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Chinese Economics Thread

This is a discussion on Chinese Economics Thread within the Members' Club Room forums, part of the China Defense & Military category; The BBC is reporting today that the Chinese Government has imposed temporary price controls on basic food staples and fuel ...

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    Norfolk is offline Junior Member
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    Chinese Economics Thread

    The BBC is reporting today that the Chinese Government has imposed temporary price controls on basic food staples and fuel:

    Retailers and producers will face heavy fines if they increase the price of basic necessities, the government says.

    Food prices climbed more than 18% in November, while the price of pork jumped by more than 50%.

    Inflation has traditionally been associated with civil unrest in China, and correspondents say the intervention shows the government is very concerned.

    During the past 20 years, the Chinese administration has largely abandoned price controls, as the free market took hold across the country.

    The price of basic essentials has increased hugely during this time, and families on low incomes - numbered in their hundreds of millions in China - currently spend between 30% and 50% of their income on food for the table.
    More at the link.

    This is a little unsettling, particularly when the U.S. economy is in the midst of economic troubles of its own occasioned by the mortgage default crisis. James Fallows wrote an interesting piece in the January/February 2008 edition of The Atlantic Monthly on the present interdependent economic relationship between China and the U.S. In it, Fallows describes how Chinese Government policies on economic and social development intended to minimize the potential for major disruptions, coupled to the effects of the decline in value of the U.S. dollar on both the purchases of Chinese manufactures and Chinese investments in U.S. securities, taken together may in effect conspire to bring about a serious economic and subsequently political break between the two countries and serious social and political instability, particularly within China. It's only four pages, and well worth the read: "The $1.4 Trillion Dollar Question" by James Fallows.

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    Re: Chinese Economics Thread

    It's the same in Hong Kong now, where the SAR government has imposed limits on the prices that can be set by the electricity company, due to the fact because demand is so high now the companies think they can charge more for it.

    Although there are of course normal market forces like increased spending and consumption by the mainland market, i do believe it is the changes in the US' political winds that are prompting these actions, just as the visit to China by Fukuda the new Japanese PM, in where some progress looks like it has actually been made on the relationship between the two nations.

    This is somewhat unusual given the lackluster attempts at reconciliation between the two sides since China's economic boom, however i think it's due to the fact that the democrats looks to be more and more likely to come into power after Bush leaves, and they are significantly more protectionist than the republicans.

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    Re: Chinese Economics Thread

    Hi Norfolk

    Player posted the link to your report in NCCF and so out of courtesy I think it is only right I post a copy of my response here as well

    Well I have read it and if it is a little shallow, it is interesting in its demonstration of American thinking on the matter and perhaps more importantly, how little it understands the Chinese perspective.

    I have no doubt that China has used America as a starter engine for its own Internal economic demand and what we are seeing now is a natural move away form US dependence and towards an economy more balanced between its global exports and domestic demand.

    Many factors are now driving this movement process, many of which must have been forseen for a long time, including the loss in value of the existing T Bills as now being witnessed. The important thing has been to keep the engine running and to convert as many farmers into industrial workers as possible, but without allowing the inflation by demand or exchange rate values that push down hard on the hundreds of millions of farming families that have yet to be included in the economic miracle. I notice that the author missed this point completely.

    The report is also somewhat out of date as large sums of money are now being earmarked for infrastructural development in the interior and are announced just at the time when market forces are pushing development inwards naturally. This does rather suggest a much higher degree of planning by the Central Govt in not wasting money on premature investment that may otherwise have become inadequate, poorly maintained or otherwise seriously depreciated, by the time they were actually needed. This may seem rather harsh, but the provision of modern services, road, rail, airports, hospitals and schools etc, provides a substantial economic boost to these areas by providing a large number of middle class jobs that present the relocating Coastal Professionals and Skilled workers with a standard of living and environment similar to that which they will have left behind. This duality strengthens the process, while either one on their own would run the risk of withering on the vine.

    The Blackstone incident although seemingly expensive in market terms is modest in Government spending terms and the current losses "buy" the Sovereign Funds the right to severely criticise future attempts by Western Governments to try and dictate the manner by which these funds are invested. So if $2 Billion buys increased freedom in options for $300 Billion investment funds, then this loss will appear minimised and be quickly offset by the increased gains that it has enabled.

    The bald truth is that the US is no longer capable of sustaining Chinese growth and had exhausted its credit through its activities so far. Further growth therefore will need funding from alternative markets and again, if managed properly, initial losses through dollar value declines are likely to be off set by greater future gains from alternative export and domestic markets.
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    Re: Chinese Economics Thread

    Hmm, as the article says I'm not sure how temporary price controls will change much. I haven't seen anything to suggest inflation is caused primarily by profiteering. When it's because the cost to the seller rises, he'll simply stop selling stuff - he won't give it away at a loss.
    "Japan is as much of a threat to China, as China is to Japan."

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    Re: Chinese Economics Thread

    I think including the food article with the Forex/Dollar issue here is a bit of a red herring.

    Over here in the West we are seeing Agricultural Commodity Inflation, due to higher grain and Fuel prices, but the factors driving Chinese food inflation is rather different.

    In China it is rocketing demand from a rapidly growing number of Industrial workers and increasing workers pay, not being able to be met by China's subsistence farmers, which is resulting in increasing food exports at market values to take up the slack.

    To date the CCP has been content to let food prices rise as they have increased the value of farmers incomes (although subsistence method inefficiency means most potential gains are not realised and there are virtually no external fuel or grain inputs to worry about.

    The controls will have been introduced, as now the benefit to the rural community of rising prices is being offset by the cost to the urban poor, who need to be kept sweet and who need to enjoy a life still good enough to encourage the ongoing flow from the land to the factory.
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    Re: Chinese Economics Thread

    Quote Originally Posted by SampanViking View Post
    To date the CCP has been content to let food prices rise as they have increased the value of farmers incomes
    They have to let prices rise at least somewhat to match inflation. However, they can't artificially hold them down because of higher demand or increasing cost. If people are making a loss they'll stop producing/buying and distributing. That will then push prices up even higher - it's a vicious circle.

    The only way to deal with inflation is to increase interest rates. The government has waited too long to do that - the recent changes have not been enough. If it shies away from taking hard but necessary measures things will get worse, not better.
    "Japan is as much of a threat to China, as China is to Japan."

    --FuManChu

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    Re: Chinese Economics Thread

    Raising Interest rates isn't going to do you any good here Fu.

    China's inflation is all demand led and occurs almost entirely in Fuel costs, which are largely absorbed by Industry and Food Costs. As most of China's food is produced by subsistence farmers whose limited contact with the cash economy is restricted to savings and out of pocket expenditure, they are unlikely to have loans or even purchase inputs for their produce.

    On the demand side, what effect are interest rates likely to have (except spread misery artificially to non inflationary areas of the economy) that higher prices cannot do by themselves.

    The problem here is an inability to produce food to the output levels of modern farms using intensive methods. Higher Interest rates will do nothing to encourage the investment that any rural entrepreneur would need to find if they tried to go that route. If anything lower rates or special soft loans (along with rural land reforms) are the best solution to try and encourage an effective production response to the current situation.
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    Re: Chinese Economics Thread

    Quote Originally Posted by SampanViking View Post
    Raising Interest rates isn't going to do you any good here Fu.
    I'm not sure how much it would affect food prices, but clearly it can affect overall inflation - otherwise interest rates wouldn't have been raised as they were last year.

    If anything lower rates or special soft loans (along with rural land reforms) are the best solution to try and encourage an effective production response to the current situation.
    I disagree, because that will just cause inflation elsewhere to increase and cause the same problem in another sector. Overall inflation will increase even faster, then maybe the farmers will have to put up prices anyway to cope.

    If China can't feed itself then it needs to import more food, or put more land aside for agriculture, rather than build factories and luxury appartments.
    "Japan is as much of a threat to China, as China is to Japan."

    --FuManChu

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    Re: Chinese Economics Thread

    Hi SampanViking

    I rather agree that there is an element of "Mirror-Imaging" that has to be accounted for and filtered out, if possible, from many Western reports and analyses on anything non-Western, including China. And of course it is all to easy to for hackles to be raised (I still have mine, by the way, from my old Army days) by Western perceptions of Chinese intentions and actions; the whole "Yellow Peril" bit and all.

    But I do find myself inclined to Fu's takes on this situation. When it comes to anything economic, I go by two simple guidelines: for micro-economics, buy low and sell high!; and for macro-economics, well, when anything gets built, made, or offered for sale, the money to pay for it has to come from somewhere, and there's only so much to go around - so who's paying for all this, and how? Hence my mounting trepidation over the past few years at what has developed into the mortage crisis in the US and inflation in China. There just isn't enough free hard cash to go around to pay for all the debt that has accumulated as well as all the goods and services that have been produced. And I fear that these may be indications of more serious economic weakness either to develop or to reveal itself.

    It seems to me that Chinese Government policy tries to balance the requirement for relatively inexpensive food and labour with the need of the population, both urban and rural, to be able to see at least steady personal financial improvement, whilst relying to a considerable extent upon the export market to achieve that. Anything that disrupts or may disrupt that steady personal financial improvement creates conflict with the basic expectations of most Chinese. And that is often touted as perhaps single most important factor in maintaining social and political stability within China.

    As to Chinese monetary policy and forex investments, I quite agree that its end is not profit per se, but rather is an instrument wielded to acheive strategic economic ends. Namely, the safest, most predictable, and controllable development of the national economy of China as is practical. As you pointed out about the investment in Blackstone, what's $2 billion in exchange for opening up solid (and potentially lucrative) investment opportunities for $300 billion? It's largely irrelevant that the Blackstone investment in and of itself was an early loss, profit-wise; it's what doors to bigger and better things that that investment opened that counts. You have to spend money to make money. And that's one way China may be able to unhitch itself over time from debtors if such debtors were to prove unreliable in paying their debts.

    But at the present, China may find itself in a tight situation, as both its own internal economic pressures, and especially that of inflation, coupled with US economic weakness and the devaluation of the US Dollar and US securities, may combine under the right (ie. wrong) circumstances to create a much more difficult situation than either China or the US is able to handle well.

    Here's Michael Pettis' blog entry today on the temporary price controls:

    "China wants to force inflation down. Can it?"
    Last edited by Norfolk; 01-10-2008 at 04:06 PM.

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    Re: Chinese Economics Thread

    I don't know my economics, but isn't the market really just a communal ponzi scheme?

    I want Asia on my front porch and America as my backyard.
    Disclaimer: By America, I meant the Continent. And yes, I know Asian homes have neither a backyard nor a porch in the American sense.

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    Spike is offline Banned Idiot
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    Re: Chinese Economics Thread

    Article from Bloomberg that comments about the connections between the US and Chinese economies and potential problems for China if the US had a serious downturn.

    China December Trade Surplus Narrows as Exports Cool

    By Li Yanping

    Jan. 11 (Bloomberg) -- China's trade surplus narrowed for a second month as export growth slowed, signaling that the fastest economic expansion in 13 years may have peaked.

    The surplus for December shrank to $22.7 billion from $26.2 billion in November, the Chinese customs bureau said in a statement on its Web site today, lower than the $24.4 billion median estimate of economists surveyed by Bloomberg News.

    Export growth cooled to 21.7 percent last month from 22.8 percent, indicating that recent yuan gains, the slowing global expansion and cuts to export-tax rebates on polluting industries are beginning to bite. For 2007, the trade gap surged 48 percent to a record $262.2 billion, giving U.S. and European officials ammunition to keep calling for faster appreciation of the yuan.

    ``Slower export growth may help China achieve a soft landing,'' said Wang Tao, head of economics and strategy for Greater China at Bank of America Corp. in Beijing. ``China's economic expansion may have peaked last year.''

    After the figures were released, the yuan remained near the highest since a dollar peg was scrapped in 2005. The currency was 0.1 percent stronger at 7.2644 per dollar as of 1 p.m. in Shanghai, heading for its fifth weekly gain.

    The yuan advanced 7 percent against the U.S. dollar in 2007, twice as fast as in 2006, partly because the central bank boosted interest rates to a nine-year high.

    Currency Gains

    U.S. Treasury Secretary Henry Paulson and European Central Bank President Jean-Claude Trichet led teams to China over the past two months pressing China to let the yuan rise further and ease trade tensions.

    ``Pressure on China to let its currency appreciate faster won't stop because the surplus is still getting bigger,'' said Xing Zhiqiang, an economist at China International Capital Corp. in Beijing. Xing expects the yuan to rise 10 percent in 2008.

    China's economy expanded 11.5 percent in 2007, the fastest pace in 13 years, according to government forecasts. Wang estimates it will grow between 8 percent and 10 percent over the next three to five years.

    ``Government measures to curb export growth of energy- consuming and polluting products and to lower import tariffs have effectively curbed further widening of the trade surplus,'' the customs bureau said in a statement on its Web site today. ``Policy adjustments achieved initial results.''

    Tax Rebates

    China reduced export-tax incentives twice last year on products including pig iron and nickel. New tax rules to slow exports of some other steel products that took effect on Jan. 1 may cool shipment growth further. Steel-product exports fell 14 percent in December from a year earlier.

    The tax measures were, in part, a response to pressure from trading partners. The European Union in November threatened to introduce tariffs to shield producers such as ArcelorMittal.

    ``Exports will decline further this year as higher taxes make Chinese prices less competitive,'' Liu Yuanrui and Shao Wenzhong, analysts at Changjiang Securities Co., wrote in a report today.

    Imports climbed 25.7 percent in December to $91.7 billion, maintaining the previous month's 25.3 percent pace of expansion.

    Government policy makers last month named inflation and the risk that the economy will overheat as its two main concerns for 2008 and said the People's Bank of China would pursue a ``tight monetary policy.''

    Made in China

    The policy is designed to slow the rate at which cash has been funneled into building thousands of factories, many of which may become idle should export demand dwindle too fast.

    Policy makers are trying to prevent the economy from overheating in the face of risks that global growth will stall and slash demand for Chinese-made goods.

    ``If exports slow in China, you'll see a lot of overcapacity, you'll see margins collapse, you'll see deflation and you'll see a lot of non-performing loans,'' said Huang Yiping, chief Asia economist at Citigroup Inc. in Hong Kong.

    A 1 percentage point slowdown in the U.S. would trim China's export growth by 4 percentage points and reduce gross domestic product by 0.5 percentage point, according to Ma Jun, chief China economist at Deutsche Bank AG in Hong Kong.

    Morgan Stanley forecast last month that growth in China's shipments abroad may slow to 16 percent in 2008. Imports will increase 18 percent, the investment bank predicted.

    ``A U.S. slowdown will hit China's other export markets too -- and that we think will likely have a knock-on impact upon China's own investment growth,'' said Stephen Green, an economist at Standard Chartered Plc in Hong Kong.

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    Re: Chinese Economics Thread

    Hi Norfolk

    I do find myself inclined to Fu's takes on this situation
    Your words are like daggers aimed at my heart

    Sorry but too tired and intoxicated to give a proper answer to your points this PM, watch this space
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    Re: Chinese Economics Thread

    Quote Originally Posted by SampanViking View Post
    Hi Norfolk

    Your words are like daggers aimed at my heart

    Sorry but too tired and intoxicated to give a proper answer to your points this PM, watch this space
    Sorry SampanViking, I didn't mean to make you unhappy! And I will indeed be watching. Have a good sleep and a gentle recovery!

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    Re: Chinese Economics Thread

    Quote Originally Posted by Spike View Post
    Article from Bloomberg that comments about the connections between the US and Chinese economies and potential problems for China if the US had a serious downturn.
    Here's a piece that looks a little deeper into this issue of Chinese dependence on exports. A 'best case scenario' for China of a US slowdown may be that it'll help achieve a 'soft-landing' & alleviate some of the inflation problems discussed here.

    http://economist.com/finance/display...ry_id=10429271

    An old Chinese myth
    Jan 3rd 2008
    From The Economist print edition


    Contrary to popular wisdom, China's rapid growth is not hugely dependent on exports

    MOST people suppose that China's economic success depends on exporting cheap goods to the rich world. If so, its growth would be seriously dented by a stuttering American economy. Headline figures show that China's exports surged from 20% of GDP in 2001 to almost 40% in 2007, which seems to suggest not only that exports are the main driver of growth, but also that China's economy would be hit much harder by an American downturn than it was during the previous recession in 2001. If exports are measured correctly, however, they account for a surprisingly modest share of China's economic growth.

    The headline ratio of exports to GDP is very misleading. It compares apples and oranges: exports are measured as gross revenue while GDP is measured in value-added terms. Jonathan Anderson, an economist at UBS, a bank, has tried to estimate exports in value-added terms by stripping out imported components, and then converting the remaining domestic content into value-added terms by subtracting inputs purchased from other domestic sectors. At first glance, that second step seems odd: surely the materials which exporters buy from the rest of the economy should be included in any assessment of the importance of exports? But if purchases of domestic inputs were left in for exporters, the same thing would need to be done for all other sectors. That would make the denominator for the export ratio much bigger than GDP.

    Once these adjustments are made, Mr Anderson reckons that the "true" export share is just under 10% of GDP. That makes China slightly more exposed to exports than Japan, but nowhere near as export-led as Taiwan or Singapore (which on January 2nd reported an unexpected contraction in GDP in the fourth quarter of 2007, thanks in part to weakness in export markets). Indeed, China's economic performance during the global IT slump in 2001 showed that a collapse in exports is not the end of the world. The annual rate of growth in its exports fell by a massive 35 percentage points from peak to trough during 2000-01, yet China's overall GDP growth slowed by less than one percentage point. Employment figures also confirm that exports' share of the economy is relatively small. Surveys suggest that one-third of manufacturing workers are in export-oriented sectors, which is equivalent to only 6% of the total workforce.

    Even if the true export share of GDP is smaller than generally believed, surely the dramatic increase in China's exports implies that they are contributing a rising share of GDP growth? Mr Anderson's work again counsels caution. Although the headline exports-to-GDP ratio has almost doubled since 2000, the value-added share of exports in GDP has been surprisingly stable over the same period (see left-hand chart). This is explained by China's shift from exports with a high domestic content, such as toys, to new export sectors that use more imported components. Electronic products accounted for 42% of total manufactured exports in 2006, for example, up from 18% in 1995. But the domestic content of electronics is only a third to a half that of traditional light-manufacturing sectors. So in value-added terms exports have risen by far less than gross export revenues have.


    Many of China's foreign critics remain sceptical. They argue that China's massive current-account surplus (estimated at 11% of GDP in 2007) proves that it produces far more than it consumes and relies on foreign demand to buy the excess. In the six years to 2004, net exports (ie, exports minus imports) accounted for only 5% of China's GDP growth; 95% came from domestic demand. But since 2005, net exports have contributed more than 20% of growth (see right-hand chart).

    This is due not to faster export growth, however, but to a sharp slowdown in imports. And even if the contribution from net exports fell to zero, China's GDP growth would still be close to 9% thanks to strong domestic demand. The boost from net exports is in any case unlikely to vanish, even if America does sink into recession, because exports to other emerging economies, where demand is more robust, are bigger than those to America. According to Standard Chartered Bank, Asia and the Middle East accounted for more than 40% of China's export growth in the first ten months of 2007, North America for less than 10%.

    Multiplier effects

    China's economy is driven not by exports but by investment, which accounts for over 40% of GDP. This raises an additional concern: that weaker exports could lead to a sharp drop in investment because exporters would need to add less capacity. But Arthur Kroeber at Dragonomics, a Beijing-based research firm, argues that investment is not as closely tied to exports as is often assumed: over half of all investment is in infrastructure and property. Mr Kroeber estimates that only 7% of total investment is directly linked to export production. Adding in the capital spending of local firms that produce inputs sold to exporters, he reckons that a still-modest 14% of investment is dependent on exports. Total investment is unlikely to collapse while investment in infrastructure and residential construction remains firm.

    An American downturn will cause China's economy to slow. But the likely impact is hugely exaggerated by the headline figures of exports as a share of GDP. Dragonomics forecasts that in 2008 the contribution of net exports to China's growth will shrink by half. If the impact on investment is also included, GDP growth will slow to about 10% from 11.5% in 2007. This is hardly catastrophic. Indeed, given Beijing's worries about the economy overheating, it would be welcome.

    The American government frequently accuses China of relying excessively on exports. But David Carbon, an economist at DBS, a Singaporean bank, suggests that America is starting to look like the pot that called the kettle black. In the year to September, net exports accounted for more than 30% of America's total GDP growth in 2007. Another popular belief looks ripe for reappraisal: it seems that domestic demand is a bigger driver of China's growth than it is of America's.


    Copyright 2008 The Economist Newspaper and The Economist Group. All rights reserved.

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    yongke is offline New Member
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    Re: Chinese Economics Thread

    I agree with the last poster. The current inflation is Supply side, not Demand side. For example, the increase in fuel cost count as Supply, since it will cost company more money to buy fuel, which lead to increase in price. This have nothing to do with demand, which have no relation with fuel cost (they are not buying fuel after all).

    There for, this "inflation" is more of an adjustment. If the price of pork rises by 50% and general inflation is less than 10%, then the farmer are making far more money than before.

    In time, the price will settle to an equalibrium point and inflation will lower naturally.

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