1. China’s political system has the efficiency and consensus to produce far-sighted decisions that Washington can only envy. Faced with our own gridlock and polarization, Americans are understandably eager to find a rhetorical cudgel, and we entered 2012 repeating the line that Chinese leaders had become all that ours were not: ambitious, visionary, willing to pull for a larger purpose. In last year’s State of the Union, President Obama invoked China as the “home to the world’s largest private solar research facility, and the world’s fastest computer. “So, yes,” Obama said, “the world has changed.” And he was not wrong. But this year added some sobering facts about the haste, waste, and corruption associated with China’s Great Leap. When a bridge collapsed in August, killing three people and injuring five, it was the sixth bridge collapse in a little over a year. The authorities blamed overloaded trucks, but it turned out that the concrete had been adulterated with sticks and plastic bags, the kind of corner-cutting that Chinese regulators have found in the nation’s enormous railway construction project. For this and other reasons that follow, the myth of China’s political efficiency can be retired.

10. Local bureaucrats might be corrupt, but decision-makers at the top are carefully selected and have deep public approval. “If we speak candidly,” wrote Deng Yuwen, a deputy editor of the Party-run newspaper called Study Times, “this decade has seeded or created massive problems, and the problems are even more numerous than the achievements.” The Bo Xilai debacle exposed a gangland element to Party politics that reaches to the top, and the revelations about Wen Jiabao’s family wealth leaves no doubt about the extent of self-dealing. Inside and outside the Party, reformists are calling not only for economic liberalization but also for credible efforts to end the two-tiered society, to resume political reform, and to narrow the widening wealth gap. China faces more urgent threats to growth and social stability than any time since the uprising at Tiananmen Square, in 1989. Between 2006 and 2010, the number of strikes and riots and what Chinese officials call “mass incidents,” doubled to a hundred eighty thousand a year—and that will continue to grow until the political culture improves.

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On-campus recruitment ad from cell phone manufacturer Xiaomi.

As China’s breakneck rate of economic growth finally begins to slow, some analysts are holding their breath for the country’s “hard landing.” There are signs that direct foreign investment, consumption and other important indicators are on a downturn. For the country’s college students, their future after graduation is uncertain. On top of all this, the government may be under-reporting the slowdown:

You know, China’s an enormous country with a lot of regional variations. But one economist based in Tsinghua University, Patrick Chovanec, says that in some areas, he thinks that growth for the whole year might only be 4 to 5 percent; that in fact, these official numbers don’t reflect the extent of the slowdown.

The anonymous BBS forum post below describes a sharp decline in on-campus recruiting at Nankai University in Tianjin, a coastal city not far from Beijing. It compounds Chovanec’s concern, adding that the media have remained upbeat in order to smooth the path for “The Meeting” (last week’s 18th Party Congress). The post seems to no longer be available on NewSMTH.net (水木社区), where it first appeared. But if the censors decided it painted to bleak a picture, then it has years of post-graduation struggle to erase:

On November 7, a report on the employment situation from the Nankai University Employment Counseling Center circulated online. The report shows that Nankai graduates are facing very serious difficulties finding jobs this year. Netizens speculate that college graduates across the nation are also facing formidable challenges.

This year’s employment situation is unusually grim in that:

(1) The number of employers recruiting on campus has decreased by more than 40% compared with this time last year. The number of employers that have reserved space for on-campus recruitment in November and December has also declined sharply compared to previous years.

(2) In previous years, several non-local talent-hunting fairs would organize employers to come to our school and other universities for recruitment. More than a hundred employers would eagerly sign up. But this year, it is generally difficult to find just ten employers to participate.

(3) We learned through communication with some conglomerates that many viable enterprises are recruiting less because they face mergers and reorganization. For example, ZTE used to easily make dozens of job offers at our school, but made only three this year.

Because of The Meeting and other reasons, the media haven’t reported too negatively on the situations of the economy and employment this year. But just as the Employment Counseling Center has seen, the reality is the worst in the last eight years. Even during the financial crisis of 2008-2009, we did not experience such an impact.

Read more about the Chinese economy from CDT.

Via NewSMTH.net. Translation by Mengyu Dong.

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Throughout the week, Chinese social media sites were abuzz with reports from disgruntled tourists complaining about lengthy queues, chronic overcrowding, and awful traffic. One popular post on Weibo, China‘s top social network, featured pictures of tourists stuck in highway traffic jams getting out of their cars to play tennis or host picnics on the road. Another showed pictures of the beaches in the island province of Hainan covered in a thick blanket of tourist-created trash. A third told of a camel that dropped dead of exhaustion after ferrying tourists through the Gobi desert in the northwestern town of Dunhuang.

While travelers groaned, though, economists must have been grinning. For months, China-watchers have been worrying about the prospect of a ‘hard-landing’ for the Chinese economy. China’s economic planners have been working to shift China’s economy away from reliance on government-funded infrastructure spending and low-value manufacturing and toward a more consumer-driven model of growth. Thus far, their efforts have had limited success, with consumers largely choosing to hold onto their cash rather than fritter it away on discretionary spending. Meanwhile, demand for Chinese-made products from Europe and the US continues to lag, and China analysts are not convinced that the domestic consumers are ready to replace the flagging low-end manufacturing sector. Could the crowds signal that better times are coming?

Some are cautiously optimistic. Travelers pumped close to $35 billion into the domestic economy during the 7-day Golden Week period at the start of October, an increase of 45% compared to the same period last year. “People who believe China is mired in a crisis, with slumping growth and falling stock prices, could be shocked by this strong tourism data,” Ting Lu, an analyst at Bank of America Merrill Lynch, wrote in a recent report. The promising tourism data, he says, indicates that consumption spending is increasingly shifting towards leisure pursuits.

See also reactions from the economist community to the 3rd quarter and September figures released this week, compiled by The Wall Street Journal’s Josh Chin.

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GDP reached 35.35 trillion yuan (5.61 trillion U.S. dollars) in the first three quarters of 2012, NBS spokesman Sheng Laiyun told a press conference.

“GDP grew 7.7 percent in the first three quarters, and the economy is generally stable,” Sheng said. During the first half, the GDP grew 7.8 percent.

“Compared with the first half, we have seen some improvements in the third quarter,” he said. Despite the growth slide, Sheng said that the economy had been stabilizing, especially since September.

He said a slew of evidence backed this, citing the trade rebound and other major economic indicators that showed growth picking up.

Asian stocks rose on the news, according to Bloomberg, and Reuters reports that Hong Kong’s benchmark index neared its 2012 high. And while David Pierson of The Los Angeles Times points out that growth has fallen to its slowest pace in more than 3 years, others agreed with both Sheng and Premier Wen Jiabao’s assessment that the economy is stabilizing. Specifically, according to MarketWatch’s Chris Oliver, analysts cited better-than-expected September data as a sign that growth could rebound back above the 8% level in the fourth quarter.

Bloomberg Businessweek’s Joe McDonald reports that the “painful downturn” may have begun to reverse:

In a sign of an emerging recovery, economic activity in the latest quarter was up by 2.2 percent from the previous three month period, the biggest quarter-on-quarter gain in a year, said Dariusz Kowalczyk, senior economist for Credit Agricole CIB in Hong Kong.

“This confirms that the economy is rebounding from the trough in the first quarter of this year,” Kowalczyk said. “There is no room and no need for further major stimulus.”

…

“We can see a clear sign of steady economic growth,” said Sheng Laiyun, spokesman for the National Bureau of Statistics. “There is a smaller margin of decline and some major indicators have been growing faster.”

Forbes contributor Kenneth Rapoza adds that those anticipating a China hard landing may need to “wait til next year”.

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“The trade data is a positive sign for the Chinese economy,” said Citigroup C +5.50%economist Ding Shuang. “But it remains to be seen whether import and export growth can remain at these levels,” he added, noting that unfavorable economic fundamentals in the U.S. and the European Union—China’s two big trade partners—raise uncertainties.

…

The monthly results come as economists and investors look for a bottom for the slowdown in China’s economic growth. The nation’s growth rate likely slowed to 7.4% in the third quarter to its lowest level since the first quarter of 2009, according to economists surveyed by the Journal. That would be below the government’s full-year GDP target of 7.5%. The National Bureau of Statistics is scheduled to issue GDP data on Thursday. “We expect the data to show that demand remained weak, destocking continued, and recovery has yet to happen,” UBS UBSN.VX +1.44%economists said in a note. “Continued destocking has likely delayed economic recovery,” they added.

The news buoyed global markets on Monday, according to The Associated Press, creating positive momentum at the start of a week that should also see more progress on the economic fates of Greece and Spain. Bloomberg reports that the price of gold also declined to its lowest level in more than two weeks, reflecting a belief that China would not need to implement additional stimulus measures. Reuters adds that the low inflation, combined with signs that lending may be on the upswing, may take some pressure off policymakers to act ahead of the 18th Party Congress.

But has China really turned a corner? MarketWatch’s Craig Stephens dives further into the latest data releases, predicting that this week’s announcement of China’s third quarter GDP growth figures should “show a further slowdown”, and also noting that economists have been burned already this year for prematurely calling the bottom of China’s economic downturn:

Still, it will take more than one month’s export data to restore confidence in China’s growth story. The backdrop of a weak global economy also makes it harder for China to continue to crank up exports.

There are also some one-off influences in September’s trade bounce to consider. Firstly, there was likely some front-loading of shipments ahead of the eight-day “Golden Week” holiday in the first week of October.

And let’s not forget the launch of Apple’s iPhone 5. This is also cited for stronger monthly figures, as mainland Chinese assembly factories ramped up overtime.

On China’s domestic economy, the trade figures offer less reassurance. Imports in September edged up 2.6% — better than the contraction in August, but still suggesting a spluttering economy.

Meanwhile, Chinese banks are still failing to anchor the economy by turning on the lending taps.

Still, some see opportunity for the China to avoid a hard landing and enact the reforms necessary to achieve more sustainable growth levels. At the Chinese Finance Association’s annual conference in New York over the weekend,The Wall Street Journal’s Erin McCarthy reports that China’s economy faces a critical juncture:

“Last year, most economists in China feared complacency [with the state of the economy], but this year anxiety permeates,” said Jianfeng Yin, deputy director general of the Institute of Finance and Banking at the Chinese Academy of Social Sciences. “Today many people think the turning points are coming.”

…

Mr. Yin predicted that the share of China’s working-age population will start to decrease in 2015, marking a critical nexus. Many of these workers had gone into non-agricultural employment, helping to drive China’s industrial sectors. Meanwhile, another force dragging down China’s competitiveness globally is higher labor costs, placing more pressure on its economy.

In addition, Mr. Yin said he sees an investment turning point, with non-financial businesses and the government’s savings rates likely decreasing because of these rising wages and demographic shifts.

Within these challenges, however, Mr. Yin and other participants at the conference saw the opportunity to create more-sustainable growth, particularly through more investment and financial reforms.

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The World Bank also lowered China’s growth forecast in 2013 to 8.1 percent, from 8.6 percent. The global lender expects developing economies in East Asia to grow slower.

“China is experiencing a double whammy – the growth slowdown is driven by weaker exports as well as domestic demand, in particular investment growth,” Bert Hofman, World Bank chief economist for East Asia and the Pacific, said at a briefing in Singapore.

Although there was a risk the slowdown in China could worsen and last longer than many analysts forecast, Hofman stressed that the World Bank still expects China to have a soft landing.

The forecast was based on the bank’s East Asia and Pacific Data Monitor released on Monday.

China’s Central bank has already cut interest rates twice this year and reduced banks’ required reserve ratios on three occasions in an effort to spur growth. Writing in the latest issue of the state-published China Finance magazine, People’s Bank of China head Zhou Xiaochuan said China would keep monetary policy flexible and pursue financial reforms to fight the economic slowdown. From Reuters:

“The external environment for our country’s economic growth is very grim,” Zhou said. “The impact from the international finance crisis is unabated and strengthening, and downward pressure on the domestic economy remains relatively big.”

Given trying circumstances, Zhou said the central bank would seek to make policy more effective while providing stability.

“Whilst keeping the continuity and stability in monetary policy, the bank will make policy more preemptive, targeted and effective,” he wrote.

Bloomberg reports that Chinese stocks have tumbled 34 percent from their November 2010 highs, and the Shanghai Composite Index hasn’t traded so cheap since at least 1997, as the country battles its worst economic slowdown in more than a decade:

Haitong Securities Co. strategist Chen Ruiming, who correctly predicted on Aug. 1 the index would fall below the 2,000 level, says the measure is poised to drop a further 14 percent to 1,800 this year. China’s stocks will end down for a third year, according to Bank of Communications Co.’s Hao Hong, the only forecaster among 13 strategists surveyed by Bloomberg at the start of the year to predict declines for equities in 2012. Falling interest rates and increasing copper prices — which foreshadowed the rally in 2009 — aren’t predictive this time around, said David Cui, chief China strategist at Bank of America Corp. (BAC) He sees more losses for the index after saying in Feb. 22 that it would slump to 2,100 by year-end. The measure dropped 0.6 percent to 2,074.42 at today’s close.

“These signals are only indicative of a market turnaround if and when there are signs of a genuine turnaround in economic growth and the prospect of sustained improvement in corporate earnings,” Shanghai-based Cui wrote in e-mailed comments on Sept. 25. “Right now, things appear to be still heading downhill and the market cannot figure out where the bottom is.”

For Goldman Sachs’ Jim O’Neill, however, the slump in Chinese equities presents a compelling investment opportunity:

“At this moment, the Chinese market looks the most attractive to me. You don’t want to be with consensus; it’s quite easy to be on the wrong side of things,” O’Neill, the man famous for coining the acronym BRIC, said at a press conference in Singapore on Friday.

With the benchmark Shanghai Composite [.SSEC 2111.10 36.68 (+1.77%) ] trading at historically low valuations, he argues that the market is ripe for stock picking.

As China rebalances its economy towards being more domestically-driven rather than export oriented, there are going to be a lot of new winners, O’Neill said.

“Go long anything to do with the new China, and short anything to do with the old China,” he said.

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Investors still believe consumption will carry the Chinese economy past its current difficulties. And on the surface, China’s shoppers appear resilient. The National Bureau of Statistics reported that retail sales increased 13.2% in August year-on-year. Moreover, the People’s Bank of China is apparently expecting a stellar National Day. Days ago, the central bank completed the biggest weekly net injection of cash in China’s history—365 billion yuan—to meet expected demand during the week-long holiday.

Yet even official statistics are starting to reveal the slowdown in consumption. For one thing, the current retail-sales figures represent a deterioration from the second half of last year, when growth ranged from a low of 17.0% in August to a high of 18.1% in December. Moreover, current growth rates are also below those in the beginning of this year: the aggregated January-February period clocked in at a still-healthy 14.7%, and March posted a 15.2% gain.

The downward trend in the figures becomes even more worrying when you strip out of them inflation and exclude government procurement and store inventory, which are inexplicably included. The growth of “retail sales” in China, at least as we think of the term, is probably in the low single digits at the moment.

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Although the departing government has tried in recent months to address decelerating growth by easing bank loan restrictions, increasing pensions and offering tax breaks to small businesses, a lack of consensus among the top stewards of the economy has stymied a more muscular response, insiders say.

Similarly, many analysts question whether the incoming leadership has the political will to overcome the resistance of the so-called princelings and other well-connected families that have prospered under the current system.

China’s standard economic formula, they say, is losing its potency: overzealous government investment and lagging consumer spending are creating serious imbalances that are expected to lead to a much more painful reckoning, perhaps not long after the new raft of younger leaders assumes power in early 2013.

“There are tough choices to make, but the central government appears to be so paralyzed they are just sitting on their hands,” said Ho-Fung Hung, a political economist at Johns Hopkins University in Baltimore. “The situation is looking increasingly dire.”

China’s economy is expected to grow 7.7 percent in the first three quarters of 2012, according to a Tsinghua University think tank, and Reuters reports that a vice governor of the People’s Bank of China reiterated the desire of policymakers to steer growth lower. Still, the slowdown has impacted all levels of the economy — China’s largest steelmaker announced Thursday that it had shut down a mill in Shanghai, and the China Daily reports that confidence among small and medium-sized enterprises has slid amid declining trade volumes. While the regime has relied on blistering economic growth to bring about social stability and preserve its own legitimacy, data collected by Richard A. Easterlin of the University of Southern California shows that growth may be outpacing happiness. Also from The New York Times:

As the recent riots at a Foxconn factory in northern China demonstrate, growth alone, even at sustained, spectacular rates, has not produced the kind of life satisfaction crucial to a stable society — an experience that shows how critically important good jobs and a strong social safety net are to people’s happiness.

Starting in 1990, as China moved to a free-market economy, real per-capita consumption and gross domestic product doubled, then doubled again. Most households now have at least one color TV. Refrigerators and washing machines — rare before 1990 — are common in cities.

Yet there is no evidence that the Chinese people are, on average, any happier, according to an analysis of survey data that colleagues and I conducted. If anything, they are less satisfied than in 1990, and the burden of decreasing satisfaction has fallen hardest on the bottom third of the population in wealth. Satisfaction among Chinese in even the upper third has risen only moderately.

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A key driver in their wealth diminishing was, in general, equities, which were down… so too were the valuations—and that makes a substantial part of their net worth,” Mykolas Rambus, CEO of Wealth-X told CNBC on Monday.

In total, the population of China’s ultra-high net worth (UHNW), which are individuals with assets worth $30 million and above, shrank by 2.3 percent in the past year, while their combined wealth decreased nearly 7 percent to $1.6 trillion. That compares to a 3.3 percent gain in the combined wealth of such individuals in the U.S., which saw their net worth hit almost $8.3 trillion this year.

Rambus says individuals holding assets in real estate and manufacturing in China’s coastal provinces were the hardest hit as factory production moved inland.

Concerns over China growth are real, writes The Financial Times’ Josh Noble, even if Beijing isn’t worried about the country’s outlook. Separately, a Sunday editorial in The Financial Times challenges incoming leader Xi Jinping to push on with the rebalancing of China’s economy:

China’s demographics are already turning. One benefit is that wages are rising. But shifting to a new economic model will not be easy. The government’s trick of turning land into revenue is running up against physical and social constraints. If it is to build anything like a viable welfare system it will need to tax its population more effectively. That could set it on a collision course with the middle class it has created.

China’s immediate growth problems are far from insurmountable. The state has low debt and more than $3,000bn in foreign exchange reserves. But the current growth model is unsustainable. Now that he is back, Mr Xi should start thinking about a new one.

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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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Factory activity is already at a nine-month low, according to the latest manufacturing sector survey from HSBC, signaling that the official August numbers for industrial production and trade published in a fortnight will foreshadow third quarter economic growth falling below the government’s 7.5 percent goal.

That is a deeply unappealing prospect for the Party’s top brass as GDP data is likely to be unveiled at roughly the same time as the new leadership in a once-a-decade power transition.

The only real option to deliver a growth spurt in the narrow time window open to policymakers is a boost to infrastructure spending. Indeed, verbal intervention may be the only answer.

“They are sending out the message that they want to stimulate the economy, but in reality that is not going to happen,” influential independent China economist, Andy Xie, told Reuters. “About the only tool left to them now is propaganda.”

China’s leaders face a conundrum, according to BBC News, as they prepare to hand over the reigns to the next generation at at time when the economy faces its worst run in years:

Recent efforts by China’s leaders to engineer a turnaround don’t seem to have worked. They have already cut interest rates twice, released more money into the economy by cutting bank reserve ratios, and announced a raft infrastructure projects.

The way to change things now would be to pump more money into building projects – and fast.

But investment spending already accounts for a huge 50% of China’s economy. The massive stimulus used to get China through the financial crisis led to inflation, worries about bad debts and soaring property prices and the government has been working to rein those in.

So if they do more now to achieve a short-term boost before the autumn Party Congress, then the result down the line could be a new, nasty bout of inflation, unpaid loans, and surging house prices, things the leadership says it’s determined to avoid.

For more on the global implications of China’s slowdown, The Economist has rolled out a stockmarket index called “Sinodependency” which is weighted by S&P 500 companies that have exposure to China.

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The glut of everything from steel and household appliances to cars and apartments is hampering China’s efforts to emerge from a sharp economic slowdown. It has also produced a series of price wars and has led manufacturers to redouble efforts to export what they cannot sell at home.

The severity of China’s inventory overhang has been carefully masked by the blocking or adjusting of economic data by the Chinese government — all part of an effort to prop up confidence in the economy among business managers and investors.

But the main nongovernment survey of manufacturers in China showed on Thursday that inventories of finished goods rose much faster in August than in any month since the survey began in April 2004. The previous record for rising inventories, according to the HSBC/Markit survey, had been set in June. May and July also showed increases.

For The Globe and Mail, Mark MacKinnon writes that output woes in China and Europe have sent the world’s central banks scrambling for answers:

This latest batch of troubling signals – combined with fresh worries about the damage wreaked by the burgeoning European debt crisis – has triggered a selloff in global equity markets. As well, central banks in China, the United States and Europe are being called on to ride to the rescue with more stimulus and bailout measures.

The trouble in the world’s workshops stems from the recession in Western Europe amid a spreading debt crisis and the stumbling recovery in the United States.

China, once viewed as the saviour that would reignite global growth, has not been able to replace falling demand from the United States and the European Union, by far its biggest customers, to keep its export-driven manufacturing machine humming.

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The city of Chongqing in China’s southwest called for investment of 1.5 trillion yuan ($237 billion) in seven key industries over the next three years, the state-run Xinhua news agency reported Monday.

…

Separately, Tianjin, a city next to Beijing, said it has “preliminarily” decided to move forward with a plan calling for investment of 1.5 trillion yuan over four years in 10 industrial sectors, ranging from the petroleum and chemical industry to the aviation and aerospace industry over the next four years, according to a report by the state-run Tianjin Daily posted on the Tianjin municipal government website on Tuesday.

The announcements follow a similar plan from Changsha, the capital of central China’s Hunan province, which last month unveiled plans for 829.2 billion yuan in investments.

The plans signal a growing appetite in China for government spending to help boost slowing economic growth. In the second quarter, China’s economy grew 7.6% from a year ago, the slowest rate since the global financial crisis, and more recent economic data suggest the slowdown will continue.

Despite the ambitious announcements, however, many analysts question whether Chongqing, Tianjin, and others will actually follow through on their proposed investments. From Reuters:

“You look at the size of some of these stimulus announcements and it is quite clear it is almost impossible they will all be brought to fruition,” said Alistair Thornton, an economist at IHS Global Insight.

Many analysts suspect the Tianjin plan and the others may be no more than verbal intervention to boost market confidence.

“To a large extent, they are just plans, or more detailed plans to five-year plans,” said Ting Lu, an economist at Bank of America-Merrill Lynch, referring to five-year economic blue-prints that China uses to chart its growth path.

“It’s not stimulus as defined by Wall Street.”

Indeed, many of the industries recently highlighted by local governments as areas of investment are those outlined in their five-year plans, making it hard to tell if recent investment pledges are indeed new.

And even if local governments were to attempt to bring-forward spending to lift economic growth, they will need approval from Beijing, as it controls the reins of bank lending and has the last say on any big project, said Lu.

Earlier this month, The Financial Times highlighted Changsha’s spending plan:

That the government of Changsha, a city of 7m, needs to prop up its economy at all might strike outside observers as bizarre. The city’s gross domestic product increased 12.9 per cent in the first half of this year, about two-thirds faster than the national growth rate. But the pace of growth was down from its 15.2 per cent average of the past five years. The drop to low double-digit growth has been sudden and unwelcome.

“Changsha has been among the fastest growing of the cities in central China, but it’s still small on a per capita basis and we want to catch up with the coastal areas. It’s like when you give a skinny man a nice meal. He still wants to eat more,” says Liu Fei, president of Hunan Fuli Investment Consultancy.

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Private surveys and company data might be free from fears of political manipulation, but they have their own problems. Survey sample sizes are small (420 firms for the HSBC PMI and even less for the MNI survey) while company results are not necessarily representative of the sector as a whole.

That said, the independent data paints a picture that – with a couple of notable exceptions – is broadly consistent with the official data. Industrial output growth is decelerating , and perhaps more quickly than the government data suggests. But investment and demand for industrial commodities continue to grow, consumers are hitting the shops, and exports are flowing through the ports.

Despite second quarter GDP growth dipping to its lowest level in three years, a weekend piece in The China Daily cautioned against panic:

On July 16, The Wall Street Journal said China would drag the world economy into “another recession”. On the same day, a commentary in Germany’s Die Frankfurter Zeitung titled “The fear of China crash” even warned that China is facing a catastrophic economic crash.

Some people in China, too, are worried about the continuous slowdown and a possible hard landing, and have appealed to the government to take necessary actions to sustain the 8-percent growth rate for the whole of 2012. However, these reports do not reflect the current state of the Chinese economy.

China has set this year’s growth target at 7.5 percent. So, even if the economy continues to grow at 7.6 percent in the second half, the entire year’s average will be 7.7 percent. China’s 12th Five-Year Plan (2011-15) envisages an annual growth rate of 7 percent. Hence, if 2012 has a growth rate of 7.7 percent, the economy needs to grow only by 6.4 percent a year from 2013 to 2015.

An 8-percent growth rate was the “red line” for China during the 1997-99 Asian financial crisis and the 2009 global financial crisis. But that’s no longer the case because China is shifting its focus from rapid economic growth to a more sustainable development model.

In The Diplomat, however, Barry Eichengreen questions how committed China’s leadership really is to sacrificing high growth and restructuring its economy:

At one level, it is a good thing that Chinese officials have these policy levers to pull, unlike their counterparts in the U.S. and Europe, whose policy room for maneuver is all but exhausted. The policy response prevents China from suffering unnecessary economic damage from events in Europe and the United States. Insofar as growth faster than seven percent is important for social stability, even graver risks are averted.

But at another level, the policy response is only storing up problems for the future. Prior to the current slowdown, the Chinese authorities had committed to restructuring their economy. Restructuring meant redirecting Chinese output from foreign to domestic markets, which implied a change in the product mix, given differences in Chinese and foreign spending patterns. Restructuring meant rebalancing domestic spending from investment to consumption. The investment rate would be lowered from a stratospheric 50 percent, given that no economy can productively invest such a large share of its national income for any length of time. There would be no more construction of ghost towns and no more bullet trains running off the rails, in other words. As wages rose, the share of consumption would be allowed to rise from 1/3 of GDP toward the 2/3 that is the international norm. Bank balance sheets would be strengthened by holding financial institutions to stricter reserve requirements and higher lending standards. The result was to be a better balanced, more stable, and less financially vulnerable Chinese economy.

Given the global slowdown and the Chinese policy response, this restructuring agenda is now on hold. The new measures will succeed in keeping high single-digit growth going for a time, as they did in 2009-10. But they will do so by aggravating the economy’s imbalances and storing up problems for the future. This is not good news for those of us concerned with China’s longer run prospects.

© Scott Greene for China Digital Times (CDT), 2012. | Permalink | No comment | Add to del.icio.us
Post tags: economic slowdown, GDP growth, government data, hard landing
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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.

© CDT Money for China Digital Times (CDT), 2012. | Permalink | No comment | Add to del.icio.us
Post tags: accounting, CCP 5th generation, coal, economic growth, electricity, Evergrande Real Estate, exports, fraud, GDP, hard landing, imports, leadership transition, PMI, sino-forest
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