Liu He, who leads the party’s Central Leading Group on Financial and Economic Affairs, has been given the task of preparing a seven-point blueprint for the Third Plenum of the 18th Communist Party Congress, which is due in about October, according to a source with close ties to several members of the Politburo Standing Committee.

If executed as intended, the new reform program would go some way to answering doubts about whether China can continue underwriting the Australian economy, including huge gas and other resource investment plans over the next decade.

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Some hedge fund managers say China’s has reached a “zugzwang” moment, referring to the predicament when a chess player must make a move but prefers to pass.

“In China policy is made when the pain of inaction is higher than the pain of action, and we’ve reached that point,” said David Hoffman, managing director of the Conference Board China Centre for Economics and Business.

[Source]

China reported disappointing first quarter GDP growth of 7.7 percent last month, as slumping factory output and soft consumption pulled the economy back from the 7.9% growth figure posted in the final quarter of 2012. But while TIME’s Michael Schuman wrote that “China’s growth model is broken and can’t be so easily fixed,” emerging markets investor Mark Mobius told the Vancouver Sun last week that concerns over China’s economic slowdown are overblown:

Q. The most recent news we’ve seen from China has focused on lower inflation and a slowdown in their economy. How much does what goes on in China weigh on the overall emerging markets sector?

A. It has an impact in Asia, of course, because you’ve seen more and more trade and investment between China and the rest of Asia. (But) China is just one part of the whole equation. Because you’ve got a huge Indian economy, you’ve got a very big Brazilian economy, a big Russian economy, the so-called BRICS. Then you’ve got Indonesia, you’ve got Thailand, many other countries that are doing quite well, and are having an impact on what’s happening around the world.

Q. What are we missing (in Canada) by focusing so much on China and the appearance of their slowdown?

A. First of all, the slowdown is kind of a misnomer because if somebody goes from 12-per-cent growth to eight-per-cent growth and they are the second largest economy in the world, that’s not a big, big problem, because they’re growing at a rapid rate. At eight per cent, in a huge economy, the actual dollar amount of increment is greater than it was five years ago.

[Source]

BBC’s chief business correspondent Linda Yueh wrote this weekend that while the services sector has grown more rapidly than other parts of the Chinese economy this year, concerns still linger:

One worry expressed to me about rebalancing towards services and focusing on consumers came from one of China’s best-known economists and the former World Bank chief economist, Justin Yifu Lin of Peking University.

He stresses that consumption should not be pursued for its own sake. The bursting of the credit bubble in America makes that point vividly. Instead, he says, consumption supported by income growth, not borrowing, is key.

He also points out that it’s not exports which are the important factor for future growth, but more government spending and investment for productive uses.

It’s all about finding the right balance. China’s economy is now fairly equally driven by services and industry, while maintaining its position as the world’s largest exporter of goods. Manufacturing is growing and not declining. China is not giving up on exports, it’s simply becoming more balanced.

[Source]

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Although there is some hope that domestic consumption will grow in line with the government’s new emphasis on this economic driver, there are also good reasons to believe that the economic slowdown will continue and likely get worse throughout the year. For one thing, these disappointing numbers came despite the economy being pumped with liquidity in March, when net new loans totaled Rmb1.06tn (US$171.2 billion).

A sustained sizeable fiscal stimulus is unlikely to be in the cards however, at least if Premier Li is to be believed. Over the weekend, for example, Premier Li told a seminar that “if interim measures have to be carried out, they should not set up barriers for promoting market-oriented reform and development in the future.”

In other words, if there is a fiscal stimulus in 2013, it is likely to be small and short-lived, given continued concern over the long-term impact of the massive fiscal stimulus the Chinese government injected into the economy in response to the 2008 financial crisis.

Li Ruoyu, an economist with the State Information Center, went further in expressing this viewpoint when comparing short-term stimulus aimed at reviving an 8 percent to “drinking poison to quench a thirst.”

The Wall Street Journal’s James Areddy and Tom Orlik note that the new austerity measures imposed by president Xi Jinping may have played a large role in the growth slide, as they report that “the days of miracles appear to be over” for the world’s second largest economy:

Less indulgence by officials “may be the largest factor” in dragging down first quarter growth, according to Lu Ting, China economist at Bank of America Merrill Lynch; 10 million of them carry government-issued credit cards that, on average, rack up annual spending of about $5,800, or a total of $58 billion, according to Shanghai research firm Emerging Asia Group

One measure of the funk is a 94% price drop for the yellow-colored dao yu, or knife fish. Two years ago, one of the Yangtze River delicacies traded wholesale for more than $220. They now cost $13.

The new austerity also is deflating luxury markets for art, liquor, entertainment and clothing.

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Many investors had anticipated a possible surprise on the upside, with growth faster than the consensus, after a surge in liquidity in the economy during the first quarter and an uptick in export growth.

The liquidity and export data had encouraged expectations that growth would accelerate again in the first quarter, after snapping seven straight quarters of weakening expansion in the previous quarter thanks to policy action to put momentum back in the economy.

“This number may well explain my there was so much liquidity support in Q1,” Tim Condon, head of Asian economic research at ING in Singapore, told Reuters.

“Industrial production is unexpectedly weak and that’s the source of weakness in GDP. Based on this, the consensus GDP forecasts are going to be headed lower and we’ll certainly be looking at ours.”

Slumping factory output and soft consumption proved the biggest headwinds, report Simon Rabinovitch and Jamil Anderlini of The Financial Times, as the economy pulled back from the 7.9% figure posted in the fourth quarter of 2012. One economist told The Wall Street Journal that “overall these figures are pretty weak,” and said the data reduced the likelihood that the Chinese government would tighten monetary policy. A spokesman for the statistics bureau, however, said that the lower-than-expected growth figure should not cause alarm. From The New York Times:

“Over all in the first quarter the economy had a steady start and has advanced in a stable way,” Mr. Sheng said at a news conference in Beijing. “Generally, it’s operating within the range of 7.4 percent to 7.9 percent — that is, steady growth.”

China’s industrialization and urbanization would remain powerful engines for relatively rapid growth, Mr. Sheng said.

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In a panel discussion on Friday afternoon, Hu told the provincial legislative congress that the gross domestic product of Jiangsu province was catching up quickly with Guangdong, according to a China News Service report.

Hu said that whichever province earned the No1 ranking for GDP growth would attract even more investment.

The comment came in stark contrast to Hu’s predecessor, Wang Yang, who told local officials a year ago to focus more on industrial upgrades and social reform, while keeping a cool head about GDP.

Echoing Hu’s remarks, the director of Guangdong’s statistics bureau, Xing Xiaowei warned that Jiangsu, whose GDP expanded by 10.1 per cent in 2012, would overtake Guangdong in 2015 “if we do not accelerate our pace”, the Guangdong party mouthpiece, Nanfang Daily, reported on Saturday.

Guangdong’s GDP grew 10.2 percent in 2012, according to a government work report released last week, tops in the nation.

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But has China’s factory sector really rebounded? Not so fast, according to The Financial Times’ Kate MacKenzie, who breaks down the individual components of the official PMI and sees a mixed underlying story. Input prices have jumped, and both new export orders and employment continue to contract (albeit both more slowly than in September). MacKenzie writes that such details “stand out to us as taking the shine off the overall positive figure”. The Wall Street Journal also scanned the analyst community and found a mixed reaction to the manufacturing data, though some wrote that the readings validated the government’s current approach to policy easing.

As observers continue to debate the direction of the Chinese economy after September and third quarter data also generated cautious optimism, Peking University’s Michael Pettis remains at the center of the debate. The self-proclaimed “China skeptic” has long-highlighted the constraints of China’s growth engine and stressed the likelihood of  a sharp and necessary slowdown as the economy shifts away from an investment and export-led model, and this past week he took on two “China bulls” in separate conversations on the subject.

NPR’s Rachel Martin interviewed Pettis and CLSA’s Andrew Rothman, who took the view that China’s rebalancing process has already commenced thanks to “significant steps” taken by the government:

ROTHMAN: Well, actually one of the reasons why I’m bullish about China is because it is slowing down. It’s very positive that the leadership of China has recognized that the two decades of 10 percent growth are no longer sustainable. And they’ve made a lot of adjustments to slow it down while still keeping income growth high. But it’s always going to be slower, a little bit slower every year for the future.

MARTIN: Michael, I assume you’re not as optimistic as Andy.

PETTIS: Well, China’s economy has been driven primarily by very high investment. Every country that has had very high levels of investment for many years has run into the problems that, at some point, additional investment creates economic activity but it actually destroys wealth. The problem is if you bring investment levels down, you need something else to replace it. And that something else is normally consumption.

But it’s extremely difficult consumption rates up quickly enough to replace declining investment rates. So we’re going to see many years of much, much slower growth as China rebalances away from investment.

With growth already retreating from the double-levels enjoyed before the financial crisis, The Wall Street Journal also asked Pettis and expert Nick Lardy if 7%-8% economic expansion is “the new normal” or if the slowdown will continue. Lardy argued that consumption has already begun to contribute more prominently to GDP, and wrote that he expects incoming leaders Xi Jinping and Li Keqiang to accelerate the pace of reform and stave off any further deterioration in China’s economic performance. Pettis, however, challenged the assumption that household consumption can continue to grow at such a strong clip and instead suggested that overall economic growth “will slow substantially in the next few years”. From Pettis’ response to Lardy:

Global and Chinese conditions are not nearly as good anymore. This means that it will be hard to maintain 7% household consumption growth even in the best-case scenario. But rebalancing in China means by definition that household consumption growth has to outpace GDP growth by at least 3 or 4 percentage points every year for the next decade just to bring Chinese consumptions levels to rates equivalent to the lowest consuming countries in the world.

This is just another way of saying that the growth contribution of investment has to drop so sharply that GDP growth cannot exceed 3% – 4% if China is to rebalance. Any higher GDP growth cannot be consistent with even a minimal rebalancing of the Chinese economy unless there is some way to force much greater growth in household consumption – i.e. much greater growth in household income – in spite of much worse global and Chinese economic conditions.

The arithmetic simply doesn’t work. China must rebalance its economy because its over-reliance on investment has become toxic. For China even to maintain GDP growth rates of even 7% to 8% implicitly requires that household consumption grow by 10% – 12%, something never before achieved even under much better economic conditions. Without a deus ex machine that turbocharges consumption growth, high GDP growth rates are incompatible with rebalancing.

Big Bad Loans

Broader economic data may point to a rebound, but disappointing corporate earnings results have blunted that outlook to an extent. From oil refiners to construction and heavy machinery giants, and from the auto industry to airlines, a number of big names have seen profits slump in the just-completed quarter.

Why? There are plenty of reasons – slumping global demand and rising labor costs, to name a couple. But The Diplomat’s James Parker also writes that China is “addicted to credit”, and notices the sharp increase in accounts receivable (money owed but not yet paid to a company by its customers) on the balance sheets of Chinese companies:

During a slowdown, it is common for payments to be delayed as everyone hangs on to cash. Some companies, though, can be tempted to avoid curtailing production by offering reluctant customers much easier credit to encourage sales, the hope being that the slump will soon end and “natural” demand will pick up again. The trouble of course is that if the slowdown is prolonged, or the recovery weaker than expected, these accounts receivable might turn “un-receivable”, and thus have to be written down as losses. An increase in A/R is expected, but such a large increase suggests that some companies have been staying in operations through this vendor financing.

The Wall Street Journal also reports that China’s state-run banks, despite enjoying double-digit profit growth in the third quarter, are bracing for an uptick in non-performing loans. Even The China Daily admits that bad loans are weighing on China’s biggest lenders, and Forbes contributor Gordon Chang goes so far as to call the Big Four banks “China’s Enrons”:

Whether they cooked the books or not, Chinese bankers have a lot to hide. To avoid the effects of the global downturn, Premier Wen Jiabao, beginning at the end of 2008, made the banks go on a spree by forcing them to abandon lending standards. That permitted China to bulk up on “ghost cities,” towering government offices in rural villages, and magnificent airports in the middle of farmland. Even after central officials supposedly reined in the loan-a-thon in 2010, lending has continued at a fast pace: new loans were up 23.7% in Q3, compared to the same quarter last year.

As a result of this “directed” lending, the banks are now carrying “assets” that cannot, in the normal course of business, be paid back. “The Mother of All Debt Bombs” is how Minxin Pei of Claremont McKenna College characterizes the risky situation. Chanos puts it this way: “Imagine a credit python,” he said. “The U.S. is the pig at the end of the snake, and China and Asia are the pig entering the snake in terms of deleveraging the banks.”

Other News:

• The China Daily reports that analysts expect the Renminbi trading band to be broadened this year.
• Real estate developers have turned their eyes back towards Beijing and Shanghai, according to Bloomberg, as opportunities wane in 2nd-Tier cities.
• Crude steel output slowed sharply during the first nine months of 2012, according to data provided by China’s National Development and Reform Commission (NDRC)
• Search engine giant Baidu reported a 60% rise in third quarter profit amid growing advertising revenue.
• China announced new measures aimed at supporting its ailing solar industry, which has suffered U.S. duties on exports over dumping claims.
• As sales growth slumps for Nike, Lee jeans and others, one private equity partner tells The Wall Street Journal that “the hypergrowth era for the apparel industry in China is over, period“.
• Toyota misfired with Chinese buyers, and the problem runs far deeper than the recent anti-Japan protests, writes Reuters’ Norihiko Shirouzu.
• Bloomberg reports that China has suspended operations at some coal mines to avoid any safety disasters in the run-up to this week’s 18th Party Congress.
• Tobacco giant Philip Morris is trying to raise its profile in China.
• Reuters reports that a Chinese sovereign wealth fund has taken a 10 percent stake in the holding company which controls Britain’s Heathrow Airport.

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The projects include highways in Zhejiang and Xinjiang provinces, according to statements on the National Development & Reform Commission’s website. The approvals were given during June-August period. The agency also cleared plans for nine sewage-treatment plants, two waterway upgrades and five port and warehouse projects, without disclosing the required investments.

Building-related stocks jumped following the announcements, which came a day after the country’s top economic planner backed plans for subway projects in 18 cities and after an increase in the rail-construction budget. The move will help accelerate infrastructure investment growth to more than 20 percent year- on-year from 15 percent, according to HSBC Holdings Plc.

“Beijing policy makers are stepping up efforts to speed infrastructure investment to hold up growth,” Qu Hongbin and Sun Junwei, economists at HSBC, said in a note yesterday. “We expect a fast filtering-through process to generate a modest growth recovery in the coming months.”

The announcement comes as a survey by Reuters which shows that China’s economy may be cooling even more in the third quarter. Is China’s current growth rate sustainable? Economist Michael Pettis responds to Steven Greenville, who last month called Pettis a “leading growth pessimist” while arguing that China’s growth potential is still underrated, and clarifies his views on the Chinese economy. From The Carnegie Endowment for International Peace:

By now most analysts have sharply lowered their forecasts to 5-7%, with the bulls still at the high end, without however explaining what they know today that they didn’t know in 2009. Debt has surged, it is true; the banking system is insolvent and increasingly illiquid; policy measures are losing traction; and wealthy Chinese are pulling money out of the country. But these were long predicted by the sceptics as automatic consequences of the investment-heavy growth model China had pursued for too long. None should have been unexpected.

Of course I think the current consensus of 5-7% average growth for the next ten years is still too high, and the historical precedents make it clear that we tend to underestimate sharply the cost of an adjustment of this nature (think for example of the USSR in the early the 1960s, Brazil in the late 1970s or Japan in the late 1980s, all of whom suffered far more difficult subsequent adjustments than even the sceptics had expected). Already this year Beijing has announced growth rates for China of 7-8%, but a large number of economists in China, based on alternative measures of economic activity, doubt the accuracy of the official numbers, with some arguing that real growth this year may be as low as half the posted rates.

I am not smart enough to say if they are right or wrong, but one way or the other I expect growth forecasts among China bulls to continue declining over the next few years. If, as I expect, Beijing seriously begins to rebalance its economy in 2013, I believe as I always have that the average annual growth rate over the following ten years will not exceed 3-4%.

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In the letter, experts point out that including such terms breaches the Law on the Standard Spoken and Written Chinese Language and the Regulation on the Administration of Publication.

The collection of terms using Latin or Greek letters in the dictionary violates the law, which stipulates that publications in Chinese should conform to generally-followed criteria and standards of the language.

“Listing those terms and replacing Chinese characters with letters in such a dictionary, which is supposed to be an exemplary linguistic standard, deals the most severe damage to the Chinese language in a century,” Li Minsheng, a researcher with the Chinese Academy of Social Sciences, said Monday.

‘NBA’ was also among the English abbreviations proscribed by a 2010 directive from “a relevant Chinese government department” to national and local broadcasters. The ban apparently did not apply to the logo of state broadcaster CCTV.

Xinhua’s report on the petition points out that Chinese has already adopted many terms from Japanese, including ‘dang’ (political party), ‘jieji’ (social class) and ‘douzheng’ (struggle). But the scholars’ complaint is less about foreign loans than the preservation of Chinese script, the defining expression of the Chinese culture. From Xinhua:

Fu Zhenguo, a senior journalist with the state-run People’s Daily and one of the organizers of the petition, said that if the Chinese people ignore the inclusion of words like “NBA” and “GDP” in their language and do nothing to exclude them from the dictionary, the language they use will end up as a bizarre mixture of Chinese and English.

[…] “If they keep growing, we could have over 10,000 English entries in 100 years,” said Fu, who has instead proposed translating English words into their Chinese equivalents before including them in the dictionary.

“When the English language absorbed the Chinese vocabulary, it used pinyin, the phonetic system that romanizes Chinese characters, instead of the Chinese characters themselves,” he said.

“So why do we take in these English acronyms and words without translating them into Chinese characters?” he asked.

The protesters’ vehemence echoes 20th century discussions of writing reform, in which a comprehensive shift to alphabetic script was proposed on grounds of efficiency and modernity. That argument is long dead, but those fighting to keep the Roman alphabet out of Chinese face an uphill battle. One major beachhead is technology and the Internet, where alien letters spill over from URLs and pinyin character entry into online slang and culture (from Ministry of Tofu, via Eveline Chao). From Didi Kirsten Tatlow at The New York Times:

William C. Hannas, a linguist and author who speaks or writes 10 languages including Chinese, says the debate on going to an alphabetized writing system, which flourished into the 1950s, is over.

“There is no debate in China — or anywhere today — on writing reform,” he wrote in an e-mail. “We resent being asked to give up a tradition, or hearing from an outsider especially, that a piece of our identity is flawed.”

Nevertheless, something along those lines is happening unofficially, he says.

Especially online, Chinese are experimenting with the Roman alphabet: government, “zhengfu” in pinyin, is often shortened to “ZF.” An interpersonal competition is a “PK” (taken from video game terminology). To digitally alter images with a program like Photoshop is to “PS.” To make love is to “ML.”

“Digraphia — the coexistence of character and alphabetic writing — is happening in China not by policy from the top down, but by default from the bottom up,” Mr. Hannas wrote.

See more on changing language and the eternal treadmill of dictionary updates via CDT, as well as our Grass Mud Horse Lexicon and Word of the Week series.

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Even with Beijing having already taken steps in the second quarter to offset slumping exports and boost domestic consumption, including its first interest rate cut since late 2008, The Wall Street Journal reports that analysts believe the government still has more tools left in its policy arsenal:

“There should be [another] cut in interest rates and in the bank-reserve ratio in July,” said Sheng Hongqing, senior economist at China Everbright Bank. “The export situation is very difficult.” Other economists were also anticipating more monetary policy moves ahead. “The government hasn’t done enough in terms of policy easing,” said Wei Yao, China economist at Société Générale.

A Reuters piece out Monday asserts that no bottom is in sight as China looks increasingly likely to miss its 2012 growth target. But as bearish as recent data appear, could the real situation on the ground actually be worse? In a New York Times piece over the weekend, Keith Bradsher points out that while doubts have persisted for years about the accuracy of Chinese economic data, this is the first time in several decades that a slowdown has coincided with a leadership change at the top of a Communist Party regime that has long-relied on economic growth for its legitimacy and social stability. As a result, local and regional officials with an eye toward promotion may be fudging the numbers:

Record-setting mountains of excess coal have accumulated at the country’s biggest storage areas because power plants are burning less coal in the face of tumbling electricity demand. But local and provincial government officials have forced plant managers not to report to Beijing the full extent of the slowdown, power sector executives said.

Electricity production and consumption have been considered a telltale sign of a wide variety of economic activity. They are widely viewed by foreign investors and even some Chinese officials as the gold standard for measuring what is really happening in the country’s economy, because the gathering and reporting of data in China is not considered as reliable as it is in many countries.

…

“The government officials don’t want to see the negative,” so they tell power managers to report usage declines as zero change, said a chief executive in the power sector.

Another top corporate executive in China with access to electricity grid data from two provinces in east-central China that are centers of heavy industry, Shandong and Jiangsu, said that electricity consumption in both provinces had dropped more than 10 percent in May from a year earlier. Electricity consumption has also fallen in parts of western China. Yet, the economist with ties to the statistical agency said that cities and provinces across the country had reported flat or only slightly rising electricity consumption.

Accusations of financial fraud weren’t only reserved for Chinese public officials last week, as one of China’s largest property developers came under fire in a scathing research report rife with allegations of accounting irregularities, bribery and insolvency. Short seller Citron Research published a 57-page report on Thursday about Evergrande Real Estate Group, a Hong Kong-listed company whose property assets have grown 23x since 2006. The report calls out “at least 6 accounting shenanigans” used to hide an actual equity value well less than zero. From the report:

Over the past 5 years, Evergrande has executed an untoward program of bribes aimed at local government officials in order to build its raw land industry. To finance growing cash flow shortfalls related to these bribes, subsequent land purchases, and related real estate construction activities, Evergrande has employed a complex web of Ponzi-style financing schemes. These schemes are characterized by a reliance upon perpetually growing pre-sales, off-balance sheet partnerships and IRR guarantees to third parties.

Evergrande’s business model is unsustainable, and is showing signs of severe stress. Management is working hard to cover-up the company’s precarious and rapidly deteriorating financial condition. However, with presales and condo prices now falling rapidly, with its income statement and assets materially overstated, and with its off-balance sheet guarantees looming as more and more imminent liabilities, our analysis suggests that the cover-up has entered its final inning.

Evergrande’s share price plunged following the report’s dissemination, and the company denied the accusations in a brief statement to the Hong Kong Stock Exchange on Thursday while reportedly considering legal action against Citron. A number of global investment houses published on the incident and questioned the validity of the report, with some even reiterating their “buy” rating on the stock, a fact that Evergrande hurried to point out in a stronger statement on Friday titled ““Eight Famous Investment Banks Support Evergrande to Dispel Rumors Spread by A Short Seller.” Reuters even reported that Evergrande had explored buying back some of its shares on the open market after the beating they took on Thursday, a move that aimed at further bolstering

Still, the damage was arguably done anyway. At a time when Chinese companies are suffering perhaps their greatest crisis of credibility in years, Evergrande joins a list of scandal-ridden companies that includes names such as Sino Forest, ChinaCast Education and SinoTech Energy. The difference is that the others were small and obscure companies while Evergrande ranked 5th in market capitalization among Chinese property names before the report. Sino Forest was a junior county-level cadre to Evergrande’s Politburo heavyweight.

Sino Forest, ChinaCast and SinoTech were, however, listed in the United States, where Patrick Chovanec writes that regulators may have to forcibly delist every Chinese company unless they can reach an agreement with China on a satisfactory way to deal with fraud investigations going forward. While such a “nuclear option” is unlikely, Chovanec writes that few investors or politicians have seriously considered the possibility:

Rather than assisting the SEC in its cross-border probes — as other countries regularly do — the China Securities Regulatory Commission (CSRC) has actively blocked the SEC’s information requests, insisting that audit materials on Chinese firms fall under China’s ambiguous yet draconian State Secrets Law. This April, when the SEC issued a subpoena to the Chinese arm of Deloitte, demanding the audit records of Longtop Financial (which collapsed last May after Deloitte resigned as its auditor), Deloitte refused, noting that the CSRC directly ordered them not to turn over such papers. The firm argued it could be dissolved and its partners jailed for life if they were to comply. In May, the SEC responded by initiating administrative proceedings to punish Deloitte China for violating its duties under the 2002 Sarbanes-Oxley Act. Penalties could include suspending the firm’s authority to perform audits for US-listed companies, which are required under U.S. securities laws. Apparently similar subpoenas have been issued to each of the other “Big Four” global audit firms (E&Y, KMPG, and PWC), and have met with similar replies.

There is a further complication.  The Sarbanes-Oxley Act established the Public Company Accounting Oversight Board (PCAOB), a five-person body appointed by the SEC.  Public accounting firms that wish to perform audits on US-listed companies must register with PCAOB, and PCAOB is required, by law, to conduct inspections of those firms.  So far, Chinese authorities have refused PCAOB permission to inspect auditors based in China, including the local arms of “Big Four” global audit firms.  Last month, it looked like PCAOB might have worked out a compromise that would let it observe Chinese regulators perform their own inspection, but the SEC action against Deloitte China appears to have derailed that plan.   The stage is set for a deadlock with serious, potentially disastrous implications, as my fellow CPA and Peking University counterpart Paul Gillis describes in his blog:

The PCAOB faces a December deadline to complete inspections of Chinese accounting firms that are registered with the PCAOB. It seems highly unlikely that they will meet this deadline, since Chinese regulators will not let them come to China. While the PCAOB could extend the deadline, they have already been under political pressure to act … Without resolution, the only meaningful option for the SEC, and the PCAOB, is for the PCAOB to deregister the firms and for the SEC to ban them from practice before the SEC.

The consequence of those actions would be that U.S. listed Chinese companies would be without auditors and unable to find them. Having an auditor is a listing requirement of the exchanges, so under exchange rules the companies face delisting. The U.S. listed Chinese companies would be unable to file financial statements as required. That should lead the SEC to eventually deregister the companies with the SEC.

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People’s Bank of China (PBOC) Governor Zhou Xiaochuan wrote back in March that conditions were “basically ripe” for interest rate liberalization, and former PBOC adviser Li Daokui also claimed in a  March speech that banks were big enough to fend for themselves. The policy move suggests, to an extent, that Beijing agrees. Banks now have greater flexibility to set the rates that they offer to savers (up to 1.1x the deposit rate, vs. 1.0x before) and borrowers (as low as 0.8x the lending rate, vs. 0.9x before), which will give households more reasons to put their cash in the bank and will allow banks to offer more attractive terms to potential borrowers.

The Wall Street Journal’s Tom Orlik writes that the policy move “hasn’t come a moment too soon” and will help ease the problems caused by the existing system:

Low interest rates for savers have triggered an exodus of funds from the banking system into new wealth-management products—short-term investments offering some of the security of a deposit but with inflation-beating returns. Assets invested in these products have grown from almost zero a few years ago to equal roughly 10% of deposits in the banks by the end of 2011, according to some estimates. As a consequence, the banks are starved of deposits, making it difficult for them to ratchet up lending to support growth.

Thursday’s move will also help to alleviate a problematic inflexibility on the lending side. In the past, banks could lend at a discount of up to 10% of the benchmark lending rate. But that discount has proved insufficient to attract borrowers, with major customers facing lower returns on investment. Medium and long-term loans to business were down 45% year-to-year in April.

The IMF hailed the adjustment in monetary policy, but not everyone applauded the news. CNBC Market Watch’s Craig Stephens warned that it could do more harm than good, and investors sold off Chinese bank shares on concerns that the rate cut would squeeze profits. Beyond that, attention quickly turned to the weekend and several key pieces of May data scheduled for release. Exports (+15.3%) and imports (+12.7%) both saw strong year-on-year increases, beating expectations and widening China’s trade surplus, though one economist told The Wall Street Journal  “it is doubtful” that the growth could be sustained into the summer due to the economic turbulence in Europe. Most importantly, China’s National Bureau of Statistics announced that consumer prices rose just 3%, a two-year low. Bloomberg reports that the figure should help assuage fears that more loosening will lead to price spikes. While Beijing has battled high inflation in the past year, writes David Pierson of The Los Angeles Times, focus can now shift to buoying the economy.

Still, retail sales grew at their slowest rate since 2011 and factory output continues to hover just above three-year lows. Given that the country faces sub-8% GDP growth in the second quarter and possibly its lowest full-year growth level since 1999, will the door remain open for increased monetary policy support? Economist Ding Shuang told Bloomberg today that he expects up to two more interest rate reductions this year, part of an “aggressive” easing strategy:

The expansion this quarter may be “very weak” at 7 percent to 7.5 percent, Ding said after the government announced data for industrial production, inflation, fixed-asset investment and exports over the past two days. Better-than- forecast trade growth in May may not be sustained as a likely recession in the European Union restrains demand, he said.

The central bank last week cut rates for the first time since 2008 in what Ding said was a “very strong signal of more aggressive policy easing.”

Overseas shipments climbed 15.3 percent in May from a year earlier, the customs bureau said yesterday, exceeding all 29 estimates in a Bloomberg News survey. Industrial output rose by less than 10 percent for a second month and retail sales increased the least in almost six years excluding holiday-month distortions, statistics bureau reports showed June 9.

Any Bulls Out There?

Despite the weak data and fears of a hard landing, not everyone is a bear on China. Business Insider notes that one research analyst expects signs of stabilization, and The Wall Street Journal reports that U.S. and other global fund managers are shrugging off the red flags and upping their bets on China:

Fund managers and financial advisers who increased their exposure even higher concede that China’s period of double-digit growth may be over. But, they add, the country’s long-term growth prospects—estimated at more than 8% by the World Bank—still trump many other markets and should continue to boost profits and eventually share prices.

Many also are encouraged by recent steps taken by Beijing to spur growth by loosening bank-reserve requirements and speeding up the approval process for infrastructure projects.

“Every year it seems there’s a growth scare from China, and every time it has been a buying opportunity,” says Mike Avery, co-manager of the $26.9 billion Ivy Asset Strategy fund, which recently raised its China stake to 20% from 18% at the end of last year.

Indeed, with Chinese stocks down about 12% over the past year, pros say many are trading at bargain prices. The MSCI China index, which tracks large- and mid-cap Chinese companies, trades at eight times next year’s earnings, about a third below its 10-year average. “China is safely cheap right now and gives you tremendous room for error,” says Jeff Everett, manager of the $360 million Wells Fargo Advantage International Equity fund. He has doubled the fund’s exposure to China and Hong Kong to about 10% since taking over the fund this year.

Fuel Prices Cut

While the PBOC’s rate cut attracted an understandably large amount of attention, it wasn’t the only move made by the government to fight the slowdown. China cut fuel prices by nearly 6%, the second reduction in a month and the largest since late 2008, in a move described by the National Development and Reform Commission as made in response to the global slump in crude oil prices. One former policymaker, however, told The China Daily that reform is still needed to allow China’s fuel prices to move with the rest of the world:

Under the current mechanism, started in 2008, the government may adjust fuel prices if the average movement of the three reference markets’ oil prices change 4 percent.

The current pricing program remains complex and not nimble enough to reflect global crude oil prices, said Zhou Dadi, former director of the NDRC’s energy research institute, adding that further reform to reflect supply and demand is a must.

The government may take the opportunity of global price drops to narrow the gap between international and domestic crude charges, and then introduce reforms to avoid volatility and market speculation, JYD’s Han said.

The revamp of the current pricing program is now just a matter of time, said Han Wenke, director of the NDRC’s energy research institute, and a guest China Daily economist.

Who stands to lose from the fuel price cut? China’s biggest oil refiners, according to Bloomberg,

Other News

• Beijing is preparing for a possible Greek exit from the eurozone, reports The China Daily, with hopes that China’s economy can cushion the blow of a worst-case scenario.
• Meanwhile, The Wall Street Journal reports that Hong Kong’s tycoons are doing their best to prop up the city’s real estate market.
• Although one investment bank thinks that China may ease property curbs to support growth, a government official tells Xinhua News that the property cooling measures are here to stay.
• China’s Banking Regulatory Commission has delayed plans to tighten banks’ capital rules until the beginning of next year, according to Bloomberg.
• The Wall Street Journal details the challenge facing China’s labor market: a lack of workers.
• The Financial Times highlights the plight of Chinese heavy equipment makers as they continue to delay Hong Kong IPO plans.
• Chinese temples may have to table their hopes of listing on a public stock exchange, according to one official.

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The Financial Times’ Kate Mackenzie summed up the situation early last week:

Two things that we know so far… sort of:

- It probably will be along the lines of the previous stimulus in that it will focus on infrastructure, construction projects, and some consumer purchase incentives.

- It definitely won’t be as big as the last stimulus which kicked off in 2008 and totalled Rmb4tn. And official media report puts the new one at Rmb1tn.

Without much visibility into the details of Stimulus 2.0, the government began to make policy announcements this week aimed at promoting growth. The State Council has agreed to revive a “cash for clunkers” program that gives consumers financial incentive to trade in their cars, the Ministry of Industry and Information Technology hinted at a possible five-year plan for the biotechnology industry, and the Ministry of Finance announced that it will offer subsidies ranging from 100 to 400 yuan on energy-efficient televisions and air conditioners sold beginning June 1. In fact, The Wall Street Journal reported on Tuesday that the government has already fast-tracked a number of investment projects for approval this year:

In the first four months of the year, China’s economic planning agency, the National Development and Reform Commission, has approved more than twice as many investment projects as it did in the same period a year earlier, an analysis by The Wall Street Journal reveals.

…

In the first four months of the year, the NDRC, which screens all large investment projects, approved 868 of them, up from 363 a year earlier, according to public notices posted on its website over the course of the year. That included 254 projects in April alone—up from 213 in March and more than three times the 74 projects approved in April of 2011.

The investment projects range from new steel mills to hospitals and water-treatment plants to clean-energy projects. The rapid pace of approvals appears to have been sustained in May, although the full data won’t be available for some weeks, as the NDRC often delays official announcements after approvals have actually been granted.

Amid all of the stimulus talk, data from China seemed to only confirm the bearish prognosis for the economy. The official purchasing manager’s index (PMI) reading for May snapped five straight months of growth and fell back to 50.4, just north of the 50 mark that signals the difference between an expansion and contraction for China’s factory sector. After diverging for months with the unofficial HSBC flash PMI, a survey which focuses more on the health of smaller private enterprises as opposed to state-owned manufacturers, the two readings are now pointing in the same direction.

Observers have expected additional tweaks to monetary policy to accompany any fiscal stimulus, including further reductions in the reserve requirement ratio. But with inflation seemingly under control, and despite warnings from Chinese economists against easing policy too quickly, the Shanghai Securities Journal reported that China may cut interest rates sooner rather than later. From The People’s Daily:

Peng Wensheng, chief economist with the China International Capital Corp, told the newspaper that the central bank is highly likely to slash interest rates soon, and may further cut banks’ reserve requirement ratio as many as three times within the year in an effort to stabilize the real economy.

The manufacturing purchasing managers index (PMI) ended five straight months of growth in May and retreated to 50.4 percent from 53.3 percent in April, the China Federation of Logistics and Purchasing said Friday. Zhang Liqun, a researcher with the Development Research Center of the State Council, said the retreat of the PMI was in line with the country’s slowing economic growth.

Zhang was quoted by the newspaper as saying that China is likely to further lose steam with a decline in the sub-index for new orders, pointing to even weaker future factory activity.

Foreign Listings Closer to Reality

Reuters reports that China is weighing the possibility of allowing overseas companies to list on its domestic stock exchanges and raise funds from local markets:

The government will draft rules for overseas firms to list in China and make necessary preparations for the opening, according to the documents signed by eight government departments, including the top planner, the National Development and Reform Commission.

China has been talking about the launch of an international board in the Shanghai Stock Exchange to encourage foreign listings. It was about to kick off the new board in the second half of last year but the move was delayed by the erupting euro zone debt crisis.

…

The government would also consider letting foreign organizations issue bonds, mutual funds, while expanding the channels for domestic investors to invest in overseas securities, the document said.

China has so far permitted only a handful of international organizations to sell limited numbers of bonds in the country, while Chinese citizens are allowed to trade foreign securities only via the Qualified Domestic Institutional Investors (QDII) in a limited quota system.

Property Market Close to the Edge?

The China Daily reports that housing prices in China have fallen to a 16-month low. From over-investment to funding problems to upcoming debt maturities and sluggish sales, The Financial Times’ Kate Mackenzie asks whether Chinese real estate has reached a tipping point:

Chinese real estate investment reportedly rose 23.5 per cent in Q1, year-on-year. And yet new construction rose only 0.3 per cent and sales of residential and commercial property fell 14.6 per cent. As Patrick Chovanec points out, despite accounting for the aforementioned 13 per cent of GDP, there was little questioning of the incongruence of these Q1 2012 numbers which showed steeply rising investment in a sector that was actually shrinking in terms of revenue.

And yet, while we and others have wondered about a wave of developer defaults was imminent, there’s been only the occasional reports of smaller developers running into difficulties.

It *might* be about to change, however. Inventories are well past the 12-month mark and are forecast to reach about 36 months by the end of this year, according to Standard Chartered. Last week we wrote about some research from Nomura arguing that a month-on-month collapse in housing starts in April (down 27 per cent) signalled a turning point.

Other News

• While foreign investment into China may be waning, Chinese companies are expected to invest a total of $500 billion overseas in the five years ending 2015, according to an official with the Ministry of Commerce.
• The Wall Street Journal’s Tom Orlik challenges the prediction that overcapacity in China’s industrial sector may cause a wave of bankruptcies.
• The vice-chairman of China’s National Development Reform Commission (NDRC) banged the domestic demand drum when discussing economic growth on Friday.
• It’s been a record year for Chinese Domestic M&A, reports The Wall Street Journal.
• China and Japan have begun direct trading of their currencies, according to a China Daily report, making the yen the only currency other than the US dollar that trades directly with the yuan.
• A Chinese industry group denounced potential U.S. tariffs on Chinese wind turbine towers, according to The Wall Street Journal.

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In this model, the Chinese state collects an excessive amount of revenue (the current estimate puts effective aggregate taxes at nearly 35 percent of GDP), provides inadequate social services, and allocates most of the capital inefficiently through a highly politicized banking system (in which loans are made on the basis of government policy and political connections, not market principles). To use a medical metaphor, this model is the cancer that will kill China’s long-term prosperity.

By all accounts, the Chinese people have already paid a huge price for this cancer. Their share of the national income has fallen to 42 percent of GDP. That is why Chinese household consumption, at 35 percent of GDP, remains the lowest of the world’s major economies. The investments made by the Chinese state may have given the Communist Party a lot of prestige (think of the country’s modern infrastructure and ambitious high-tech plans), but delivers preciously few real benefits to its people. Chinese state-owned enterprises have thrived because of their access to practically free capital, but their efficiency remains abysmal compared with domestic private firms or their Western rivals.

In a crisis, a far-sighted government should have the courage to push through tough reforms and remove these “cancerous cells” in the Chinese economy. So today, Beijing must try a different strategy to revive its growth. Tax cuts, deregulation, privatization, and increasing funding for social services can all help raise domestic consumption and promote growth. The other option – repeating the folly of stimulating the economy through state-led investment – would make China’s economic cancer all but incurable.

More negative news arrived for China’s factory sector today, with the official purchasing managers’ index (PMI) falling more than expected in May.

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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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China’s trade partners feel the pain of “deceleration” in both directions, including the ports of Southern California. And with China’s economic growth under siege both at home and abroad, economists don’t believe Saturday’s RRR cut will solve the economy’s problems by itself and instead see it as a prelude to a broader economic stimulus policy by the government. From The New York Times:

“We expect more aggressive delivery of policy stimulus via quantitative easing, substantial tax breaks, fiscal spending and investment deregulation in the coming months to ensure a soft landing,” Qu Hongbin, the co-head of Asian economic research at HSBC, said in a report.

…

Interbank lending rates have been sinking in China, a sign that the banks have plenty of spare cash even without being told that they can hold smaller reserves.

The cut in the reserve ratio should be seen “more as a signaling device used by the government to show its willingness to loosen policy in light of the significant weakening in activity growth in April,” Yu Song, an economist at Goldman Sachs, wrote in a research report.

The state-run China Securities Journal hinted on Monday that any broader economic stimulus package would likely involve another RRR reduction, but MarketWatch’s Craig Stephen pointed out that attempts to expand lending might be met by a “demand deficit” as the amount of profitable investment opportunities continues to shrink. Still, Reuters reports that economists had already rushed to update their growth forecasts after the week’s bad news:

“We were wrong and we revise down growth forecasts,” was the straight-to-the-point heading in the message line of an email sent to clients by Ting Lu, China economist at Bank of America/Merrill Lynch in Hong Kong after Friday’s torrent of data drowned his call of a Q2 GDP bounce to 8.5 percent.

He now expects growth of 7.6 percent in Q2 and 8 percent for the year versus 8.6 percent previously. The consensus forecast for 2012 growth in the benchmark Reuters poll before Friday’s data was 8.4 percent.

Lu is struggling to understand why the April data was so far away from market expectations and thinks a new reporting system requiring China’s 700,000 biggest manufacturers, representing 90 percent of the total value added in the factory sector, to submit numbers directly the National Bureau of Statistics in Beijing – rather than local offices – might be the root cause.

Whatever is behind the drop-off, the new consensus view is that Beijing will have to raise its game to stop the rot.

With research analysts across the street cutting growth forecasts, and with the ongoing political standoff in Greece weighing even further on the confidence of investors, mainland stocks fell to their lowest level in three weeks on Monday and slid again on Tuesday to a 1-month low.  China’s Ministry of Commerce poured fuel on the fire by announcing on Tuesday that foreign direct investment (FDI) declined for a sixth straight month in April. Whether because of a lackluster global economy or a slowing Chinese machine, or both, one economist told Bloomberg TV that all signs seem to point in the same gloomy direction:

“Trade data was bad, production data last week was bad, and this time FDI is also pointing to the same direction,” Zhang Zhiwei, chief China economist with Nomura Holdings Inc. in Hong Kong, said in a Bloomberg Television interview today. The reports show a “very weak economy at this moment,” with chances of an interest-rate cut rising though “still below 50 percent,” Zhang said.

In his Bloomberg View column, William Pesek writes that “nobody beats the system” and reminds anyone who hoped for unimpeded economic growth in China that “no industrializing nation has ever avoided a financial crisis.” Even The China Daily noted that the slowing growth rate is “within expectations” though not indicative of a hard landing. Tsinghua University’s Patrick Chovanec told The Financial Times that despite the desire of many to write off a slow first quarter as “just a little dip,” April’s data shows that “those forecasts were mostly a triumph of hope over reason”:

“China’s been riding an investment boom over the last three years that everyone recognised was unsustainable and now we’re seeing what unsustainable looks like,” Mr Chovanec says. “The unravelling of this investment boom is happening with nothing to replace it and that means China is in store for much lower GDP growth than we’ve become accustomed to.”

Spotlight: State-Owned Monopolies

China made another move to limit the dominance of state-owned enterprises this week, part of its plan to structurally reform the economy, as the Supreme Court established new rules that will open the door for more antimonopoly challenges and allow plaintiffs to more easily make their case. From The Wall Street Journal:

The rules, which will go into effect June 1, are meant to “improve the competitiveness of enterprises and promote the healthy development of a socialist market economy,” said a court statement issued Tuesday.

Legal experts say the rules will lower the burden on plaintiffs to prove the existence of a monopoly. They also appear aimed at addressing mounting pressures from both inside and outside China to scale back the power of the nation’s vast state-owned firms and make way for more competition from private companies.

…

The new rules say plaintiffs in antitrust cases can now prove a defendant’s market dominance by using a defendant’s old and existing company statements, press releases and website information that state its leading market position. Third-party market analysis can also be used if agreed on by plaintiffs and defendants, and if an agreement can’t be reached the courts will appoint an expert, the rules say.

Luxury Brands Still Growing:

Amid the market slowdown, The China Daily reports that international luxury brands such as Gucci recognize the need to retool their China strategy:

“Yes, the rate of expansion will be slower than in the previous years,” Patrizio di Marco, president and CEO of Gucci, told China Daily.

Some other luxury brands, including LV and Chanel, will also slow their expansion in China starting this year, business analysts said.

Rather than just expanding their stores in China, the leading luxury brands are starting to pay more attention to upgrading their current stores.

Despite the slowdown, Gucci will relocate and enlarge some of its stores in China.

“It’s not (store) numbers, it’s how you engage with your customers that counts,” Di Marco said.

While growth in the sector may continue to slow, and several potential roadblocks exist, a new report by CLSA Asia Pacific Markets expects that China will continue to lead the global luxury boom. From The Wall Street Journal:

Mainland-Chinese customers generate roughly one-third of Gucci and Prada’s world-wide sales, he added, and it’s not uncommon for rich Chinese to spend one-quarter of their disposable income on luxury goods.

They are also, Mr. Fischer pointed out, becoming more discriminating. Gucci and other retailers are stocking fewer logo-emblazoned items in their Chinese stores as shoppers begin to gravitate to more subtle displays of wealth.

Other News

• Hong Kong’s securities regulator has proposed new rules that would leave banks criminally liable if they act as IPO sponsor for a company that lies to investors.
• The Chinese government cut fuel prices for the first time since October, a move which helps motorists but will hurt the bottom line of the country’s oil refiners.
• China’s National Development Reform Commission has ruled that private equity funds must raise 100% of their money from local sources if it wants to be treated as a local fund, a blow to foreign firms who already face a higher hurdle than their mainland counterparts.
• At Berkshire Hathaway’s annual shareholder’s meeting this weekend, Warren Buffet was asked how long it would take for China to see a great company like Coca-Cola.
• Swiss banking giant Credit Suisse will move bankers to the mainland and apply for a stock trading permit as it seeks to take advantage of looser restrictions on foreign investment banks in China.
• Ford is trying to play catch-up with its rivals in China but faces headwinds, according to Reuters.

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The People’s Bank of China, the country’s central bank, said in a statement published on its official website that the floating band in the inter-bank spot foreign exchange market will be enlarged from 0.5 percent to 1 percent effective April 16.

To keep the exchange rate stable, the PBOC has set a daily reference rate for the yuan and it will be allowed to fluctuate only to the daily limit on either side of the reference rate. The trading range was widened to 0.5 percent from 0.3 percent in May 2007.

It also raised the spread between dollar selling and buying prices offered by the foreign exchange-designated banks to their customers to 2 percent of the reference rate, from the current level of 1 percent.

News of this announcement was widely supported by the International Monetary Fund (IMF) as it promoted market transparency and economic stability. From CBS Market Watch:

Christine Lagarde, managing director of the International Monetary Fund, welcomed the move.

“This underlines China’s commitment to rebalance its economy toward domestic consumption and allow market forces to play a greater role in determining the level of the exchange rate,” Lagarde said in a statement.

The scale of the widening is bigger than the 0.7% the market had expected, according to Ting Lu, a China economist at Bank of America Merrill Lynch, in emailed comments.

Earlier this week, China Securities Regulatory Commission increased the quotas for foreign institutional investors from $30 billion to $80 billion. This move highlights a strategic economic shift from an export model to a consumption model. From Bloomberg News:

China, the world’s second-biggest economy, has pledged this year to free up control of the yuan and liberalize interest rates as the government deepens reforms to revive growth and offset slowing exports and a cooling housing market. China needs to rely more on markets and the private sector as its export- oriented model isn’t sustainable, World Bank President Robert Zoellick said in February.

“More action on opening up their markets to outside investment is definitely a positive,” Jeff Papp, a senior analyst in Lisle, Illinois at Oberweis Asset Management Inc., which oversees about $700 million, said in a phone interview. “It’s not a huge amount. They’re taking a small-steps approach to see how markets will react with more participants.”

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Post tags: China Securities Regulatory Commission, currency revaluation, foreign investors, GDP, imf, QFII, Yuan rate
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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

© Sophie Beach for China Digital Times (CDT), 2012. | Permalink | No comment | Add to del.icio.us
Post tags: defense budget, economic growth, GDP, NPC, npc 2012, Wen Jiabao
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