Ryssdal: … Somebody’s making money.

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

Man speaking

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

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

Ryssdal: No, come on. Really?

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

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

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

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

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

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

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

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

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Other economists believe China’s growth will rapidly pick up, including Tang Jianwei at the Bank of Communications:

“Growth will rebound in the second quarter. The chance for a hard landing is slim,” said Tang Jianwei, an analyst at the Bank of Communications.

“The economy will keep a reasonable growth rate as long as the government properly handles its macroeconomic control measures,” he said, forecasting growth of 8.6, 8.7 and 9 percent, respectively, for the next three quarters.

Tang said he expects export growth to recover in the second quarter, as export orders have increased amid an improved global economic outlook.

The Bank of Communications also published a report predicting that China’s inflation rate would ease in April to 3.3 percent, down from 3.6 percent in March on the back of slowing growth in food prices. Otherwise, focus turned to Chinese corporates. Many of China’s public companies reported their results for the first quarter, results which indicate that the Chinese economy may have not bottomed out yet after all.  More than 60 percent of the listed companies to release earnings by April 23 had reported either a drop in profits or a loss, with big manufacturers leading the decline.

Sluggish earnings may be the least of investors’ worries in China, however, as clouds of fraud have formed around several PRC companies in recent weeks. With the Sino-Forest scandal still lingering after the tree grower filed for bankruptcy protection in March, another Chinese timber company, Hong Kong-listed China Forestry Holdings, announced that it could only account for about 1 percent of its historical sales. The announcement caps a tumultous 15 months for the company - Former CEO Li Han Chun was detained by police in March 2011 for the alleged embezzlement of 30 million yuan, and the company also halted trading in its shares early last year so an independent committee could investigate account irregularities highlighted by the company’s auditor.

Elsewhere, the U.S. Securities and Exchange Commission (SEC) charged U.S.-listed Chinese oil field services firm SinoTech Energy and its two top executives with fraud last week, specifically for lying about the value of the company’s assets and misappopriating proceeds from its 2010 initial public offering. According to The Wall Street Journal, the company’s chairman allegely stole more than $40 million from the company’s bank account last summer.

In the world of rogue Chinese CEO’s, however, few can hold a candle to Ron Chan, the former chief executive of ChinaCast Education. ChinaCast revealed in an open letter earlier this month that Chan and several other executives had made off with key company property, including corporate chops (for affixing company seals to authorize its business operations), following a dispute with the board which saw him removed from his post in Shanghai.

In The New York Times’ DealBook, Steven M. Davidoff writes that the real problem facing Chinese companies in their battle to regain investor confidence goes well beyond missing chops:

One reason that ChinaCast is having a problem is that shareholders did not actually buy an interest in its operations. Instead, to avoid Chinese restrictions on foreign investment, ChinaCast’s shareholders invested in a United States company that has contractual arrangements with a Chinese company. But the Chinese company remains in the ownership of Chinese citizens.

The problem with this structure, known as a variable interest entity, is that it may be illegal under Chinese law and has been criticized by Chinese regulators. Even if it is legal, if the Chinese owners decide to go rogue, the United States-listed entity must sue and obtain a judgment from a Chinese court to enforce these dubious contracts. Good luck with that. Such a litigation can take a long time to resolve, if ever.

In ChinaCast’s case, it can’t do anything until it has control of the corporate seals, but under Chinese law it needs them to sue to recover them. In the meantime, the operators of the Chinese subsidiary can take full advantage of the situation.

As recent attempts by Chinese companies to list in the United States show, the improprieties of Ron Chan, SinoTech, Sino Forest and others have left the door firmly shut for others to access the U.S. market. China Auto Rental, the country’s top car rental provider, hit the brakes on its proposed U.S. IPO this week to “avoid possible bloodshed” after it failed to generate any meaningful interest in its stock offering. Bloomberg reported that only about half of the ~$140 million order book was covered by the time the company chose to scrap the deal.

So far this year, only one Chinese company has completed a public listing in the United States – Vipshop, a Guangzhou-based online discount retailer, which plummeted 33 percent in its first five days of trading after it already had to price the offering well below the marketed range. Vipshop became the first Chinese company to list in the U.S. in nearly eight months, and likely will be the last for some time. With an increasing number of Chinese companies waiting for the U.S. market to open for them again, and with little evidence that it will do so in the near future, they will likely need to pursue alternative funding avenues until the storm clears.

New IPO Guidelines

While Chinese firms face significant headwinds in their efforts to tap the U.S. equity markets, China’s securities regulator announced new guidelines meant to improve the country’s own IPO process:

The reform is aimed to make the pricing of new offerings better reflect the issuer’s fundamentals. China’s stock market has been plagued by abnormally high pricings of new offerings and the subsequent reverse in earnings growth of the issuer after the listing, as well as continuous weakness in newly-listed companies’ shares.

The guidelines on new rules comes as a growing list of state-run firms are eager to tap a slowly recovering domestic stock market. The benchmark Shanghai Composite Index has gained 9% so far this year, after dropping 22% in 2011.

Analysts said the stock market is unlikely to react too much to the reform.

“Potential impact from the reform is likely to be limited as it’s more focused on technical adjustments in the pricing procedures [instead of fundamental reform of the IPO system],” said Jiang Shiqing, an analyst with Industrial Securities.

Shifting Opportunities for Foreign Firms in China

The Wall Street Journal’s Bob Davis looks at the first-quarter results of several foreign companies and highlights evidence of the beginnings of a transformation for China’s economy:

Caterpillar, the Peoria, Ill., construction- and mining-equipment company, last week bragged about first-quarter growth in the U.S., which Chief Executive Doug Oberhelman said “more than offset slowing in China and Brazil.”

Ditto for Swiss engineering company ABB. Chinese sales are having “some difficulties,” said Chief Executive Joel Hogan, while demand is growing in North America for its power equipment.

Others reporting slowing China demand during the first quarter included miner Vale SA VALE -1.27%and United Technologies Corp., UTX +0.92%which said new Chinese orders fell 21% at its Otis Elevator unit.

Meanwhile, Apple reported that sales in greater China, which includes Hong Kong and Taiwan, more than tripled to $7.9 billion in the quarter ended March 31, driven in large part by Chinese consumers like Wang Hong. The 24-year-old saleswoman on Friday bought a new iPhone 4S from an Apple Store in Beijing for about 5,000 yuan, or nearly $800. That is about 1,000 yuan more than she makes in a month, but she said she wanted the phone to keep up with her friends—one of the marks of an increasingly consumer-oriented society. Her friends have iPhones, “so I think I should own one, too,” she said.

The numbers, Davis writes, may signal the early stages of an economic rebalancing toward a heavier reliance on consumer spending versus exports and investment.

Other News:

• During Premier Wen Jiabao’s just-completed visit to Europe, China vowed to double its trade with Central and Eastern European countries to $100 billion by 2015.
• Li Keqiang visited Russia last week and announced that the two sides had signed contracts worth $15 billion in an effort to expand cooperation.
• The Wall Street Journal reports that a slowdown in profit growth for China’s biggest banks might not be enough to quell public anger about excessive profits in the sector.
• Reuters’ Jason Subler details the obstacles faced by foreign companies doing business in China, specifically the minefield of bribery risks.
• The Chinese appetite for U.S. corn and cotton has kept the prices for both afloat in recent months.

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Such a fast-rising wealth gap is not just an academic pre-occupation; it inflicts real economic and social damage. The ADB estimates that if China’s economic growth between 1990 and 2008 had been achieved with no increase in inequality, an additional 110 million people would have been lifted out of extreme poverty.

To put that another way, 110 million people – equivalent to the entire population of Guangdong – with all the inhabitants of Hainan thrown in for good measure – are still living on less than US$1.25 a day because a few of their more well-connected compatriots got very rich first.

Naturally enough, these paupers have limited spending power, which is bad news for an economy looking to rebalance itself more towards consumption-led growth. Countries with widening income gaps, the ADB warns, also tend to have deteriorating growth prospects.

Abolishing the hukou household registration system and giving farmers land ownership rights, he suggests, could go some way towards addressing the problem. A China Daily op-ed on Thursday similarly recognised the urgency of reducing income inequality, and launched its own flotilla of proposed remedies. For example:

… [A] set of strict ownership definition standards should be set up to prevent the flow of State-owned assets to certain groups and individuals in the process of economic re-organization. At the same time, an effective monitoring system should be put in place to restrict or eradicate the power of individual local leaders in resource redistribution ….

In addition, the country should try to strengthen the trade union and wage negotiation system to help raise wages. At the same time, practical steps should be taken toward building an inclusive and balanced education system to uproot one of the key causes of the current income gaps.

Last but not least, the influence exerted by vested interest groups on the country’s income distribution policies should be eradicated by promoting a democratic, fair and transparent decision-making mechanism for income distribution.

Resentment of widening inequality is sharpened by the growing cost of living; an effort to tame one aspect of this by providing millions of affordable homes is already underway. But according to a recent Reuters report, the scheme’s numbers “don’t quite add up”, while the AP added this week that the subsidised accommodation drive would be “no cure-all”:

On paper, building affordable housing seems like a tidy way to provide inexpensive homes at prices low-income families can manage, while keeping property developers and other industries busy by generating demand for home furnishings, autos and building materials such as steel, copper and cement.

But whether the plan to provide housing for a fifth of the country’s urban families will achieve its aims is in doubt. Problems with financing, quality and corruption are plaguing the project. And for many, the prices are not low enough to offset disadvantages such as the out-of-the-way locations of the housing estates.

On Monday, meanwhile, The Wall Street Journal’s Tom Orlik reported higher than expected inflation figures:

Consumer prices rose 3.6% in March compared with a year ago, from 3.2% in February. That’s a move in the wrong direction, and higher than the 3.3% consensus forecast.

To examine the cause of the increase, it’s time to take another stroll to China’s countryside. Food prices rose 7.5% year-to-year, with sprouting vegetable prices the main contributor ….

The proximate cause of March’s inflationary rise might be a shortage of vegetables. But the underlying cause is the massive increase in the money supply in the past three years, and sharp rises in wages that means more of that money is ending up in consumers’ pockets.

Analysts’ comments collected at the WSJ’s China Real Time Report played down the severity of food inflation, calling it “benign so far in the year”, and predicting that high vegetable prices were merely “transitory”. The Financial Times’ Jamil Anderlini acknowledged that that the food price spike could be ominous, but argued that “in a sign that consumer inflation may resume its downward trajectory, China’s producer price index turned negative in March for the first time since late 2009, dropping 0.3 per cent from a year earlier.”

But in his latest Bloomberg World View column, Adam Minter pointed to netizens’ more heated views on food prices, in the wake of a magazine feature on almost-free lunches available to officials in government canteens.

The hashtag #One Sentence Attesting to Rising Prices# has spent much of the week at the top of the heavily censored trending topic list at Sina Weibo, attracting responses such as this anguished complaint by a netizen in Tianjin:

Lately, the fuel-price rises, the cooking-oil price rises, the green-vegetable price rises, the shampoo price rises, the wedding-celebration prices rise, even a pancake is 4.5 yuan…People can’t afford to drive, a meal, bathing, a wedding, even breakfast. Little is left in our pockets at the end of the month!

Under such circumstances, it isn’t surprising that a sizable number of tweets on Sina Weibo openly question whether the March consumer price index increase of 3.6 percent is actually a lowball estimate. “I went to the supermarket and bought a watermelon for 40 yuan,” a netizen wrote on Monday, and then cracked a joke: “There’s a mistake, CPI is 13.6 percent.”

There’s nothing new about anger at Chinese officials’ misuse of public funds for personal ends. It’s become such a problem that the use of public funds for international travel, automobiles and entertaining is characterized by the catch-phrase “the three consumptions.” They are, among other matters, a major source of corruption and, in the eyes of the Chinese public, a significant reason for the widening gap between the party cadres, and those they are supposed to be governing.

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Wen touched on a number of familiar points in the report, including strengthening China’s social service and security net, improving agricultural and consumer distribution networks, the need for price stability, promoting private investment and boosting consumption. From the report, translated and posted by The Wall Street Journal:

We will work hard to expand consumer demand. We will vigorously adjust income distribution, increase the incomes of low- and middle-income groups, and enhance people’s ability to consume. We will improve policies that encourage consumption. We will vigorously develop elderly care, domestic, property management, medical and healthcare services. We will encourage consumer spending on cultural activities, tourism, and fitness; and implement the system of paid vacations. We will actively develop new forms of consumption such as online shopping; support and guide the consumption of green goods such as environmentally friendly building materials, water-saving sanitation products, and energy-efficient vehicles; and expand consumer credit. We will improve the urban-rural logistics system and infrastructural facilities, such as roads and parking lots, strengthen supervision over product quality and safety, improve the consumption environment, and safeguard consumers’ legitimate rights and interests.

…

We will continue to improve the investment structure. We will maintain the steady growth of investment and use investment to promote consumption and vice versa. We will fully implement the State Council’s 36 new guidelines on encouraging and guiding nongovernmental investment and adopt specific operating rules for their implementation. We will strengthen the role of government investment in guiding adjustment of the economic structure, ensure funding for key projects that are under construction or expansion, and begin construction on major national projects in an orderly manner. We will tighten standards on market access and the screening and approval process relating to land, credit, energy conservation, environmental protection, safety, and quality; and strengthen supervision and inspections of major projects, particularly those undertaken by governments and state~owned firms, to improve the quality of and returns on such investments.

Xinhua News reported that slower but better growth will benefit the world economy in the long run, and several foreign observers spoke about the global importance of a Chinese economy with a more balanced direction:

Steve Roach, Yale professor a former president of Morgan Stanley Asia, said in a recent article that China is doing a “far better job” in managing its economy than most give it credit. It even offered some lessons in macro policy strategy that the rest of the world should heed.

He also said China has waged a very successful campaign in controlling its inflation, which “has long been the nation’s most destabilizing economic threat.”

“China has plenty of ammunition in its monetary policy arsenal,” while in contrast, central banks of the United States and European nations “are out traditional ammunition,” and “have been forced to rely on untested and dubious liquidity injections,” Roach said.

He added that China is cut from a very different cloth than the advanced economies of the West. Long focused on stability, Beijing is more than willing to accept short-term costs of a “growth sacrifice” to keep its development on track.

Reuters reports that the lower national growth target falls short of the 10.3 percent weighted average of the projections of China’s 31 provinces, a reminder that the sum of the parts exceeds the whole and growth is still the lifeblood of regional officials:

“Clearly they want to signal that they want to change the growth model. But to change the growth model, you need to do a lot more than lowering your growth target,” said Stephen Green, an economist at Standard Chartered Bank in Hong Kong.

“The system hasn’t changed. It’s still all about stronger growth, getting promoted on the back of growth,” he said.

So while most provincial leaders have trimmed targets to show support for the national leadership, the personal incentive to outperform keeps them well above Beijing’s mandated rate.

While China observers looked to policy announcements and other hints emerging from this week’s NPC sessions, a number of data releases at the back end of the week combined January and February numbers to help to clear up any distortions caused by the Lunar New Year holiday. The factory sector grew at an 11.4% clip, its slowest expansion since mid-2009, and the People’s Bank of China announced that new yuan loans totaled RMB 710.7 billion. While the figure represents a decline from January’s RMB 738 billion level, and fell short of a RMB 750 million estimate in a Bloomberg News survey of 26 economists, it exceeded a RMB 500 million estimate in the state-run China Securities Journal. The shortfall, about RMB 300 million less than in the same period last year, may fuel increased expectations of more RRR cuts in 2012 as the central government continues to “fine-tune” its economic levers.

Finally, Friday brought news that the consumer price index (CPI) rose at the slowest pace in 20 months, a bright spot in an otherwise dreary string of data and one which may have bolstered the case for a stimulus. But while some economists agreed that the inflation figure supported policy loosening, one analyst warned Reuters to expect a tight year for Chinese monetary policy as China attempts to avoid a hard landing.

Spotlight: Weekend Trade Data

China posted a rare and massive $31.5 billion trade deficit in February, its largest in at least a decade, with exports falling nearly 25 percent from January. Import growth of nearly 40% far outpaced exports, though Xinhua News reported that the vast and skewed deficit reflected the statistical challenges posed by the earlier-than-usual Lunar New Year Holiday. The Financial Times cited the Lunar New Year effect as well, pointing out that combining the January and February data paints a less grim picture. Still, the news was enough to snap a two-day gain when Hong Kong’s stock market opened on Monday morning.

Other News

• During the annual sessions of the National Committee of the Chinese People’s Political Consultative Conference (CPPCC), the vice chairman called for more efforts to develop China’s private economy.
• China auto sales saw their worst two-month start since 2005, falling 6% in January and February compared with a year earlier, a dip that a member of the China Association of Automobile Manufacturers called a cause for concern.
• China’s foreign exchange regulator announced Friday that it had approved 23 new foreign institutions under its Qualified Foreign Institutional Investor (QFII) quota system this year, picking up the pace of approvals and raising the combined investment quota to $24.6 billion cross 129 foreign investors.
• As a growing number of manufacturers turn away from coastal hubs and look inland in an attempt to reduce costs, Xinhua New points out that many workers who typically would find work in cities as migrant laborers are now staying in their home provinces.
• Bloomberg reports that Asia-focused hedge funds started after the 2008 credit crisis are shutting down as they struggle to raise capital on an ongoing basis.
• Zhou Xiaochuan, governor of the People’s Bank of China, told state media that China may “appropriately” widen the yuan’s trading band as it nears the requirements to become more of a free-floating currency.
• Xinhua News reports that a Chinese-made commercial airliner will be ready for export by 2016.
• With blue-collar labor costs soaring, and China no longer offering the most cost-effective option for factory manpower, The Economist ponders what the end of cheap China means for China and the world.

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To witness the frenzy firsthand, head to Beijing’s Caishikou Department Store, a four-story gold emporium that rang up sales of $1.5 billion last year. Visitors be warned: sharpen your elbows and be ready to push.

To buy a necklace, shopper Wang Li recently fought her way through a scrum of cash-waving customers hanging over a glass counter loaded with gold chains, Mao pins, pendants of Christ on the cross and more.

“I thought about buying Swarovski crystal, but I don’t think it will ever be as valuable as gold,” said Wang, a 24-year-old teacher who treats herself to a new piece of yellow-metal jewelry about once a month. “Besides, I like how feminine gold makes me feel.”

On another floor, customer Zhang Li waited in line to purchase gold bars, an investment he describes as the only safe bet left for ordinary Chinese.

“If I had invested in stocks or property last year, I would have lost money,” said Zhang, 36.

As Mr. Zhang says, and as Sydney University’s John Lee claimed in a piece for The Financial Times earlier this month, China’s consumer-driven gold rush is fueled by more than just a fear of inflation:

A better explanation could be the lack of alternatives for households that are the best savers in the world. In an economy lacking financial sophistication and depth, options are limited to savings accounts, which offer negative real returns, stocks listed on one of the two national exchanges, or else property.

The problem with stocks is that in most listed companies, state-owned enterprises hold a majority of shares. Combined with abysmal financial reporting, poor transparency and lax trading rules, stock prices are easily manipulated by insiders.

Property is the other alternative. But Chinese knew of the country’s infamous ghost cities long before the international media. Knowing that yield was irrelevant, as many of these properties will never be rented out, locals knowingly bought them as speculative capital assets. Now prices have collapsed in many areas, locals are much more wary of pouring capital into an asset that may never offer a reliable return.

See also recent CDT coverage of gold in China, where imports hit a record high late last year as the Chinese continue to blur the lines between retail and investment demand for the precious metal.

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HSBC’s economists said they expected bigger new loans and at least two additional 50bp reserve ratio cuts in the coming months. “Interest rate cuts will remain a secondary monetary policy tool of choice. We only look for a 25bp interest rate cut when headline CPI falls below 3 per cent, likely towards the middle of the year.”

But some disagree. “Markets should not take this RRR cut as a sign of a bigger monetary easing,” said Ting Lu, China economist at Bank of America Merrill Lynch. “We believe the RRR cut is merely part of the ongoing fine-tuning which was started in October 2011.”

The increased lending capacity should help China’s real estate market, which has seen an extended period of cooling. The policy decision by The People’s Bank of China came the same day that the National Statistics Bureau reported that China’s housing market experienced its worst performance since the government began releasing prices across 70 cities at the beginning of last year. None of the 70 cities surveyed saw an increase in home prices in January, and prices in 48 cities fell from December levels, stats which The China Daily attributed to the tightening measures introduced by Beijing to reel in China’s real estate market in 2011. Some Chinese cities may have already begun tweaking policy to dance around property market restrictions recently handed down from the central government, according to The Wall Street Journal:

Late last month, Zhongshan, an industrial city along the Pearl River Delta in southern China’s Guangdong province, raised the temporary price ceiling on newly built apartments to 6,590 yuan ($1,046) a square meter. The previous cap, set in November, was 5,800 yuan.

The new cap is 11% above last year’s average selling price of 5,935.6 yuan a square meter, so the increase matches the city’s GDP-growth target for 2012, Zhongshan’s housing and land bureaus said in a joint statement. By limiting the increase this way, they say, they are still adhering to directives from central and provincial authorities to maintain property-tightening measures this year and to further stabilize the prices of newly built homes. The rise in the average housing price in Zhongshan last year was about a percentage point below its GDP growth.

Zhongshan’s new cap increase may stand, but elsewhere the Anhui city of Wuhu scrapped a new home buyer subsidy policy almost as quickly as it announced it. Wuhu’s policy ran counter to comments this week by Wen Jiabao that China wouldn’t seek to relax real estate cooling measures, suggesting a disconnect between local officials and Beijing as the country attempts to balance out its housing bubble.

Finally, while the RRR reduction should provide some breathing room for China’s lenders,  one analyst told Bloomberg that interest rate cuts will likely remain a “secondary monetary policy tool” as the government hopes to avoid rising inflation. Consumer prices rose 4.5% in January, reversing a steady decline from last summer’s high, though experts cautioned to take the data with a grain of salt in light of the Lunar New Year holiday.

Spotlight: Europe

A slumping housing market serves as just one of many pressure points on China’s economy, with the European debt crisis also continuing to weigh on this year’s outlook. Despite its growing popularity as a investment destination for private Chinese companies, the eurozone has yet to receive a financial commitment from the Chinese government as it seeks to resolve its sovereign debt woes. And with senior Chinese and EU officials gathering for a summit last week, a People’s Daily editorial reiterated China’s confidence in the European economy but again avoided a firm pledge of financial participation in the bailout:

Europe should also consider China’s participation in solving the European debt crisis in a rational and peaceful way. China does not have the ambition or capacity to “buy out” or “control” Europe like what some European media said, and China always supports the euro and the European Union, which is a sharp contrast to the negative international voices on the prospect of Europe.

When and if China does decide to deploy its massive foreign currency reserves in support of a European rescue package, which many believe would occur through the International Monetary Fund, it has agreed to do so in cooperation with Japan. Japanese Finance Minister Jun Azumi wrapped up a weekend visit to Beijing by saying that he shared China’s view that Europe should do what they can to strengthen their positions amid the crisis, adding that the two sides would approach any potential assistance in close consultation.

The head of China’s sovereign wealth fund, for his part, said last week that the fund remains hesitant to invest in European government bonds.

Chinese Labor: Cheap no More?

In a Friday New York Times Op-Ed, Beijing-based journalist Michelle Dammon Loyalka highlights a fundamental shift taking place in China’s labor market which may threaten the manufacturing dominance that has fueled China’s historic economic rise. While the Lunar New Year often leads to labor shortages as millions of migrant workers head home for the holiday, luring them back to work has proven increasingly difficult:

Although nearly two weeks have passed since the Lantern Festival that officially marks the end of the 15-day holiday, cities across China are still facing a serious labor shortfall. In order to lure new workers and retain the old, some companies give employees sizable bonuses just for coming back to work, while others offer cash for every new employee they bring along with them. And in many areas, wage increases ranging from 10 to 30 percent have become the norm.

Despite all this, cities like Beijing, Shenzhen and Guangzhou are still short hundreds of thousands of migrant workers. Shandong Province is missing a full third of its migrant work force, and Hubei Province reports a loss of more than 600,000 workers. Last week, the Chinese government released a report describing this year’s post-Spring Festival labor shortage as not only more pronounced than in years past, but also longer-lasting and wider in scope.

As Loyalka writes, the structural roots of China’s present labor problems go beyond the typical holiday hangover.

Other News:

• Speaking of China’s currency reserves, estimated at around US$ 3.2 trillion, The Wall Street Journal’s China Real Time Report examines where the cash might be parked.
• Three years since its launch, Reuters examines China’s offshore yuan market and asseses its likely future. Meanwhile, The Wall Street Journal highlights the struggles of the offshore yuan-denominated bond markets as investors have turned to dollar-denominated debt amid concerns over slower-than-expected yuan appreciation.
• With World Bank chief Robert Zoellick announcing mid-week that he would step down in June, a foreign ministry spokesman said China hopes the next leader would be chosen “based on merit and open competition.” The comment reflects growing agitation from the developing world, including the BRIC nations, for a greater voice on the World Bank and IMF. The World Bank expects to choose a successor by the time its April meetings.
• China has raised a mining tax on iron, tin and other resources as it seeks to boost conservation and curb pollution.
• South Korea’s Yonhap News Agency reported last week that China has agreed to invest US$ 3bn to develop North Korea’s northeastern free trade zone.

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Post tags: CDT Money, debt crisis, housing prices, inflation, labor shortage, peoples bank of china, real estate bubble, reserve requirement ratio, Wen Jiabao
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The weak external outlook underscores the importance of accelerating the transformation of China’s economy to reduce its vulnerability to the vagaries of global demand. China has taken a number of encouraging steps, including appreciating the renminbi, making substantial investments in the social safety net, expanding pension and health care coverage, raising the minimum wage, and beginning to raise the cost of inputs to production (particularly energy). Greater efforts are now needed to raise household income and shift the growth structure from exports and investment toward consumption.

Other news throughout the week did little to stir optimism or counter the IMF’s downside view. Domestically, the Ministry of Commerce announced that sales during the Lunar New Year holiday – typically one of the busiest shopping seasons of the year - grew at the slowest pace since 2009. Even luxury brands, which have poured into China to meet booming demand, reported disappointing numbers and a tentative sentiment among browsing customers who just last year “were grabbing everything.” January auto sales hit the brakes as well, tumbling more than 25% year-on-year in the sector’s biggest drop since 2005.

Friday’s January trade figures only reinforced hints of sputtering domestic demand. Exports fell for the first time in 2 years, and imports plunged 15 percent from a year earlier  - All in all, China’s biggest trade decline since the 2008 global financial crisis. While crude oil imports hit the third-highest level on record and copper imports rose in January compared to a year earlier, commodity imports declined overall from December. And even with the holiday period factored in, The People’s Bank of China said Friday that new RMB loans totaled 738 billion yuan in January, less than 75% of the consensus estimate of around 1-trillion yuan. The trade data and lending shortfall led some to believe the government would soon loosen monetary policy, possibly through a cut in the reserve requirement ratio that many expected to happen last month. From Reuters:

Lunar New Year distortions will make policymakers wary of any hasty reaction. Most analysts expect them to assess January and February data combined before deciding whether the current policy of gentle easing should be intensified.

The week-long Lunar New Year holiday, which fell in January this year and in February last year, typically sees factories shut or run at half speed during the period.

But seasonal factors alone do not convince every economist that January is a one-off distortion, especially for trade.

“A fall of over 15 percent in January cannot be entirely explained by the Lunar calendar, and adds weight to the view that economic output is slower than headline indicators might suggest,” said Ren Xianfeng, an economist at IHS Global in Beijing.

One data point which could complicate the government’s easing plans, however, is inflation. China’s National Bureau of Statistics announced Thursday that January’s consumer price index rose 4.5% year-on-year, reversing a steady decline from last summer’s high of 6.5%, with food prices soaring 10.5%. If the CPI print contained any source of optimism, it was that nonfood inflation fell for a fifth consecutive month. Adding to the mixed message, this week’s wave of mostly negative news comes just a week after China’s manufacturing industry data surprised to the upside, signaling that domestic demand may help the economy withstand weakened exports after all. With PMI at its highest level since October, one government researcher told Xinhua News that “the country’s economic slowdown trend is stabilizing.”

Any attempt to dissect January and February economic data in China, and diagnose a hard or soft landing for the world’s second-biggest economy, may prove vexing. While the Chinese economy changes so rapidly that regularly charting its course is challenging enough, the lunar calendar magnifies such difficulties during the early months of every year. The Wall Street Journal dubbed the hazy picture the “Lunar New Year Effect.” “Our simple and humble suggestion is to wait for February data to come out and read two months’ data together,” one analyst told Reuters:

That’s what the Chinese government does. It lumps together the figures most influenced by factory closures, like industrial production and output data, into a combined January-February figure. The Lunar New Year never falls outside those months.

Other News:

• Citibank received approval to launch a credit card program in China later this year, becoming the first non-Asian bank to do so. While Bloomberg reports that the move may signal an opening of China’s bank market, The Economist warns that such optimism may be misplaced.
• A Brookings Institution study published this week offers a “blueprint” for how Beijing can raise the international status of the renminbi, according to The Financial Times.
• The Wall Street Journal writes about one loss-making auto-parts maker in Michigan that received a lift from an unlikely place, as Chinese state-owned and private companies have begun to funnel capital into the United States.
• Despite the tumble in January auto sales, a senior J.D. Power analyst told The Wall Street Journal on Friday that vehicle sales in China could double to 35 million a year by 2018. The China Association of Automobile Manufacturers published data on the bestselling cars and top automakers in China in 2011.
• Visiting Canadian Prime Minister Stephen Harper witnessed the signing of 23 agreements between Canadian and Chinese enterprises worth nearly $3bn during a Thursday business forum in Beijing.
• Caixin details the latest regulatory initiatives announced for initial public offerings in China, part of a series of broader structural upgrades anticipated in the domestic securities markets.
• Bloomberg reported on Monday that China may launch a market for high-yield bonds within the next couple months, a move which could offer a “much-needed” funding source for smaller firms.
• With China’s once-hot property market turning polar, one local government in Anhui province announced new policies to boost property developers, including a range of subsidies and a waiving of property transfer taxes for commercial real estate purchases. Analysts differed on whether the central government would look to adopt Wuhu’s policies at the national level, or whether the new policies would help at all.

[Editor's Note: CDT Money is a once-a-week roundup of business and economic news from China. We’ll be giving an overview of business and economic trends from the world’s second-largest economy, as well as collecting the best news and analysis of the week from newspapers and the blogosphere.]

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Post tags: CDT Money, debt crisis, Europe, exports, imf, imports, inflation, lending, lunar new year, manufacturing
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 “The central bank aims to ease policies prudently and pace loan growth at the beginning of the year so as to avoid a replay of the credit explosion in 2009 and 2010 and prevent inflation from rebounding,” said Lu Zhengwei, a Shanghai-based economist at Industrial Bank. Lu now sees a reserve-ratio cut in February to add liquidity and spur growth after the reverse-repurchase contracts expire.

Some analysts backed away from their reserve-ratio predictions when they saw the central bank inject 353 billion yuan ($55.7 billion) into the financial system in the week before the holiday, using the 14-day contracts. Barclays said the move had an effect similar to a cut in the bank requirements.

Postponing a reserve ratio cut indicates monetary easing “is meant to be moderate and controllable,” Hong Kong-based JPMorgan economists led by Zhu Haibin wrote in a Jan. 20 report after forecasting a pre-festival move in a Jan. 17 report. A cut “in the coming weeks” remains likely because market liquidity will be tight when the 14-day reverse repurchase contracts mature, they said.

The central bank is allowing the nation’s five biggest lenders, including Industrial & Commercial Bank of China, to increase first-quarter lending by a maximum of about 5 percent from a year earlier, two people at state lenders said previously.

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Post tags: bank reserve ratio, central bank, economic slowdown, inflation
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1) The run-up to Beijing’s once-in-a-decade political transition in October 2012 is likely to generate intensified clampdowns internally and assertive rhetoric abroad as China faces rising domestic challenges, and finds itself constrained internationally. Fearful neighbors may further strengthen ties with the United States. Pariah/failed state “allies” North Korea, Pakistan, and Iran will likely experience problems that affect China’s own interests. Externally, China is likely to be more intransigent than before. Internally, Beijing will resist making difficult decisions about economic reforms, particularly reforms that might harm key state-owned enterprises and monopolistic/oligopolistic concerns connected with families of political elites. Domestically and internationally, Chinese leaders will attempt to postpone difficult policy decisions until after the transition.

2) Slowing economic growth will likely increasingly expose the flaws and unsustainable nature of China’s infrastructure-driven growth model.One local banking regulator cited by Minxin Pei claims only 1/3 of the investment projects currently under construction will produce cash flows large enough to cover their debt service burden. This may rapidly reduce economic growth and commodity demand in 2012.

Damien Ma writes in The Atlantic that 2011 “saw the democratization of the China narrative,” and assesses the likelihood of rebalancing in 2012 as a number of “structural maladies” – including high inflation, employment, healthcare and education costs – continue to fester:

To me, one of the biggest questions next year is whether China can create the necessary political conditions, amid one of the most important transitions in a decade, to forge ahead with its restructuring. With the anticipated slow down in growth and a shrinking export surplus, there appears to be an opportunity to steer the ship of state in a different direction. Yet with a political leadership still unsettled, I find it hard to be optimistic over the extent of progress next year. But I am fully open to being surprised.

See also warnings by Wen Jiabao of a “difficult” start for China’s economy in 2012, via CDT.

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Post tags: 2012, economic growth, education, healthcare, inflation, leadership succession
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“We will continue to manage well the relationship between stable and relatively quick economic growth, structural adjustment and inflation,” Hu said. “Global interdependence is deepening while instability and uncertainty in the world economy’s revival is increasing.”

The government is wrestling with the aftermath of past stimulus, including the debt burdens of local-government investment vehicles. Companies also face rising labor costs, and Communist Party leaders have recently sought to defuse protests over illegal land use and environmental pollution.

While the 25-member Politburo affirmed an unchanged “proactive” fiscal stance for 2012 in December, a Nov. 30 cut in banks’ reserve requirements indicated a shift toward a bigger emphasis on supporting growth.

Earlier today, the head of China’s central bank, Zhou Xiaochuan, said the country would maintain a “prudent” monetary stance and ensure that policy remains stable in 2012.

While Hu addressed the economy, he also addressed the status of Hong Kong, Macau, and Taiwan. China Daily translates Hu’s speech:

In the new year, we will unswervingly adhere to the road of socialism with Chinese characteristics, follow the guidelines of Deng Xiaoping Theory and the important thought of Three Represents, and further carry out the Scientific Outlook on Development. We will continue to properly deal with the relationship among maintaining a stable and relatively fast economic growth, adjusting economic structure and managing inflation expectations. We will accelerate the change of economic development mode and structural adjustment, focus on ensuring and improving people’s livelihood and work hard to consolidate the healthy momentum of economic and social development.

We will uphold the principles of “one country, two systems”, “Hong Kong people governing Hong Kong” and “Macao people governing Macao” with a high degree of autonomy. We will work together with our compatriots in Hong Kong and Macao to maintain long-term prosperity and stability in the two Special Administrative Regions. We will adhere to the principles of “peaceful reunification and one country, two systems,” continue to promote the peaceful development of cross-Straits relations, maintain the essential interests of the Chinese nation and enhance the common interests of compatriots on both sides of the Taiwan Straits.

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Post tags: economic recovery, economic slowdown, Hong Kong status, Hu Jintao, inflation, macau, Taiwan relations
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