Chinese Economics Thread


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2016-08-31 08:54Xinhua |
Editor: Wang Fan

Construction has begun on a power transfer project linking China's resource-rich northeast to its energy-thirsty eastern regions.

The 800-kv ultra-high voltage (UHV) direct current (DC) power transmission project, connecting Jarud in Inner Mongolia Autonomous Region to Qingzhou in Shandong Province, will transfer the abundant coal, wind and solar power in Inner Mongolia, Jilin, Heilongjiang and Liaoning in northeast China and consume more than half of the local surplus power.

With total estimated spending of 22.1 billion yuan (3.1 billion U.S. dollars), the 1,234-km line is expected to transmit 55 billion kwh of power, reducing coal consumption in north China by 25 million tonnes every year.

A launch ceremony for the project was held in Beijing on Friday and construction is expected to be completed next year.

It was the first project to be included in a national multi-billion-dollar plan to boost northeast China's flagging economy.

The three-year revival plan, announced by the National Development and Reform Commission (NDRC) on Aug. 22, involves a total of 127 major projects in the northeast from 2016 to 2018, plus major work in 137 areas.

The wide-ranging plan covers sectors including transportation, energy, water conservation, agriculture, as well as urban and rural development.

More than 1 trillion yuan will be invested in the projects, financed by private companies as well as central and local governments, said Zhou Jianping, an NDRC official.

The money will not be spent on industries that suffer overcapacity, but go to key areas to create growth, such as infrastructure and emerging industries, he said.

The northeast, which includes Liaoning, Jilin and Heilongjiang provinces and part of Inner Mongolia Autonomous Region, was among the first regions in China to be industrialized, relying largely on heavy and chemical industries, energy resources, raw materials and a large number of state-owned enterprises.

Amid an economic slowdown in the last two years, the region has experienced more difficulties than the rest of the country. According to NDRC data, the region's economy grew 2.2 percent in the first half of 2016, much lower than the 7.6 percent, 7.8 percent and 8 percent for the east, central and western regions of the country, respectively.

Economic observers believe the projects will help "stabilize" a staggering economy, winning breathing space for the region's ongoing structural reform and economic transformation.

According to a recent statement by Shenyang United Assets and Equity Exchange, Liaoning Province will sell stakes in some of its state-owned enterprises, an important step for the structural reform of SOEs. The province was the country's worst economic performer in H1 as its gross domestic product contracted by 1 percent in the period.

Experts expect local governments to be offered more rights to explore so that more measures will be put in place to free the market and eradicate the negative influence of the region's previously planned economy.

Liang Qidong, vice president of the Liaoning Academy of Social Sciences, advised the central government to approve establishment of a free trade zone in Dalian as soon as possible to play an experimental role in the region's reform.

According to the five-year plan of Liaoning, the province plans to apply for establishment of the Dalian Free Trade Zone before 2020.

Other suggestions to stimulate the local economy include supporting hi-tech enterprises to gain easier access to financing in the capital market.

"Rather than rely on central government investment, the northeast should step forward to promote structural reform with enduring efforts," said Jin Fengjun, a researcher with the Chinese Academy of Sciences.


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Good tactic, pilot in one area. If successful, then try in more areas.

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2016-09-01 08:14 | Xinhua
Editor: Mo Hong'e

Chinese authorities have decided to set up seven new free trade zones (FTZs) across the country, bringing the total number to 11 as China looks to replicate the success of previous trials.

The new FTZs will be located in the provinces of Liaoning, Zhejiang, Henan, Hubei, Sichuan and Shaanxi as well as Chongqing Municipality, according to commerce minister Gao Hucheng.

The expansion came nearly three years after the launch of China's first FTZ in Shanghai to test a broad range of economic reforms, including more openness to foreign investment and fewer restrictions on capital flows.

In late 2014, Tianjin, Fujian and Guangdong were approved to set up the second group of FTZs.

With the addition of 7 more FTZs, China is hoping to press ahead with wider reforms, while allowing the regions to tap their unique geographical and industrial advantages for further experiments.

"The decision to expand the FTZs shows authorities' strong resolution in advancing reforms and opening up," Gao told Xinhua in an interview.

He said the FTZs will be launched following necessary procedures, but did not give a timeframe.

According to Gao, Liaoning Province in northeast China will focus on market-oriented reforms to transform the old industrial base into a more competitive area, while coastal Zhejiang is expected to explore trade liberalization of commodities and improve capacity of global allocation of commodities.

Central China's Henan will tap its potential in transportation and logistics, and Hubei will build high-tech bases and facilitate the development of the Yangtze River Economic Belt.

China hopes the FTZs in Chongqing, Sichuan and Shaanxi, all in the country's less developed west, will help open the regions to bring out their economic vitality.

Among the successful trials in the first two groups of FTZs has been the introduction of a "negative list," which specifies investment sectors off-limits to foreign investors and allows industries not on the list to follow the same new investment rules as domestic firms.

The policy has led to a surge in business registrations. In the first half of 2016, a total of 4,923 foreign-funded firms were established in the four FTZs, with investments amounting to 359 billion yuan.

According to a poll conducted by the Development Research Center of the State Council, 82 percent of firms surveyed reported "notable progress" in the business environment, and 95 percent were optimistic about future development.

Encouraged by the results, China is considering expanding the approach nationwide. During its bimonthly session, the National People's Congress (NPC) Standing Committee considered provisions that may allow foreign and Taiwanese investors to start businesses across the country as easily as in the four FTZs.

The Ministry of Commerce said it will work on a nationwide negative list for foreign investment if the top legislature passes the bill.


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Four Considerations on the Chinese Economy

Plenty is written about the Chinese economy; but plenty more needs to be understood.
By Andong Peng
August 28, 2016

China is not as unequal as some think.

It has become commonly accepted that China has not only been catching up with the non-Communist West in terms of wealth gaps, but has actually surpassed it. In 2014, a much-trumpeted research paper from the University of Michigan concluded that “income inequality has been rising rapidly in China and now surpasses that of the U.S. by a large margin,” with a Gini coefficient of 0.55 vs 0.45 in the U.S. This is backed by empirical evidence of the disparities that exist side-by-side in large cities such as Shanghai and Beijing.

However, much of the work done on coefficients has relied on income distribution. Look at the data from another perspective and the results are quite different. On an asset distribution basis using data from Credit Suisse’s Global Wealth Report for 2015, the numbers show that China is still towards the lower end of the scale. Calculating on a simple basis of mean wealth per capita as a multiple of median, my calculations show China to be significantly more egalitarian than other emerging markets (most of all Russia) or the U.S. Credit Suisse’s own internal asset-based Gini number confirms this.

So why is this the case? The reality is that much of this has to do with the large transfer of wealth to the urban household sector during the reforms of the late 1990s under Zhu Rongji. According to Arthur Kroeber, the value of these transfers equated to around one-third of China’s GDP for 2003, meaning that while incomes are not growing, the middle classes have been endowed with a substantial asset base which is as meaningful an evaluation of wealth as incomes are, particularly in an environment of relatively stable house pricing.

Growth is not being driven by debt.

With all the concerns about Chinese indebtedness over the last couple of years, one would imagine that the huge infrastructure projects that the government is backing through initiatives like “One Belt, One Road” (now referred to as “Belt and Road”) are being funded by borrowing. Yet if we drill down into the numbers, the vast majority of fixed asset investment is being funded through equity. Indeed as a proportion of overall FAI, the equity piece has been steadily growing since the 2008 stimulus and has now reached over 70 percent. Debt exposure is being somewhat over-reported.

Why is this? Well first, the vast majority of corporate expenditure is normal business start-ups, not just major infrastructure projects. While the headline investments make the most noise, on the ground China continues to be an economy that sees tremendous entrepreneurialism and start-ups not only in technology but across the retail-facing industries. Chinese innovation should not be underestimated. China is a place to start businesses, in a way only rivaled by the U.S. and far ahead of regional peers such as Japan (has anyone heard from a Japanese start-up recently?). Indeed, this Chinese appetite for equity is one of the most important dynamics across the world, and may eventually have knock-on effects on public markets too.

Second, and intriguingly, it also seems that the huge rise in corporate borrowings that has been reported in the last few years has not been drawn down for capex spending, and certainly not on white elephants. Instead, as reported by Dragonomics, corporates have been largely bolstering their cash balances and/or using loans to make financial investments, mostly liquid. Technically this may or may not count towards “net cash” but it certainly is not money “spent.” Netting this off may reduce the perceived debt number quite substantially.

Consumption is not underperforming.

A longstanding complaint about Chinese economic performance has been the failure of “rebalancing,” a phrase which is used constantly by the government itself. Central to this charge has been the assessment of consumption as a proportion of GDP growth, which for more than a decade has been overshadowed by investment-led growth, hovering at or around 50 percent with private consumption even lower. The government itself has vowed to raise this.

Yet in context, these numbers are not so bad. Yes, as a proportion of growth consumption did fall during the 2000s, but this was because of the exceptional investment that was happening during this time. Actually consumption – aka “good growth” even for skeptics – has been extremely stable, averaging 4.6 percent since 2008 and 4.8 percent since 2000, even as overall growth ballooned to the highs of over 12.0 percent. Meanwhile, even as headline GDP has begun to slow, consumption remains relatively robust, resulting an incremental addition to Chinese buying power of about half a trillion US$ in 2015.

As a standalone figure the 2015 increase is sandwiched neatly between Norway and Austria as the world’s 28 largest economy in nominal terms and 27th (just above the Netherlands) at PPP. Many other countries would kill for such numbers, and the evidence of ongoing Chinese consumption is all around us, not least empirically through national trends and events such as this year’s record-setting Singles Day shopping spree. It is certainly still growing – and fast.

China has almost passed the middle income trap already.

There is constant talk about how China is falling into the middle income trap – the problem of “getting old before it gets rich” as The Economist puts it. And of course, there is certainly a long way to go, yet in the world beyond Asia there is still a widespread misunderstanding of how wealthy China is already.

An investment banking analyst recently pointed out the fact that China’s GDP per capita at PPP, in current U.S. dollar terms, is somewhat within sight of what Japan’s figure was back in 1990, the point at which that country was widely touted to have “arrived.” This claim is not without its problems of course: For a start, many would question the validity of the PPP formula as a means of comparison; second, at $14,239 vs $19,230, being within sight is still roughly a quarter poorer, not the smallest of margins. Still, it is something to think about. After all PPP, for all its faults, is still the best proxy we have for attempting to compare across economies in time and space; and as for 25 percent, well I suspect rather a lot of people would be happy enough to be within such a small relative distance.

However, the point also begs other comparisons. Japan was in many ways exceptional and had a long history of economic development. Meanwhile, Korea, whose own model of mixed economy is more reminiscent of China’s, was admitted to the OECD in 1996 when its own GDP per capita figure was the same as that of China today. Is China equivalent to Korea in 1996? Or Japan in the mid 1980s?

Another consideration is that of urban-rural divide – a contributory factor to the inequality story outlined above. China’s national GDP is still a reflection of an urbanization rate of just 50 percent, far below either Japan or Korea. It is therefore instructive to look at China’s urban GDP per capita figures, which, according to the OECD, bring it more in-line with Japan around 2000 (or Korea in 2006).

This whole discussion is of course highly imperfect and theoretical, but it sets a useful scene when considering exactly where China is in the development curve and what problems it actually faces. The aging population and declining fertility issues are, after all, an urban problem so looking at urban wealth is relevant. It also brings into focus the historical amnesia about what other countries were like in terms of such issues as pollution, as they were “growing up”


None of these points are designed to argue against an overall story of China slowing down. But in the constant muddle of analysis about China both internally and externally, such counterpoints are useful for at least coloring the narrative.

Andong Peng is a former public policy researcher at Tsinghua University, and currently works on UK-China trade relations.


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(Xinhua) 20:09, August 31, 2016

View attachment 31434
Canadian Finance Minister Bill Morneau attends a press conference in Beijing, capital of China, Aug. 31, 2016. (Xinhua/Shen Bohan)

BEIJING, Aug. 31 -- Canada announced Wednesday that it had decided to apply for membership of the Asian Infrastructure Investment Bank (AIIB), a sign of growing international confidence in the China-initiated multilateral bank.

If Canada joins the AIIB, it will be the first North American member of the bank, which already has 57 founding members including Australia and the United Kingdom.

Participation in the AIIB is "clearly Canada's best choice," Canadian Finance Minister Bill Morneau told a press conference in Beijing, saying that the bank represents the renewed approach of multilateralism, for which Canada "couldn't be more supportive."

"Canada is always looking for ways to create hope and opportunity for our middle class as well as for people around the world, and membership in the AIIB is an opportunity to do just that," Morneau said.

AIIB president Jin Liqun said Canada's membership will contribute significantly to the bank's development, noting that all countries interested in the AIIB were welcome to apply for membership.

"The decision of Canada to apply to join AIIB is very welcome and shows its confidence in the strong foundations the bank has built in our first few months," Jin told reporters.

There are now more than 20 countries waiting to join the AIIB and the door is wide open, he said.

The AIIB said that formal expressions of interest from potential new members would be welcomed before Sept. 30, 2016, and it looked forward to to welcoming the first of these new members early in 2017.

The AIIB, a not-for-profit bank initiated by China, was officially established last December and started operating in January.

With authorized capital of 100 billion U.S. dollars, it prioritizes investment in energy, power, transport, rural infrastructure, environmental protection and logistics.

In June, the bank approved its first four loans, totalling 509 million dollars, to fund power, housing and transport projects in Bangladesh, Indonesia, Pakistan and Tajikistan.

Canada's move shows the international community's deepening understanding of and strengthening confidence in the AIIB, said Huang Wei, a researcher at the Chinese Academy of Social Sciences.

"More and more countries are optimistic about the bank's future," she said.

With a healthy financial market, Canada can bring its rich experience in financial management and governance to the AIIB, while membership in the bank will benefit the country's own infrastructure and help it expand international influence, according to Huang.

For Canada, helping fund high-quality infrastructure in Asia will contribute to global economic growth and help Canadian companies explore new commercial opportunities, Morneau said.

China is now Canada's second largest trading partner. Trade between the two countries was over 67 billion U.S. dollars in 2015, a 10.1 percent increase year on year, according to Canadian statistics.

At Friday's press conference, Jin said the AIIB will operate in line with international standards, have zero tolerance over corruption and be vigilant about possible redundant positions.
Took us long enough. Although this is getting political, the last government should have joint the AIIB instead of following US footstep. If would have given Canada a more exposure to world politics and influence.
Took us long enough. Although this is getting political, the last government should have joint the AIIB instead of following US footstep. If would have given Canada a more exposure to world politics and influence.
Would Canada be a founder member as well? or already close?

I can see only the US and Japan would still deny it ....


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I think currently the talks is only about participation. I have not heard about being founding members, unless I have missed some news about (which could be likely)


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2016-09-02 16:15 | |
Editor: Feng Shuang

The mega merger between the top two ride-hailing service providers in China may hit a roadblock as the country's antitrust watchdog says it is investigating the case.

The Ministry of Commerce said at a news conference in Beijing on Friday it was investigating whether the merger deal between Didi Chuxing and the China unit of the US-headquartered Uber Technologies Inc suggested a potential monopoly.

Shen Danyang, spokesman for the ministry, said that Didi and Uber China completed the merger deal on August 2; right after the two announced their agreement to tie-up on August 1 without filing any application to the ministry in advance.

"So far the antitrust bureau of the ministry has asked Didi to explain the reason of not filing application and required the company to submit related documents," Shen said.

According to him, the bureau has talked to related government organizations and enterprises to understand the market competition of the ride-hailing industry brought by the deal and will push the investigation forward to make sure the playing field is leveled and the interest of consumers is protected.

The Beijing-based Didi Chuxing was not available to comment on Friday.

Didi announced at the beginning of August its decision to acquire Uber's China operations, creating a ride-sharing titan estimated to take about 90 percent of the market.