial edge to help his country stave off bankruptcy - an overture that could become more common as China is increasingly perceived as sitting on a money pot.
More pertinent to the United States is whether China will re-examine its strategy of financing U.S. debt. Chinese experts say that the American and Chinese economies are so intertwined that Chinese leaders will not make any abrupt changes in its policy of directing the bulk of its foreign currency reserves to dollar-denominated assets. Indeed, the U.S. Treasury secretary, Henry Paulson Jr., and other senior U.S. officials have been in almost daily contact with their Chinese counterparts.
"China, with the responsibility of a big country, will not make trouble for international financial markets," said Hu Angang, a Chinese economist who is the director of the Center for China Studies at Tsinghua University. "The Chinese government is very rational and flexible, and very clearly recognizes any policy does not just influence domestic markets but also global markets."
McCormick said that U.S. officials had not asked their Chinese counterparts to buy any specific portion of the Treasury bonds that would be issued to finance the Bush administration's $700 billion economic recovery plan. But U.S. officials have tried to impress on Chinese officials that the United States remains an attractive place to invest.
"We've certainly tried to give them confidence we're taking the appropriate policy steps," McCormick said, adding that the United States had also encouraged China to continue to be "a stable and long-term investor in the global financial system."
Some Chinese experts are suggesting that China could use more of its foreign reserves to purchase stocks in Western companies and even leverage positions onto corporate boards. Doing so, these experts say, would allow China to develop expertise and gain more experience in global business.
But others say China was stung by the backlash after a state-owned Chinese petrochemical company sought to purchase Unocal and would be cautious in making any moves deemed politically risky. Domestic pressures also exist; public criticism has erupted after some investments by the country's sovereign wealth fund lost money.
McCormick said that the United States welcomed investments by sovereign wealth funds, whether from China or any other country.
No one is yet certain when the global financial system will stabilize, but the crisis has convinced many economic analysts that the system itself will be re-examined. The financial crisis is "a ground-shaking event, but people are going to stick to the same system," said Wang Tao, chief of the China economic research unit for UBS Securities. "But they are going to think about how to reform the system, and China will probably have a stronger voice than before."
In recent years, some Chinese experts have written analyses about the inevitability of an American decline and how China must prepare to manage it. But in the face of the current crisis, most Chinese analysts say China is nowhere near ready yet to stand as a superpower.
"China doesn't want to be viewed as a replacement for the States," said one Chinese scholar who requested anonymity so that he could discuss the mind-set of government officials. "We are still a developing country. We have more foreign reserves than other countries, but we also have more problems."
Friday, October 24, 2008
China's Next Test: Health Care
October 20, 2008
Reuters
China's economic boom has resulted in stark inequity between its urban and rural populations in terms of health, and experts urged the government to work harder at providing health care for everyone.
Infant mortality in China's countryside stands at 123 for every 1,000 live births compared with 26 in the richest counties, the experts wrote in a paper published in The Lancet medical journal.
Of every 1,000 children, 64 in the countryside will not live beyond their fifth birthday, compared with 10 in the cities.
The report, by researchers in China, the United States and Britain as well as from the World Health Organization, is part of a special series on China's health reforms.
While life expectancy in Shanghai is 78.1 years, that figure is 66.1 in Gansu, one of the poorest provinces.
The team of experts also highlighted China's "missing women."
"In China, the problem has been exacerbated in recent decades by the practice of sex-specific abortions," the experts wrote.
The report continued that "discrimination lasts through infancy and childhood, reflected in higher death rates for girls."
"In 2000, infant mortality was 33.7 per 1,000 live births for girls compared with 23.9 per 1,000 for boys."
The authors attributed the disparities to inadequate government investment in health care, which increased "out-of-pocket" costs, hitting the poorest the hardest.
There was also insufficient government stewardship, which resulted in "doctors using their knowledge to prescribe inappropriate yet profitable procedures and drugs."
Another paper in the series highlighted the preference among medical and health care graduates for joining pharmaceutical and biotechnology companies instead of the medical profession, where they are needed.
This paper, led by Sudhir Anand of the University of Oxford, estimated that one million such graduates between 2000 and 2005 were not absorbed into the country's health care workforce.
"Although the production of doctors and nurses has greatly expanded in recent years, serious problems of distribution remain," the experts wrote, adding that "the goal of its health reform should be to promote equitable and universal access to basic health services."
Another paper highlighted how health care was taking up the bulk of household incomes, or a whopping 50 percent in 2006 (more than 18 times that in 1990) because of inadequate health insurance.
This compares with 45 percent in South Korea, 16 percent in Sweden, 15 percent in Japan and 11 percent in France.
"The average cost of a single hospital admission is now almost equivalent to China's annual income per head and is more than twice the average annual income of the lowest 20 percent of the population," wrote the team, led by Hu Shanlian from Fudan University in Shanghai.
"More than 35 percent of urban households and 43 percent of rural households have difficulty affording health care, go without, or are impoverished by the costs," they wrote.
The papers noted recent moves by the Chinese government to modernize the public health system and introduce health insurance plans, but much more needed to be done, especially to raise the level of reimbursement and help people who live in poverty.
Another Lancet report warned that chronic illnesses like cancer and heart and respiratory diseases were time bombs, and that the Chinese should reduce their intake of fatty foods and salt, stop smoking and start exercising.
Increasingly affluent Chinese consumed between 25 and 100 percent more fat each day in 2002 compared with 1982, sharply raising the risk of heart disease and cancer, the experts wrote in The Lancet.
While the country was plagued by infectious diseases before 1990, chronic illnesses are now the main health problem and accounted for 74.1 percent of all deaths in 2005, up from 47.1 percent in 1973, the researchers wrote.
While these chronic illnesses have to do with people living longer, several high-risk factors are also involved.
Apart from a fatty diet, many Chinese consume a relatively high 12-gram dosage of salt daily, which the paper said accounted for hypertension in about 177 million Chinese adults.
Based on Chinese definitions, 22.8 percent of Chinese were overweight in 2002. About 7.1 percent in the population were obese in 2002.
The paper also drew attention to the smoking habit of many Chinese.
"One in every three smokers in the world is a Chinese man," the experts wrote. They reported that cigarette consumption increased to 2,022 billion in 2006, to a level 17.4 percent higher than in 2002.
The average Chinese male smoker smoked 15 cigarettes a day in 2002, up from 13 in 1984.
The costs of China's disease burden from smoking were likely to be vast, and China will suffer reduced productivity and more premature deaths, the researchers warned.
"Hypertension and tobacco can be targeted health priorities," wrote the team, led by Yang Gonghuan of the Chinese Center for Disease Control and Prevention in Beijing. "Reduction of salt intake should become a national campaign."
Reuters
China's economic boom has resulted in stark inequity between its urban and rural populations in terms of health, and experts urged the government to work harder at providing health care for everyone.
Infant mortality in China's countryside stands at 123 for every 1,000 live births compared with 26 in the richest counties, the experts wrote in a paper published in The Lancet medical journal.
Of every 1,000 children, 64 in the countryside will not live beyond their fifth birthday, compared with 10 in the cities.
The report, by researchers in China, the United States and Britain as well as from the World Health Organization, is part of a special series on China's health reforms.
While life expectancy in Shanghai is 78.1 years, that figure is 66.1 in Gansu, one of the poorest provinces.
The team of experts also highlighted China's "missing women."
"In China, the problem has been exacerbated in recent decades by the practice of sex-specific abortions," the experts wrote.
The report continued that "discrimination lasts through infancy and childhood, reflected in higher death rates for girls."
"In 2000, infant mortality was 33.7 per 1,000 live births for girls compared with 23.9 per 1,000 for boys."
The authors attributed the disparities to inadequate government investment in health care, which increased "out-of-pocket" costs, hitting the poorest the hardest.
There was also insufficient government stewardship, which resulted in "doctors using their knowledge to prescribe inappropriate yet profitable procedures and drugs."
Another paper in the series highlighted the preference among medical and health care graduates for joining pharmaceutical and biotechnology companies instead of the medical profession, where they are needed.
This paper, led by Sudhir Anand of the University of Oxford, estimated that one million such graduates between 2000 and 2005 were not absorbed into the country's health care workforce.
"Although the production of doctors and nurses has greatly expanded in recent years, serious problems of distribution remain," the experts wrote, adding that "the goal of its health reform should be to promote equitable and universal access to basic health services."
Another paper highlighted how health care was taking up the bulk of household incomes, or a whopping 50 percent in 2006 (more than 18 times that in 1990) because of inadequate health insurance.
This compares with 45 percent in South Korea, 16 percent in Sweden, 15 percent in Japan and 11 percent in France.
"The average cost of a single hospital admission is now almost equivalent to China's annual income per head and is more than twice the average annual income of the lowest 20 percent of the population," wrote the team, led by Hu Shanlian from Fudan University in Shanghai.
"More than 35 percent of urban households and 43 percent of rural households have difficulty affording health care, go without, or are impoverished by the costs," they wrote.
The papers noted recent moves by the Chinese government to modernize the public health system and introduce health insurance plans, but much more needed to be done, especially to raise the level of reimbursement and help people who live in poverty.
Another Lancet report warned that chronic illnesses like cancer and heart and respiratory diseases were time bombs, and that the Chinese should reduce their intake of fatty foods and salt, stop smoking and start exercising.
Increasingly affluent Chinese consumed between 25 and 100 percent more fat each day in 2002 compared with 1982, sharply raising the risk of heart disease and cancer, the experts wrote in The Lancet.
While the country was plagued by infectious diseases before 1990, chronic illnesses are now the main health problem and accounted for 74.1 percent of all deaths in 2005, up from 47.1 percent in 1973, the researchers wrote.
While these chronic illnesses have to do with people living longer, several high-risk factors are also involved.
Apart from a fatty diet, many Chinese consume a relatively high 12-gram dosage of salt daily, which the paper said accounted for hypertension in about 177 million Chinese adults.
Based on Chinese definitions, 22.8 percent of Chinese were overweight in 2002. About 7.1 percent in the population were obese in 2002.
The paper also drew attention to the smoking habit of many Chinese.
"One in every three smokers in the world is a Chinese man," the experts wrote. They reported that cigarette consumption increased to 2,022 billion in 2006, to a level 17.4 percent higher than in 2002.
The average Chinese male smoker smoked 15 cigarettes a day in 2002, up from 13 in 1984.
The costs of China's disease burden from smoking were likely to be vast, and China will suffer reduced productivity and more premature deaths, the researchers warned.
"Hypertension and tobacco can be targeted health priorities," wrote the team, led by Yang Gonghuan of the Chinese Center for Disease Control and Prevention in Beijing. "Reduction of salt intake should become a national campaign."
Saturday, October 18, 2008
Blowups Aside, China Is Doing Well As a Money Manager
October 16, 2008
Rick Carew
Quick: Is China the "dumb money" or the "smart money?"
China's sovereign wealth fund and some of its financial firms have taken big hits on their high-profile overseas investments in companies like Morgan Stanley, Blackstone Group and Barclays.
Those losses have attracted some tough criticism, and no doubt made regulators wary of greenlighting other efforts to bargain-hunt among the wreckage of Wall Street and the City.
The reality is that those high-profile troubled investments total only a bit over $10 billion. That's about 0.5% of the country's $1.9 trillion in foreign exchange reserves.
Much of the rest of that -- which economists put at 60% to 70% -- is in U.S. Treasurys, agency debt, and corporate bonds. Those holdings, especially U.S. Treasurys, have done well as a flight to quality makes them more attractive than equities or less well secured debt.
Even the problems at Fannie Mae and Freddie Mac haven't hurt China as the U.S. rescue plan leaves bondholders whole.
So, high-profile blowups aside, the fact is that China has done very well over the past year managing its money.
Where China went right is in staying away from the momentum investing of the past few years. That's kept the country's nest egg safe -- even as the country's forex safeguard, the State Administration of Foreign Exchange, put small amounts of money into more risky investments like private equity funds and blue-chip stocks.
The country's sovereign wealth fund, China Investment Corp., has less than $100 billion allocated for overseas deals and has become increasingly gun-shy about pulling the trigger as its investments in Morgan Stanley and Blackstone soured.
Outsiders may gloat over those ill-timed moves. But in truth, among the world's biggest investors, China may turn out to have been the smartest money of all.
Rick Carew
Quick: Is China the "dumb money" or the "smart money?"
China's sovereign wealth fund and some of its financial firms have taken big hits on their high-profile overseas investments in companies like Morgan Stanley, Blackstone Group and Barclays.
Those losses have attracted some tough criticism, and no doubt made regulators wary of greenlighting other efforts to bargain-hunt among the wreckage of Wall Street and the City.
The reality is that those high-profile troubled investments total only a bit over $10 billion. That's about 0.5% of the country's $1.9 trillion in foreign exchange reserves.
Much of the rest of that -- which economists put at 60% to 70% -- is in U.S. Treasurys, agency debt, and corporate bonds. Those holdings, especially U.S. Treasurys, have done well as a flight to quality makes them more attractive than equities or less well secured debt.
Even the problems at Fannie Mae and Freddie Mac haven't hurt China as the U.S. rescue plan leaves bondholders whole.
So, high-profile blowups aside, the fact is that China has done very well over the past year managing its money.
Where China went right is in staying away from the momentum investing of the past few years. That's kept the country's nest egg safe -- even as the country's forex safeguard, the State Administration of Foreign Exchange, put small amounts of money into more risky investments like private equity funds and blue-chip stocks.
The country's sovereign wealth fund, China Investment Corp., has less than $100 billion allocated for overseas deals and has become increasingly gun-shy about pulling the trigger as its investments in Morgan Stanley and Blackstone soured.
Outsiders may gloat over those ill-timed moves. But in truth, among the world's biggest investors, China may turn out to have been the smartest money of all.
Tuesday, October 14, 2008
Economist Upbeat About Chinese Economy
October 14, 2008
Pang Li
Despite the global financial crisis, Yao Jingyuan, chief economist at China's National Bureau of Statistics (NBS) expressed optimism about the prospects for the Chinese economy in an interview with China Economic Weekly.
Yao admitted the global economic situation is complex and difficult. The credit crunch in the US has led to a financial crisis. The American economy, which generates a quarter of global production, is set to slow down. The Eurozone has also been hit hard. According to statistics published on August 14 by Eurostat, Eurozone GDP declined 0.2 percent in the second quarter of 2008, the first decline since 1995.
Yao said a world slowdown will inevitably cut demand for China's exports. And the strengthening of the Renminbi is affecting China's competitive edge. Growth in exports to the USA, China's second largest trade partner, declined 5.7 percentage points in the first half of 2008.
Soaring commodity prices especially oil, which breached US$140 per barrel at one point have also badly affected China, the second largest oil consumer in the world. Last year's grain reserves amounted to just 15 percent of crop consumption, lower than the safety line of 18 percent. This triggered huge hikes in international grain prices, exerting pressure on China's domestic grain market.
But in spite of the challenges, Yao said the Chinese economy is basically healthy and drew attention to four points:
Firstly, the economy has maintained rapid growth for over three decades. In the first half of 2008 growth was 10.4 percent, demonstrating that the economy is still on track.
Secondly, there have been favorable structural changes to the economy. In 2007, domestic consumption overtook exports as the principal driver of growth. Unit energy consumption is also declining. Both points indicate that China is moving towards a more sustainable growth model.
Thirdly, the country's 39 major industries yielded good returns in 2007. And financial revenues reached a staggering 5100 billion yuan (about US$747 billion), up 31 percent year-on-year. These achievements show how efficiently the macro-economy is operating.
Fourthly, living standards are growing, due to improvements in the social security system and increases in household income.
Finally, Yao identified two priorities for the government in the second half of the year. Controlling commodity prices should remain a top priority. Despite the effects of global inflation China managed to rein in the CPI from 7.7 percent in May to 4.9 percent in August. Second, the authorities should maintain steady growth and avoid sharp fluctuations.
Pang Li
Despite the global financial crisis, Yao Jingyuan, chief economist at China's National Bureau of Statistics (NBS) expressed optimism about the prospects for the Chinese economy in an interview with China Economic Weekly.
Yao admitted the global economic situation is complex and difficult. The credit crunch in the US has led to a financial crisis. The American economy, which generates a quarter of global production, is set to slow down. The Eurozone has also been hit hard. According to statistics published on August 14 by Eurostat, Eurozone GDP declined 0.2 percent in the second quarter of 2008, the first decline since 1995.
Yao said a world slowdown will inevitably cut demand for China's exports. And the strengthening of the Renminbi is affecting China's competitive edge. Growth in exports to the USA, China's second largest trade partner, declined 5.7 percentage points in the first half of 2008.
Soaring commodity prices especially oil, which breached US$140 per barrel at one point have also badly affected China, the second largest oil consumer in the world. Last year's grain reserves amounted to just 15 percent of crop consumption, lower than the safety line of 18 percent. This triggered huge hikes in international grain prices, exerting pressure on China's domestic grain market.
But in spite of the challenges, Yao said the Chinese economy is basically healthy and drew attention to four points:
Firstly, the economy has maintained rapid growth for over three decades. In the first half of 2008 growth was 10.4 percent, demonstrating that the economy is still on track.
Secondly, there have been favorable structural changes to the economy. In 2007, domestic consumption overtook exports as the principal driver of growth. Unit energy consumption is also declining. Both points indicate that China is moving towards a more sustainable growth model.
Thirdly, the country's 39 major industries yielded good returns in 2007. And financial revenues reached a staggering 5100 billion yuan (about US$747 billion), up 31 percent year-on-year. These achievements show how efficiently the macro-economy is operating.
Fourthly, living standards are growing, due to improvements in the social security system and increases in household income.
Finally, Yao identified two priorities for the government in the second half of the year. Controlling commodity prices should remain a top priority. Despite the effects of global inflation China managed to rein in the CPI from 7.7 percent in May to 4.9 percent in August. Second, the authorities should maintain steady growth and avoid sharp fluctuations.
China's Economy to Remain Strong, Consultants
October 15, 2008
Xinhua News Agency
China will keep reasonably robust economic growth despite the ongoing international economic recession, according to Merrill Lynch analysts here on Tuesday.
"As part of the world economy, China certainly would be affected by the current financial crisis," said Liu Erfei, the company's managing director. "We expect the country's economy to slow down from its (current) double-digit growth to an 8 or 9 percent (annual GDP) increase, still relatively rapid."
He added while some countries including the United States stumbled in the credit sector from over-leveraging themselves, China didn't get itself involved in a similar problem.
The New York-based investment bank and brokerage house attributed the country's stable economic performance to the governmental control on its state capital.
"Domestic capital market has not been completely open to the outside yet. This enables the country to avoid major international financial risks," Liu said.
The country was spared much trouble as it didn't invest in sub-prime related financial products, the failure of which had been acknowledged as a prime cause for the present global financial woes.
Meanwhile, the company's research showed domestic consumption would stand out as a major driver for the country's economic growth at a time when exports and the property sector were affected by a shrinking global market.
A developing pro-labour policy, as well as an emerging major consumer force of people born after 1978, would help accelerate the nation's consumption, according to Merrill Lynch market analyst Cui Wei.
"Our view on China's economy in the next five to 10 years is very optimistic," Liu added.
Xinhua News Agency
China will keep reasonably robust economic growth despite the ongoing international economic recession, according to Merrill Lynch analysts here on Tuesday.
"As part of the world economy, China certainly would be affected by the current financial crisis," said Liu Erfei, the company's managing director. "We expect the country's economy to slow down from its (current) double-digit growth to an 8 or 9 percent (annual GDP) increase, still relatively rapid."
He added while some countries including the United States stumbled in the credit sector from over-leveraging themselves, China didn't get itself involved in a similar problem.
The New York-based investment bank and brokerage house attributed the country's stable economic performance to the governmental control on its state capital.
"Domestic capital market has not been completely open to the outside yet. This enables the country to avoid major international financial risks," Liu said.
The country was spared much trouble as it didn't invest in sub-prime related financial products, the failure of which had been acknowledged as a prime cause for the present global financial woes.
Meanwhile, the company's research showed domestic consumption would stand out as a major driver for the country's economic growth at a time when exports and the property sector were affected by a shrinking global market.
A developing pro-labour policy, as well as an emerging major consumer force of people born after 1978, would help accelerate the nation's consumption, according to Merrill Lynch market analyst Cui Wei.
"Our view on China's economy in the next five to 10 years is very optimistic," Liu added.
A Defensive Battle
October 10, 2008
Hu Yue
China jumps into action to counteract the fallout from the crippling U.S. financial crisis
The hard-won passage of the unprecedented $700-billion bank bailout plan in the United States has finally brought hope of an end to the country's financial nightmare. While it remains to be seen whether the government rescue can cure the market ills at their root, the repercussions of the financial woes have been felt far beyond the United States. Wall Street-generated gloom also has spread to already skittish Chinese investors, illustrated by the roller-coaster ride that domestic stock prices have been on in recent weeks.
While China's economy chugged along by a robust 10.4 percent in the first half, concerns that its growth will be subdued have taken hold. Signs of looming recession are proliferating in the export sector, a key drive of the country's growth because of waning demand from the United States.
Meanwhile, a consumer-spending spree seems less likely to take place since an overwhelming bear market has wiped more than 60 percent off domestic stock markets this year.
"Given the global financial chaos and a marked slowdown in the world economy, the domestic economy may head for a downward spiral," Premier Wen Jiabao said in a statement last month. His comment indicated the government's growing concerns about far-reaching damage to the broader economy if the stock market, overshadowed by the roaring U.S. financial fallout, is further left to find equilibrium on its own.
As the latest effort in a string of moves to shore up the shaky confidence in domestic markets, the central bank on October 8 announced cuts in both the reserve-requirement ratio and the benchmark one-year deposit and loan interest rate, by 0.5 percentage points as of October 15, and by 0.27 percentage points as of October 9. On the same day, the State Council suspended the 5-percent tax levied on the interest income of bank deposits starting on October 9.
Prior to that, the China Securities Regulatory Commission (CSRC) announced on October 5 that it would shortly start a trial program for financially sound securities firms to engage in margin trading and short selling. Margin trading allows investors to borrow money from brokerages to buy shares, while short selling lets them sell securities that they do not own, but have borrowed from securities firms. Short sellers then try to buy back the stock at a lower price, attempting to profit from an expected decline in the stock price. Analysts say the program will bring a measure of calm to the shell-shocked market because brokerages currently have much more cash available to lend than shares, and the scale of any margin trading would far outweigh that of short selling in the initial stages.
The CSRC said in the announcement that the program, in the long run, would inject more vitality into the market and bump up liquidity. More importantly, it could provide a vehicle for investors to hedge against risks, diversify the business of brokerages and help the fledgling market mature beyond the boom-bust cycle, it said.
Analysts say the stock market has appeared to be bottoming out since the central bank on September 16 cut interest rates for the first time in more than six years. The central bank also lowered the reserve requirement ratio for small banks, further salving the wounds of small and medium-sized enterprises starved of liquidity. The surprise move was widely interpreted as a decisive shift by the government toward bucking growth after protracted inflation fears that had crimped the economy.
The interest rate cut came just a few hours after Lehman Brothers Holdings Inc. announced it had filed for bankruptcy. It is expected to prevent external pressure on China's domestic economy from becoming entrenched, although the central bank made no mention of the U.S. economic washout in announcing the rate cut. Domestically, the country's inflation eased to 4.9 percent in August from 8.7 percent in February, removing the major stumbling block to the government's stimulation efforts.
In another move, the country encouraged government entities to lift their stakes or buy back shares of major listed banks and companies that they control to provide a floor for the tumbling market. The share-buying mania of listed companies was led by Central Huijin Investment Co. Ltd. (Huijin), an investment arm of the government, which already held majority stakes in the Industrial and Commercial Bank of China Ltd., Bank of China Ltd. and China Construction Bank Corp. Huijin purchased 2 million new shares of each bank on September 23, infusing some steam into the market's recovery.
Moreover, regulators lifted the stamp tax on share purchases on September 19-the first time in history that the government had levied a unilateral stamp tax on stock trades. This move enlivened stock trading in the following days.
On the fiscal front, the government this year dropped administrative fees for individually-owned businesses and reinstated higher export tax rebates for textiles and some other products. Besides this, the country's embrace of a reformed value-added tax system is expected to further alleviate the burden on enterprises. Analysts also believe that more fiscal stimuli are on the way as the risks of an economic freefall deepen.
Affect on China
Premier Wen Jiabao reassured investors at the beginning of October that the government would continue to support a stable capital market, prop up exporters and spur the consumer market as the country edges toward a market-driven economy.
The foundations of the Chinese economy remain solid with a fluid and resilient financial market, Wen said. "But the impact of the U.S. financial meltdown on the Chinese economy should not be underrated, and efforts to maintain a healthy financial sector should not be relaxed," he said.
China's safeguards against the U.S. financial meltdown had come more swiftly than expected. The central bank said in a statement on October 4 that the country's financial regulators had put in place counteractive programs, including stronger financial oversight and risk controls.
Meanwhile, the central bank has pledged to work closely with international financial institutions to scan every corner of the global financial system where a new set of risks may hide.
"We are confident and well-positioned to maintain a stable financial system and a sound real economy through a variety of flexible control measures," the central bank's statement said.
Hu Yue
China jumps into action to counteract the fallout from the crippling U.S. financial crisis
The hard-won passage of the unprecedented $700-billion bank bailout plan in the United States has finally brought hope of an end to the country's financial nightmare. While it remains to be seen whether the government rescue can cure the market ills at their root, the repercussions of the financial woes have been felt far beyond the United States. Wall Street-generated gloom also has spread to already skittish Chinese investors, illustrated by the roller-coaster ride that domestic stock prices have been on in recent weeks.
While China's economy chugged along by a robust 10.4 percent in the first half, concerns that its growth will be subdued have taken hold. Signs of looming recession are proliferating in the export sector, a key drive of the country's growth because of waning demand from the United States.
Meanwhile, a consumer-spending spree seems less likely to take place since an overwhelming bear market has wiped more than 60 percent off domestic stock markets this year.
"Given the global financial chaos and a marked slowdown in the world economy, the domestic economy may head for a downward spiral," Premier Wen Jiabao said in a statement last month. His comment indicated the government's growing concerns about far-reaching damage to the broader economy if the stock market, overshadowed by the roaring U.S. financial fallout, is further left to find equilibrium on its own.
As the latest effort in a string of moves to shore up the shaky confidence in domestic markets, the central bank on October 8 announced cuts in both the reserve-requirement ratio and the benchmark one-year deposit and loan interest rate, by 0.5 percentage points as of October 15, and by 0.27 percentage points as of October 9. On the same day, the State Council suspended the 5-percent tax levied on the interest income of bank deposits starting on October 9.
Prior to that, the China Securities Regulatory Commission (CSRC) announced on October 5 that it would shortly start a trial program for financially sound securities firms to engage in margin trading and short selling. Margin trading allows investors to borrow money from brokerages to buy shares, while short selling lets them sell securities that they do not own, but have borrowed from securities firms. Short sellers then try to buy back the stock at a lower price, attempting to profit from an expected decline in the stock price. Analysts say the program will bring a measure of calm to the shell-shocked market because brokerages currently have much more cash available to lend than shares, and the scale of any margin trading would far outweigh that of short selling in the initial stages.
The CSRC said in the announcement that the program, in the long run, would inject more vitality into the market and bump up liquidity. More importantly, it could provide a vehicle for investors to hedge against risks, diversify the business of brokerages and help the fledgling market mature beyond the boom-bust cycle, it said.
Analysts say the stock market has appeared to be bottoming out since the central bank on September 16 cut interest rates for the first time in more than six years. The central bank also lowered the reserve requirement ratio for small banks, further salving the wounds of small and medium-sized enterprises starved of liquidity. The surprise move was widely interpreted as a decisive shift by the government toward bucking growth after protracted inflation fears that had crimped the economy.
The interest rate cut came just a few hours after Lehman Brothers Holdings Inc. announced it had filed for bankruptcy. It is expected to prevent external pressure on China's domestic economy from becoming entrenched, although the central bank made no mention of the U.S. economic washout in announcing the rate cut. Domestically, the country's inflation eased to 4.9 percent in August from 8.7 percent in February, removing the major stumbling block to the government's stimulation efforts.
In another move, the country encouraged government entities to lift their stakes or buy back shares of major listed banks and companies that they control to provide a floor for the tumbling market. The share-buying mania of listed companies was led by Central Huijin Investment Co. Ltd. (Huijin), an investment arm of the government, which already held majority stakes in the Industrial and Commercial Bank of China Ltd., Bank of China Ltd. and China Construction Bank Corp. Huijin purchased 2 million new shares of each bank on September 23, infusing some steam into the market's recovery.
Moreover, regulators lifted the stamp tax on share purchases on September 19-the first time in history that the government had levied a unilateral stamp tax on stock trades. This move enlivened stock trading in the following days.
On the fiscal front, the government this year dropped administrative fees for individually-owned businesses and reinstated higher export tax rebates for textiles and some other products. Besides this, the country's embrace of a reformed value-added tax system is expected to further alleviate the burden on enterprises. Analysts also believe that more fiscal stimuli are on the way as the risks of an economic freefall deepen.
Affect on China
Premier Wen Jiabao reassured investors at the beginning of October that the government would continue to support a stable capital market, prop up exporters and spur the consumer market as the country edges toward a market-driven economy.
The foundations of the Chinese economy remain solid with a fluid and resilient financial market, Wen said. "But the impact of the U.S. financial meltdown on the Chinese economy should not be underrated, and efforts to maintain a healthy financial sector should not be relaxed," he said.
China's safeguards against the U.S. financial meltdown had come more swiftly than expected. The central bank said in a statement on October 4 that the country's financial regulators had put in place counteractive programs, including stronger financial oversight and risk controls.
Meanwhile, the central bank has pledged to work closely with international financial institutions to scan every corner of the global financial system where a new set of risks may hide.
"We are confident and well-positioned to maintain a stable financial system and a sound real economy through a variety of flexible control measures," the central bank's statement said.
Fending off the Crisis
October 10, 2008
LAN XINZHEN
The U.S. financial crisis is having an adverse impact on China, but also offers some opportunities and lessons for the country
The U.S. financial crisis was a hot topic at the World Economic Forum's summer meeting in the Chinese port city of Tianjin in late September. More than 1,000 participants discussed what role China would play in global economic leadership in the years ahead and its economic development.
In light of the U.S. financial crisis, Chinese companies, just as other international firms, must overcome the challenges it has introduced to play a significant role in global economic leadership in the future. How companies should cope with the risks of the crisis was the central focus of the participants at the Annual Meeting of the New Champions, also known as the Second Summer Davos Forum.
Making the Best of It
The U.S. financial crisis has directly affected the Chinese banking industry. Many Chinese banks do business with U.S. financial companies, and China considers the U.S. financial market as its model for financial reform.
Liu Mingkang, Chairman of the China Banking Regulatory Commission (CBRC) and one of the speakers at the forum, said on September 27 that despite the current financial turmoil, China would make the best of the situation to improve its information sharing system. He said the CBRC has cooperated with bank regulators from various countries and signed 32 memorandums of understanding for cooperation.
"Since the beginning of this financial turmoil, we have been providing various kinds of very important information, telling our opinions to financial regulators of other countries in a friendly but straightforward way," Liu said. He also said the CBRC would adopt a more effective way to protect the depositors so they could avoid losses from the financial crisis, but he did not provide details.
On September 16, the day that Lehman Brothers Holdings Inc. said it had filed for bankruptcy, the People's Bank of China, the country's central bank, lowered the interest rate on loans as well as the deposit reserve rate to allow more capital to enter the market. It was one of the steps the central bank has taken of late to loosen the tight monetary policy that has been in place for more than a year.
When the U.S. financial crisis started, some Chinese economists suggested that China's financial institutions purchase U.S. financial stocks. But Jiang Jianqing, Board Chairman of Industrial and Commercial Bank of China (ICBC), said at a forum session on September 27 that his bank would hold on tight to its "pockets" instead of "bottom fishing" for U.S. financial stocks.
"We are still stressing our investment base on strategies, but not on finance," Jiang said.
Liu added that China's banking industry also was ready to absorb unemployed talent from the Wall Street.
Boon for Venture Capital
The venture capital sector is one of the fuses that ignited the current U.S. financial crisis. John Zhao, CEO of Beijing Hony Future Investment Advisor Ltd., said he believes that while the crisis may have a negative impact on China's investment banking industry, it would not be the same overwhelming disaster that it has been for American investment banks. Unlike U.S. institutions, Chinese investment banks are still in the initial stages of development, and bankers are making cautious investment decisions.
Zhao said the U.S. financial turmoil has brought an opportunity of transformation for those in the Chinese venture capital sector who have not yet experienced a financial crisis. It would let them draw on the experience and learn its lessons to prevent similar mistakes, he said. Although the five largest U.S. investment banks have now either closed their doors or been taken over by other companies, Zhao said Chinese investment banks would continue to grow, because China's economy is developing quickly and offers many attractive investment opportunities.
Chen Hong, Board Chairman of the Hina Group, also believes that China's venture capital and private equity sectors are still in the initial stages of development and that the country's economy will continue its high-speed growth over the next decade. Currently, Chinese venture capital firms invest billions of dollars each year in only a few hundred companies, while most of China's 27 million small and medium-sized enterprises find no access to such capital. This, on the other hand, projects the broad vista for Chinese venture investors.
At present, most of China's venture capital and private equity firms are located in major cities such as Beijing, Shanghai and Shenzhen, and in some second-tier cities such as Chongqing, Dalian and Tianjin. Chen noted there are many excellent companies in other cities that need, but cannot obtain investment, because venture capital firms are not familiar with the cities or that entrepreneurs do not know how to contact them.
"When people are familiar with this sector, I think there will be more companies of better quality that can get investment from venture capital firms, so I am not worried about the development of China's venture capital and private equity sectors," he said.
Going Global
Skyworth Group Co. Ltd. is a Chinese electronics company in the process of going global. Zhang Xuebin, the company's board chairman and chief executive officer, said at the forum that he believes it is difficult for Chinese companies that want to do business internationally to make an assessment now about how the U.S. financial crisis will affect their prospects. But in general, the crisis would serve as a good opportunity for more Chinese enterprises to become international players.
Whenever an economic or financial crisis occurs, some companies collapse while others grow stronger, Zhang said. For example, South Korea's Samsung Group grew very rapidly after the Asian Financial Crisis a decade ago, he added.
"I think that the market will finally be concentrated around some strong companies," Zhang said. "As often happens, a crisis or difficult period is the best time for such concentration to be accomplished."
The current financial crisis would make it difficult for some small and medium-sized enterprises to survive or maintain their previous operating pace, thereby forfeiting many market resources, Zhang said. As for Skyworth, Zhang said he views the crisis as an opportunity and not a threat, because the company has been growing quickly and is at the forefront of China's color TV industry.
Because the financial crisis will have the greatest impact on companies in developed countries, Wang Jianzhou, Board Chairman and CEO of China Mobile Communications Corp., said at the forum on September 28 that his company's international strategy would mainly focus on prominent emerging markets, where companies from developed countries may not set up operations because they are mired in the current financial turmoil.
Real Estate Woes
Forum participants also discussed the fallout from the U.S. subprime mortgage crisis on the real estate market as one of the root causes of the overall financial turmoil. They raised questions as to whether China's overheated real estate market would experience a similar situation.
Guo Shuqing, Board Chairman of China Construction Bank, believes such concerns are unnecessary.
"On China's housing loan market, there won't be a subprime mortgage crisis as in the United States," Guo said at the forum. He pointed out that China's home loans, which amount to 3 trillion yuan ($439 billion), account for only 13 percent of the country's GDP, much less than the 50 percent of GDP they account for in the United States.
Ronnie Chichung Chan, Board Chairman of the Hong Kong-based Hang Lung Properties Ltd., said on September 27 that China's real estate market would not suffer a collapse, because the government has been aware of the industry's overheated development and has adopted macroeconomic measures to cool down the market.
Although domestic property developers are not experiencing serious problems, it does not mean they have not or will not be affected by the financial crisis, Chan said. At present, most must deal with broken capital chains, a problem that the current financial crisis makes doubly difficult to solve.
"Some real estate companies will be inevitably knocked out," Chan said.
It will take time for the country's real estate industry to be further reorganized, but when it happens, the industry will emerge stronger and more orderly, he added.
LAN XINZHEN
The U.S. financial crisis is having an adverse impact on China, but also offers some opportunities and lessons for the country
The U.S. financial crisis was a hot topic at the World Economic Forum's summer meeting in the Chinese port city of Tianjin in late September. More than 1,000 participants discussed what role China would play in global economic leadership in the years ahead and its economic development.
In light of the U.S. financial crisis, Chinese companies, just as other international firms, must overcome the challenges it has introduced to play a significant role in global economic leadership in the future. How companies should cope with the risks of the crisis was the central focus of the participants at the Annual Meeting of the New Champions, also known as the Second Summer Davos Forum.
Making the Best of It
The U.S. financial crisis has directly affected the Chinese banking industry. Many Chinese banks do business with U.S. financial companies, and China considers the U.S. financial market as its model for financial reform.
Liu Mingkang, Chairman of the China Banking Regulatory Commission (CBRC) and one of the speakers at the forum, said on September 27 that despite the current financial turmoil, China would make the best of the situation to improve its information sharing system. He said the CBRC has cooperated with bank regulators from various countries and signed 32 memorandums of understanding for cooperation.
"Since the beginning of this financial turmoil, we have been providing various kinds of very important information, telling our opinions to financial regulators of other countries in a friendly but straightforward way," Liu said. He also said the CBRC would adopt a more effective way to protect the depositors so they could avoid losses from the financial crisis, but he did not provide details.
On September 16, the day that Lehman Brothers Holdings Inc. said it had filed for bankruptcy, the People's Bank of China, the country's central bank, lowered the interest rate on loans as well as the deposit reserve rate to allow more capital to enter the market. It was one of the steps the central bank has taken of late to loosen the tight monetary policy that has been in place for more than a year.
When the U.S. financial crisis started, some Chinese economists suggested that China's financial institutions purchase U.S. financial stocks. But Jiang Jianqing, Board Chairman of Industrial and Commercial Bank of China (ICBC), said at a forum session on September 27 that his bank would hold on tight to its "pockets" instead of "bottom fishing" for U.S. financial stocks.
"We are still stressing our investment base on strategies, but not on finance," Jiang said.
Liu added that China's banking industry also was ready to absorb unemployed talent from the Wall Street.
Boon for Venture Capital
The venture capital sector is one of the fuses that ignited the current U.S. financial crisis. John Zhao, CEO of Beijing Hony Future Investment Advisor Ltd., said he believes that while the crisis may have a negative impact on China's investment banking industry, it would not be the same overwhelming disaster that it has been for American investment banks. Unlike U.S. institutions, Chinese investment banks are still in the initial stages of development, and bankers are making cautious investment decisions.
Zhao said the U.S. financial turmoil has brought an opportunity of transformation for those in the Chinese venture capital sector who have not yet experienced a financial crisis. It would let them draw on the experience and learn its lessons to prevent similar mistakes, he said. Although the five largest U.S. investment banks have now either closed their doors or been taken over by other companies, Zhao said Chinese investment banks would continue to grow, because China's economy is developing quickly and offers many attractive investment opportunities.
Chen Hong, Board Chairman of the Hina Group, also believes that China's venture capital and private equity sectors are still in the initial stages of development and that the country's economy will continue its high-speed growth over the next decade. Currently, Chinese venture capital firms invest billions of dollars each year in only a few hundred companies, while most of China's 27 million small and medium-sized enterprises find no access to such capital. This, on the other hand, projects the broad vista for Chinese venture investors.
At present, most of China's venture capital and private equity firms are located in major cities such as Beijing, Shanghai and Shenzhen, and in some second-tier cities such as Chongqing, Dalian and Tianjin. Chen noted there are many excellent companies in other cities that need, but cannot obtain investment, because venture capital firms are not familiar with the cities or that entrepreneurs do not know how to contact them.
"When people are familiar with this sector, I think there will be more companies of better quality that can get investment from venture capital firms, so I am not worried about the development of China's venture capital and private equity sectors," he said.
Going Global
Skyworth Group Co. Ltd. is a Chinese electronics company in the process of going global. Zhang Xuebin, the company's board chairman and chief executive officer, said at the forum that he believes it is difficult for Chinese companies that want to do business internationally to make an assessment now about how the U.S. financial crisis will affect their prospects. But in general, the crisis would serve as a good opportunity for more Chinese enterprises to become international players.
Whenever an economic or financial crisis occurs, some companies collapse while others grow stronger, Zhang said. For example, South Korea's Samsung Group grew very rapidly after the Asian Financial Crisis a decade ago, he added.
"I think that the market will finally be concentrated around some strong companies," Zhang said. "As often happens, a crisis or difficult period is the best time for such concentration to be accomplished."
The current financial crisis would make it difficult for some small and medium-sized enterprises to survive or maintain their previous operating pace, thereby forfeiting many market resources, Zhang said. As for Skyworth, Zhang said he views the crisis as an opportunity and not a threat, because the company has been growing quickly and is at the forefront of China's color TV industry.
Because the financial crisis will have the greatest impact on companies in developed countries, Wang Jianzhou, Board Chairman and CEO of China Mobile Communications Corp., said at the forum on September 28 that his company's international strategy would mainly focus on prominent emerging markets, where companies from developed countries may not set up operations because they are mired in the current financial turmoil.
Real Estate Woes
Forum participants also discussed the fallout from the U.S. subprime mortgage crisis on the real estate market as one of the root causes of the overall financial turmoil. They raised questions as to whether China's overheated real estate market would experience a similar situation.
Guo Shuqing, Board Chairman of China Construction Bank, believes such concerns are unnecessary.
"On China's housing loan market, there won't be a subprime mortgage crisis as in the United States," Guo said at the forum. He pointed out that China's home loans, which amount to 3 trillion yuan ($439 billion), account for only 13 percent of the country's GDP, much less than the 50 percent of GDP they account for in the United States.
Ronnie Chichung Chan, Board Chairman of the Hong Kong-based Hang Lung Properties Ltd., said on September 27 that China's real estate market would not suffer a collapse, because the government has been aware of the industry's overheated development and has adopted macroeconomic measures to cool down the market.
Although domestic property developers are not experiencing serious problems, it does not mean they have not or will not be affected by the financial crisis, Chan said. At present, most must deal with broken capital chains, a problem that the current financial crisis makes doubly difficult to solve.
"Some real estate companies will be inevitably knocked out," Chan said.
It will take time for the country's real estate industry to be further reorganized, but when it happens, the industry will emerge stronger and more orderly, he added.
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