Ryssdal: … Somebody’s making money.

Schmitz: Right. Developers are obviously making a lot of money. And of course the government of China itself is getting rich and that’s something that irks a lot of the people I spoke to. In the past five years, much of China’s economic growth has come from building infrastructure. The party has spent hundreds of billions of dollars on this and most of these contracts have gone to state-owned companies. So in other words, the government is giving money to itself. So one man I spoke to was really frustrated with this.

Man speaking

Ryssdal: “Nothing’s OK,” right? Everything is not all right.

Schmitz: Nothing is OK. So he’s saying that the Communist party originated from the poor, but now has basically left the poor behind. He’s a security guard who makes $5 a day and he lives in a 30-square-foot apartment with his wife and his daughter and he isn’t happy at all. So I asked him. I said how could the government improve the situation in China. And so get this, he said that China should start a war.

Ryssdal: No, come on. Really?

Schmitz: Yeah. And I said with whom and he said it doesn’t matter. 

The Los Angeles Times reported the study’s release last week, and described China’s use by economists as “a real-life laboratory to study how money, inequality and change are tied to our satisfaction with life”.

Easterlin and his fellow economists based their findings on six surveys on life satisfaction in China, most of them conducted by Western firms. The fall and rise of happiness levels in China mirror the trends seen in Russia and other European countries transitioning from communism, Easterlin said.

But what makes China especially interesting is that happiness levels dipped and rose while incomes were soaring, showing that joblessness can drag happiness levels down even as national wealth is on the rise. The results echo earlier studies that have found that growing wealth does not tend to increase happiness because expectations rise along with it. People also tend to compare their wealth with others’.

“If somebody got a higher salary this year than last, he might not be happy,” Jiaotong University professor Wang Fanghua told The Times last year. “But if his income is better than his friends’, then he will be happy.”

At TIME, Austin Ramzy noted that Bo Xilai’s gestures towards addressing economic inequality helped build his broad popularity among Chongqingers.

When Bo Xilai, the rising Chinese Communist Party official who was purged in March, gave his last public comments before disappearing into detention, he was wrong about a lot of things. That bit about not being under investigation, for instance. But one line he uttered has the clear ring of truth, and it poses a serious issue for China’s leadership as it attempts to navigate this year’s political transition, the economic slowdown and the ripples loosed by Bo’s removal. Bo revealed that China’s Gini coefficient — a statistic that measures the gap between rich and poor — had entered into worrying territory. He described the number, which hasn’t been made public in more than a decade, as over 0.46. Anything higher than 0.4 is considered dangerously high and capable of fueling unrest.

In Chongqing, where Bo was Communist Party secretary for 4½ years, he made building economic protections like subsidized housing for the megacity’s poorest residents one of the tenets of his “Chongqing model.” The wholesale corruption he and his family have been accused of may have steered the wealth gap in the wrong direction, but Bo understood the political importance of appearing to care about the problem, just as he knew the appeal of cracking down on crime and reviving Mao-era culture.

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What ails China’s lending environment, and why won’t an RRR cut fix it? MarketWatch’s Craig Stephens thinks banks might have a supply-side problem, battling higher funding costs as their expanding suite of wealth management products – and the higher returns they offer investors – squeezes their margins. But Bob Davis and Tom Orlik write in The Wall Street Journal that the problem lies on the demand side, that the government can no longer “turbocharge the economy as they have in the past” by pushing state-owned banks to churn out new loans because the system lacks an ample supply of borrowers willing to take them:

The hesitation to borrow runs across the Chinese economy, from massive state-owned steelmakers struggling with overcapacity to small exporters trying to figure out when the European crisis might abate.

“We don’t need any expansion of credit because we are playing it safe,” said Stanley Lau, managing director of Renley Watch Manufacturing Co., a Hong Kong watch exporter that manufactures in southern China.

“Because of growing uncertainty over the economy, a lot of businesses are reluctant to borrow and, instead, they have decided to put their project or expansion plans on hold,” a senior executive at one of China’s largest banks said.

Even beyond the steelmakers and manufacturers, the troubles plaguing China’s cooling property market don’t help banks’ lending prospects either. Average home prices in 70 Chinese cities fell again in April, as the government continues to demonstrate a commitment to a price correction that it began in 2010. And while property prices may rebound in the 4th quarter as supply begins to ease, one research analyst told China Daily, housing ministry official Zhang Xiaohong told local media on Friday that Beijing won’t reverse its course and that “There is still room for property developers to continue to adjust prices to boost sales volume, but there is no more room for property speculation.” For now, reports Robin Kwong in The Financial Times, developers can only continue to push their large inventories of unoccupied properties:

This dynamic is reflected in the plight of Number 8 Royal Park, a super-luxurious development in Beijing where liveried footmen have been chaperoning potential buyers to assay opulently decorated 520 sq m apartments. The developer is still holding firm on its price tag of over $10m, but sales appear to have stagnated. Staff are still urging clients to buy flats in the same two towers that were on offer a year ago.

The Globe and Mail’s Mark MacKinnon points out that the Chinese government’s handling of the housing market reflects not just an attempt at a market correction, but also a play for political preservation:

That bubble is now deflating, although some economists say the market is still overvalued and that falling property prices will not constitute the main drag on GDP this year.

“You can make a pretty strong case that it’s overvalued, the property market, so I personally don’t think there will be any reversal…I think they’ll hold the line,” said Alaistair Chan, China economist with Moody’s Analytics, who said this year’s forecast for GDP growth may end up around 8 per cent from their previous prediction of 8.2 per cent.

Just as important for China’s government, though, is that restricting property prices to try to keep them within reach of the rising middle class is seen as key to preserving political stability. For an authoritarian regime obsessed with maintaining a “harmonious society,” this has been a relatively dramatic year, with labour protests, self-immolations by Tibetan activists, continuing food inflation and a rare and colourful political scandal involving the murder of a British businessman that felled one of China’s most popular politicians – all ahead of an expected transfer of power at the top that is supposed to begin with the Communist Party’s national congress in October.

As a result, some property developers are settling in with what they have, and downgrading any ambitions of big acquisitions.

Wen Calls for Growth

Chinese Premier Wen Jiabao took time during his weekend trip to Wuhan to reiterate the government’s aim of fine-tuning the economy to support growth, according to The China Daily:

“The relationship between maintaining growth, adjusting economic structures and managing inflation, must be properly handled,” Wen said in comments reported by Xinhua News Agency. “We should continue to implement a proactive fiscal policy and a prudent monetary policy while giving more priority to maintaining growth.”

The government, he said, will continue to carry out anticipatory adjustments and fine-tuning, boost domestic consumption and promote steady and relatively fast economic growth.

Even if he was only repeating the same long-deployed talking points, Chinese stocks rose today and Bloomberg News reports that Wen’s comments led analysts to speculate that the fine-tuning may become a little more heavy:

The shift in language suggests authorities are “seriously concerned about growth” and “ready to introduce further measures,” Bank of America Corp. said in a research note today. The government on May 12 cut banks’ required reserves for the third time in six months following data that showed trade, industrial production and lending were below forecasts in April.

“The April data has been a wake-up call for China,” said Alaistair Chan, a Sydney-based economist at Moody’s Analytics. “There will probably be some stimulus measures through monetary policy, more bank lending and infrastructure projects being brought forward.”

The Battle For Securities Reform 

Caixin catches up with Guo Shuqing, who took over the helm at the China Securities Regulatory Commission (CSRC) last October and has already begun to put his stamp on the job with a flurry of recent regulatory changes. The CSRC’s top priority, and “core challenge” of reform, Guo says, is in the arena of public listing:

Guo has said that a registration system for public listings is in fact not so different in nature from China’s current approval system. In the United States where a registration system is used, regulatory agencies conduct even stricter checks on companies than do their Chinese counterparts. The key is how to define the roles and responsibilities of the regulators, the exchanges and other intermediaries.

In this light, the recently released guidelines on share issue reform tackle the technical details but fail to address the underlying problems of the system. Rent-seeking can’t be eradicated without changing the vetting system. Take the newly appointed officers of the CSRC. As they become familiar with the job, and the temptations for corruption that come with it, won’t they also become less inclined to change the system? Based on the historic lessons at home and abroad, support of the top leadership is vital for a reformer.

Reforms are easier when the stock market is at a low ebb, but they will only get harder and harder. It will be a long-drawn-out war.

Is China Deleveraging?

The Wall Street Journal’s Tom Orlik writes that while China’s credit-fueled growth (which saw the ratio of credit to GDP rise to 173% by the end of 2011) may have saved China’s economy from the global financial crisis, the trend has begun to reverse amid an environment ripe with inflation, an overheated property market, among other things. It’s good for the ratio to come down and it should continue to come down, but this comes with consequences that Beijing can temper in a number of ways:

The government has options for responding. It could further lower the reserve requirement ratio, which would encourage firms to take on more loans as it lowers the cost of capital and signals that the government intends to keep demand on track—buoying confidence about future orders and profitability.

A further step would be to relax the floor on lending interest rates. China’s banks are currently allowed to lend at a discount of up to 10% to the government-set benchmark. People’s Bank of China governor Zhou Xiaochuan said in April that the next step in interest rate reform could be liberalizing the lending rate—suggesting the floor could be lowered.

Beijing also has room to ratchet up its own spending. There are signs that this is already underway. Investment funded from the state budget grew 29% year-on-year in the first four months of this year, partially offsetting a meager 4.2% increase for investment financed by bank lending.

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The company’s China sales came to US$144.3 million last year, well behind the U.S. total of US$359.2 million. But Samsonite, which listed its shares in Hong Kong last June, has been ramping up investment in Asia—already the company’s biggest revenue contributor—and seeks to raise its profile among China’s growing ranks of wealthy consumers.

Sales in Asia rose 42% last year, far outpacing other regions and underscoring the potential in the region’s developing economies, Chairman and Chief Executive Tim Parker said during an interview Thursday. He pointed particularly to China, where sales increased 63%.

“There is a growing affluent middle-class consumer in China who is getting on a plane, getting on a train and getting in a car,” Mr. Parker said. “Travelers are really beginning to take off and that’s what underpins our business.”

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In a speech to open the annual National People’s Congress, Premier Wen Jiabao said the government planned growth of 7.5 percent this year — a target below previous goals. The government wants a slightly slower pace of growth as it tries to rebalance the world’s second-largest economy.

Wen said boosting domestic consumption is “crucial” to China’s future.

He said the government will boost spending on social services and raise incomes for middle- and low-income groups, as well as expand consumer credit.

He also said subsidies for agriculture would be boosted. Just under 50 percent of China’s 1.3 billion people live in rural areas that are dependent on agriculture.

Meanwhile, budgets for both defense and domestic security are expected to rise more than 11%. The brave souls at Wall Street Journal’s China Real Time blog are live-tweeting the meetings. They have also posted searchable PDFs of Wen Jiabao’s report and other key reports from the sessions. For a briefer version, China Daily has posted highlights from Wen’s report.

In an article with the perhaps optimistic headline, “China debates the big issues at Party Congress,” CNN provides some background on the NPC and what is expected to occur at this year’s meetings:

Since the early 1990s, the NPC has passed several laws aimed at building up a legal system and has sought to promulgate a “rule by law” rather than a “rule by men” — an attempt to steer the party away from its Maoist structures to fit more closely the international norms that govern the world’s capital markets.

Among the raft of new legislation expected to be passed at the NPC are labor laws, securities laws, corporation laws, banking laws and environmental protection laws. The body also has the power to elect, dismiss and reassign local and central government officials, including the state president, the premier, top judges and ministers.

Despite this, elections are carefully choreographed, and typically there is only one candidate for one position. Token disapproval or dissent is usually shown by means of abstentions rather than straight “no” votes.

The official Global Times, meanwhile, insists that, “NPC legislative system demonstrates Chinese democracy in action.”

See reporting from previous years NPC meetings via CDT. The tag clouds at the top of most of these pages give a nice overview of the key issues for each year’s meetings:
2005
2006
2007
2008
2009
2010
2011

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The World Bank published a nearly 500 page report Monday, co-authored with a government think-tank, which prescribes a roadmap of reform for the Chinese economy as it enters the next phase of its expansion. From the foreword of the report, penned by World Bank chief Robert Zoellick and Development Research Centre of the State Council president Li Wei:

The idea behind this study was developed in 2010, at the celebrations for the 30th anniversary of the China–World Bank partnership. To commemorate that milestone, President Zoellick proposed to Chinese leaders to work jointly on identifying and analyzing China’s medium-term development challenges looking forward to 2030. Together, China and the World Bank would conduct research drawing on lessons from international experience as well as China’s own successful development record, and prepare a strategic framework for reforms that could assist China’s policy making as well as guide future China–World Bank relations. China’s state leaders welcomed and supported the proposal.

…

The report is based on the strong conviction that China has the potential to become a modern, harmonious, and creative highincome society by 2030.

In order to reach that objective, however, China must change its policy and institutional framework. China’s next phase of development will need to build on its considerable strengths—high savings, plentiful and increasingly skilled labor, and the potential for further urbanization—and capitalize on external opportunities that include continued globalization, the rapid growth of other emerging economies, and promising new technologies. At the same time, China will need to address a number of significant challenges and risks, such as an aging society, rising inequality, a large and growing environmental deficit, and stubborn external imbalances.

The report touches on a number of avenues for reform, including a reduction in the influence of state-owned enterprises, an emphasis on green development, and the improvement of China’s social security and other safety nets, all with an aim to helping China manage its economic transition and not fall into the “middle-income” trap. Zoellick held a news conference in Beijing on Tuesday to discuss the report, where one lone protester disrupted the event with “Occupy”-style slogans before security personnel dragged him away. Still, Chinese media welcomed the findings – One opinion piece in The China Daily applauded the potential dialogue the author hoped the report would facilitate, while another suggested that China is well placed to implement the suggested reforms.

High-ranking Chinese officials, including Vice Premier Li Keqiang and Finance Minister Xie Xuren, also chimed in to stress the importance of accelerating economic restructuring and promoting innovation. With the Chinese People’s Political Consultative Conference (CPPCC) and National People’s Congress (NPC) just days away from opening their annual sessions, however, the Economist warned that World Bank officials and other observers should take the rhetoric of reform with a grain of salt:

The bank, however, should be prepared for disappointment. In the buildup to the party congress, a bit of reformist posturing is only to be expected. Different factions in the party want to air their agendas in order to influence the policy choices of the new leaders. A hint of this emerged in a commentary in the People’s Daily (in Chinese) on February 23rd. It said some officials wanted to keep things as they were in order to avoid criticism, but that this would eventually result in an even greater crisis. “No matter how thorough plans are, or how intelligently crafted they are, reforms will always be attacked,” it said, giving warning that mere “tinkering” with reform had been the downfall of great nations and parties.

…

China’s new leaders will likely take at least a few months to consolidate their power and settle in before they feel confident enough to tackle economic reforms that affect powerful vested interests, such as the bureaucracy that controls state enterprises or the ministry of commerce. (Nicholas Lardy of the Peterson Institute for International Economics in Washington, DC, describes the influence of these groups in a detailed chapter in his new book, “Sustaining China’s Economic Growth After the Global Financial Crisis”). Even then, it is very unlikely that those who take over leadership of the party in a few months’ time will be any stronger than their predecessors when it comes to taking on the conservatives.

Arvind Subramanian, an Indian economist who made waves with his 2011 book about China’s path to becoming the world’s top economic power, gave his thoughts on the report during a Q&A interview with The Wall Street Journal:

What did you think of “China 2030”?

I was pleasantly surprised. I give them credit for fundamentally saying the way forward is to move qualitatively away from the status quo. The report said you had to reform. But what the report didn’t say is ‘How much of reform requires political change?’

The $1 million question is how much change can you bring on without bringing down the political scaffolding? How much more controlled reform can you do? The more reform you do, the more you bring down the scaffolding.

Spotlight: 2012 Growth Target

Premier Wen Jiabao kicked off the NPC’s annual session today by giving his annual work report and setting a GDP growth expectation of 7.5% for 2012, the first time China has set its sights below the 8% mark in the past eight years. The Wall Street Journal reports that the target signals that China intends to focus more on the quality rather than the speed of its economic expansion, and indicates a willingness by Beijing to accept slower growth in exchange for a more balanced development profile:

In his government work report to the NPC, Mr. Wen said the government aims to contain consumer-price inflation at around 4% this year. Last year, the consumer-price index rose 5.4%, above the official target of within 4%.

He also reiterated Beijing’s official line of maintaining a prudent monetary policy and a proactive fiscal policy, and set a 14% growth target this year for M2, China’s broadest measure of money supply.

“We aim to promote steady and robust economic development; keep prices stable; and guard against financial risks by keeping the total money and credit supply at an appropriate level and taking a cautious yet flexible approach,” Mr. Wen said.

For updates, insights and analysis as the NPC opens in Beijing, see The Wall Street Journal’s live blog of the proceedings.

Manufacturing Data Beasts Estimates

Elsewhere, an expansion in export orders contributed to better-than-expected February manufacturing data, as China’s official purchasing managers’ index (PMI) registered its highest level since September. The overall figure, which saw its third straight monthly gain, indicated that the resiliency of Asian economies may be helping China’s factories to manage the export strain caused by Europe’s debt crisis. While the People’s Daily hailed the news as a sign of economic stability, however, Financial Times’ Josh Noble cautioned against an overly optimistic reaction to the data:

Although the government’s purchasing managers’ index registered its highest reading in five months and marked a continued period of expansion in manufacturing, the jump is a little too small to seriously cheer the bulls.

Following the January halt in production caused by China’s new year celebrations, the PMI was expected to rise in February. Indeed it did, hitting 51, up from 50.5 in the previous month, thanks to new export orders and increased hiring. (In PMIs, anything above 50 indicates expansion; below 50 indicates contraction.)

But it isn’t all rosy. The increase of just 0.5 points is, by historical standards, pretty low for a new year rebound.

While the manufacturing sector continued its expansion, China’s non-manufacturing PMI contracted for the first time in three months in February, reflecting a decline in consumer and retail activity after the Lunar New Year holiday. It’s worth noting, however, that HSBC’s unofficial reading of China’s services PMI indicated an expansion and painted a different picture than the official data.

Lending Rebound?

With February in the books, focus in the coming week will shift to policy discussions at the NPC and the release of official economic data for February. The China Securities Journal reported on Wednesday that China’s banks likely issued less than RMB 700 billion in new loans for the month, an unofficial figure which would fall short of market expectations despite an anticipated uptick in lending following the recent reduction in banks’ reserve requirement ratio.  But the president of one of China’s “Big Four” banks, ICBC’s Yang Kaisheng, sought to dispel the belief that banks had extended fewer new loans so far in 2012:

ICBC lent 165.5 billion yuan in loans in January and February, about 15 billion yuan more than the same period last year, bank president Yang Kaisheng said on the sidelines of the Chinese People’s Political Consultative Conference.

“The idea that we’ve lent less in the first two months of this year is incorrect,” Yang said. “Altogether, the Big Four banks sawloans grow about 20 billion yuan in January and February.”

Other News:

- A China Daily op-ed published today outlines the economic challenges facing emerging China.

- As part of the working report distributed ahead of Premier Wen Jiabao’s opening remarks at the NPC today, the government will seek to develop its non-public sector by breaking up monopolies and encouraging private investment in sectors such as railways, public utilities, finance, energy, telecommunications, education, and medical care. China’s second-richest man, billionaire and NPC member Zong Qinghou, advocated such a strategy in a weekend interview.

- With property prices and housing development likely to top the agenda during the NPC and CPPCC sessions this week, one Chinese researcher writes in a Xinhua News piece that urban housing policies should not be relaxed.

- A Chinese economist at UBS expects China’s consumer price index (CPI) to rise 3.6% in February, a figure which Xinhua news says would represent a “remarkable pullback” from January’s 4.5% inrease.

- As China continues to promote an eventual internationalization of the RMB, The Global Times reported Sunday that companies based on Guangdong province may soon be able to apply for yuan-denominated loans in Hong Kong.

- Chinese banks have started to give discounted loan rates to first-time home buyers, according to state media, a potential sign of looser policy for the property sector despite nearly two years of tightening measures.

- Hong Kong’s first major IPO of 2012 fell on its first day of trading, after three large cornerstone investors helped to offset a lack of retail demand as investors remain cautious about new issues in the region.

- Copper prices neared their 2012 highs as signs of a soft landing in China helped to bolster global appetite for the commodity.

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The report warns that China’s growth is in danger of decelerating rapidly and without much warning. That is what has occurred with other highflying developing countries, such as Brazil and Mexico, once they reached a certain income level, a phenomenon that economists call the “middle-income trap.” A sharp slowdown could deepen problems in the Chinese banking sector and elsewhere, the report warns, and could prompt a crisis, according to those involved with the project.

…

The World Bank and DRC argue that asset-management firms should oversee the state-owned companies, say those involved in the report. The asset managers would try to ensure that the firms are run along commercial lines, not for political purposes. They would sell off businesses that are judged extraneous, making it easier for privately owned firms to compete in areas that are spun off.

“China needs to restrict the roles of the state-owned enterprises, break up monopolies, diversify ownership and lower entry barriers to private firms,” said Mr. Zoellick in a talk to economists in Chicago last month.

World Bank President Robert Zoellick will visit China next week to unveil the report, according to The China Daily. For more on the challanges faced by China’s economy, see also CDT Money, a weekly rundown of business and economic news from China.

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Overseas shipments decreased 0.5 percent and imports fell 15.3 percent from a year earlier, the customs bureau said on its website today. The median estimate of 30 economists was for a 3.6 percent drop in imports for the month, which had four fewer working days than January 2011 because of the holiday. The trade surplus widened to a six-month high of $27.3 billion.

Economists differed over whether the data are evidence of a slowdown in demand within China or result mainly from seasonal distortions. Commerce Minister Chen Deming said yesterday January exports “cannot make us optimistic” and the International Monetary Fund cautioned this week a deterioration in Europe could cut China’s expansion rate almost in half this year.

“Domestic demand was genuinely weak in January, while exports remained on a gradual downward trend,” said Yao Wei, a Hong Kong-based economist for Societe Generale SA.

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Based on the IMF’s “downside” forecast for the global economy, China’s growth could drop by as much as 4 percentage points from the fund’s current projection, which is for 8.2 percent this year, the organization said in a report released today by its China office in Beijing.

The outlook expands on the IMF’s warning last month that the world could plunge into another recession if Europe’s woes deepen. Premier Wen Jiabao reiterated last week his government will “fine-tune” policies to support growth amid the region’s debt crisis and the cooling domestic property market.

“China’s growth rate would drop abruptly if the euro area experiences a sharp recession,” the Washington-based IMF said. “However, a track record of fiscal discipline has given China ample room to respond to such an external shock.”

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Japan had held the No.1 position since at least 1975 until 2010, the International Energy agency’s Coal Information showed.

China, also the world’s biggest coal producer and consumer, imported 182.4 million tonnes of the fuel in 2011, 10.8 percent higher than a year earlier, data from the country showed.

Japan’s customs-cleared imports fell 5.1 percent to 175.2 million tonnes last year, hurt by slack demand for coking coal as steelmakers curbed production.

It is unclear whether China will retain this position, however, as a Reuters poll last month showed the country’s coal imports are expected to grow at a slower pace in 2012, as domestic appetite moderates and home production rises.

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In 2011, China’s gross domestic product came in at 47.1 trillion yuan ($7.4 trillion). That represented nominal growth of 17.5% from 2010, a blistering pace which makes many of the problems of debt and credit that trouble investors and hang over valuations for Chinese stocks appear a little more manageable.

Take local-government debt. The government’s own auditor put the end of 2010 number at 10.7 trillion yuan. In 2010 that was equal to 26% of China’s GDP. In 2011, it had already shrank to 22%. Even if weaker demand and reduced inflation mean a slightly lower nominal growth rate in 2012, by the end of the year it could have shrank to 19%. Local-government debt may also be creeping up, but not enough to push the ratio in the wrong direction.

Investors also worry about China’s credit binge, which saw the ratio of loans to GDP soar from 96% at the end of 2008 to 119% at the end of 2010, as loan growth ran way ahead of GDP. An expanding economy means that ratio is also moving in the right direction—down to 116% in 2011. That smaller reduction in the ratio reflects the fact that banks’ loan books continue to expand, though not quite as fast as GDP.

Indeed, better-than-expected December manufacturing data and GDP growth have indicated a soft landing for China’s economy and helped to rally global markets in early 2012. In addition, Forbes points out that commodity demand from China continues to exceed expectations. Still, writes The Economist, key indicators suggest that the makeup of China’s growth is changing:

China still runs a sizeable trade surplus. But its net exports fell in 2011 (in absolute terms) for only the third time since 2000, subtracting 0.5 percentage points from its growth. Thanks to home-grown spending, China’s economy still managed to expand by 9.2% in 2011, remaining surprisingly strong even in the fourth quarter. This growth owed an unusual amount to consumption (both public and private), which contributed over half for the first time since 2001. As a consequence, the share of consumption in China’s GDP edged up in 2011 after falling for ten years in a row.

The mainstay of China’s growth remains investment, on which its economy remains worryingly dependent. Indeed, when China’s critics are not bashing it for overexporting, they bash it for overinvestment in property. Its housing boom is, however, slowing markedly. China this week reported that the price of new homes fell in 52 out of 70 cities across the country in December, compared with the month before. Households are struggling to obtain mortgages; developers are finding it almost impossible to obtain a loan. The drying up of foreign funds is particularly dramatic, points out North Square Blue Oak, a research firm based in London and Beijing. Foreign capital fell by 65% in December, compared with a year earlier.

The flight of foreigners from property partly explains another unusual twist in the China story. Its foreign-exchange reserves fell in the fourth quarter for the first time since the height of the Asian financial crisis in 1998. The drop was small, from $3.2 trillion to $3.18 trillion, but also a little mysterious. China still exports more than it imports, and attracts more foreign direct investment than it undertakes. These two sources of foreign exchange must, then, have been offset by an unidentified drain.

The worry is that China’s capital controls have sprung a leak. “Hot money”, attracted by the country’s growth, may be flowing out as the property market falters. Some even speculate that China’s rich may begin to smuggle their new-found wealth out of the country en masse.

The Diplomat’s Rajiv Biswas also speculated on the possibility of a “Goldilocks Landing” – not too hot, not too cold – as China enters 2012.

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