For all China’s modern trappings — the new superhighways, high-speed rail networks and soaring skyscrapers — analysts say this country still prefers to pay for things the old-fashioned way, with ledgers, bill-counting machines and cold, hard cash.

Many experts say it is not a refusal to enter the 21st century as much as wariness, of the government toward its citizens and vice versa.

Doing business in China takes a lot of cash because Chinese authorities refuse to print any bill larger than the 100-renminbi note. That’s equivalent to $16. [...]

Chinese economists and government officials often suggest that printing larger denomination notes might fuel inflation. But there is another reason.

“I’m convinced the government doesn’t want a larger bill because of corruption,” said Nicholas R. Lardy, a leading authority on the Chinese economy at the Peterson Institute for International Economics in Washington, noting that it would help facilitate corrupt payments to officials. “Instead of trunks filled with cash bribes you’d have people using envelopes. And there’d be more cash leaving the country.”

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Consumer prices rose 3.2% from a year earlier, with food prices up by 6%.

Inflation has been a hot political issue in China. There have been concerns that if consumer prices rise too much, it may prompt Beijing to tighten monetary policies, which in turn may hurt China’s growth.

However, analysts said the latest data was unlikely to prompt any such moves.

They argued that the price growth was driven mainly by the Lunar New Year celebrations, which are traditionally associated with an increase in consumer spending.

But a report from Reuters argues that prices have stayed high even after the end of the Spring Festival holiday season and that urbanization is largely to blame:

Retail beef prices in Beijing city markets are higher compared with supermarkets in the Boston area. Pork, China’s staple meat, is only about 50 cents per kilogram, or 23 cents a pound, below the U.S. price, a Reuters comparison of standard retail prices show. Those prices represent a direct hit on the spending power of Chinese, whose average income is about a 10th the size of Americans’ salaries.

Contributing to food production costs are the loss of farmland and farm labor to urbanization — Chinese cities are swelling as they absorb hundreds of millions of people.

Grazing restrictions because of land degradation are also causing costs to rise across the country.

“The more the economy develops, the harder it is to raise calves,” said Wang Jimin, who tracks cattle trends for the Chinese Academy of Agricultural Science’s Rural Economic Development Institute. “In the short term, I don’t see meat prices falling unless there are a lot of imports.”

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Snow, ice and fog have caused havoc on the nation’s roads and at train stations and airports, according to reports from the Xinhua News Agency and China Daily.

[...] More than 10,000 people were stranded at Chengdu airport in southwest Sichuan province yesterday after heavy fog caused authorities to close the airport and ground more than 100 flights, Xinhua said in a separate report.

[...] Four people died and 64 others were injured in three separate road accidents in eastern China yesterday, Xinhua said, citing information from local authorities. Slippery road conditions from persistent rain and snow over the past few days may have caused the accidents, traffic police were cited as saying.

Bloomberg’s Feiwen Rong cites a report from China National Grain and Oils Information Center saying that the extended cold weather has affected crop yields in southern growing regions. Carolynne Wheeler at The Globe and Mail looks into the impact the weather is having on China’s economy :

Emergency shelters have sprung up in Anhui province. Some 400,000 people have been left in a state of emergency in Guizhou province while workers use bamboo poles to clear ice from power lines. There are widespread disruptions in power and running water and an old debate over whether the Chinese government should supply public heating in the south as it does in the north has been resurrected.

But just as important is the cold’s effect on the food supply. Some 180,000 cattle have died from the cold in the north; thousands of hectares of crops have also been damaged.

As a result, while non-food inflation came in last month at a respectable 1.7 per cent, food prices, which make up nearly one-third of the weighting, jumped 4.2 per cent from this time last year. Vegetable prices soared 14.8 per cent year-on-year, or 17.5 per cent month-on-month.

The numbers are expected to get worse in the first two months of 2013, since prices traditionally rise ahead of the Chinese New Year holiday, also known as Spring Festival, which this year falls in mid-February. And 11 days into January, Beijing’s cold temperatures show no signs of abating yet.

Despite the heavy losses, some analysts believe that inflation will remain manageable. From David Pierson at Los Angeles Times:

Higher food prices also worry the Chinese government because discontent rises when poorer people have to pay a bigger share of their income on food. Chinese households spend more than 20% of their earnings on food, or more than three times as much as U.S. households spend, according to the American Enterprise Institute.

[...] ”In all, we are still not particularly concerned about high inflation in 2013,” Louis Kuijs, an economist for the Royal Bank of Scotland, said in a research note Friday.

[...] Analysts said prices for food probably will continue to rise as demand soars during the Chinese New Year national holiday next month, then will level off.

Meanwhile, Jason Samenow at the Washington Post traces the origin of this cold front:

The cold is China has mostly originated from sprawling arctic high pressure systems in Siberia where, according to the New York Times: “thousands of people were left without heat when natural gas liquefied in its pipes and water mains burst.”

Some of this arctic air has bled even further south and west.

[...] As some of the deadly cold air mass was drawn into the Middle East earlier this week, it clashed with warm, moist air from the Mediterranean, leading to the snowstorm we reported on yesterday, which blanketed Jerusalem with 4-8 inches of snow.

Long range forecast models show some relief from the cold in China with normal to above normal temperatures in the coming week.

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Economists reacted positively to the data, according to The Sydney Morning Herald:

“The export slowdown shows external demand faces uncertainty due to concerns over the fiscal cliff in the US,” said Zhang Zhiwei, chief China economist at Nomura in Hong Kong. “Nonetheless it does not change our view that growth is on track for a strong recovery in Q4, as (growth) is mostly domestically driven.”

…

“The Chinese economy is now in a sweet spot and can stay in the sweet spot through the first half of 2013,” Ting Lu, an economist at Bank of America-Merrill Lynch, said before the trade figures were released. “Beijing will be happy to sustain the current policy stance.”

With China likely to post its slowest full-year of growth since 1999, however, Chinese leaders concluded the annual Central Economic Work Conference in Beijing on Sunday by warning that the world’s second largest economy is not yet out of the woods. With Europe’s debt crisis still raging, and with the U.S. economic recovery still uncertain amid the ongoing “fiscal cliff” deadlock in Washington, The Wall Street Journal adds that China’s new leaders “sent their strongest signal yet” that they will focus on retooling the economy to rely less on export growth and more on domestic demand. Here, the China Daily reports that top policymakers continued to pledge reform - from cutting taxes to enabling greater mobility for rural workers, and providing more support to agriculture and innovation – to keep economic growth stable.

But was anything new put forth following the conference? The Financial Times’ Jamil Anderlini checked in from Beijing today with a resounding “no”, writing that the leaders revealed an economic agenda “largely in line with that of the outgoing administration.” Similarly, Keith Bradsher of The New York Times reports that the government released a lengthy statement calling for continuity, at least for now:

The statement endorsed tax cuts, continued curbs on real estate speculation and a broader effort to increase domestic consumption and wean the economy from its dependence on exports and investment.

“The opportunities facing us are no longer the traditional ones of simply entering the international division of labor, expanding exports and accelerating investments, but rather new opportunities forcing us to expand domestic demand, improve innovative capacities and promoting the transformation of the mode of development,” the statement said.

…

While China has many economic opportunities, “we must soberly recognize that there are still many risks and challenges confronting our national development,” the overview released by Xinhua said. “Problems with imbalances, ill-coordination and lack of sustainability remain pronounced.”

“The contradiction between downward pressures on the economy and relative overcapacity in production is deepening,” the statement continued. “Business operating costs are rising while innovative capacities are inadequate. There are latent risks in the financial sphere.”

Expectations of reform have indeed been heightened of late, as new Communist Party chief Xi Jinping retraced Deng Xiaoping’s 1992 “Southern Tour” with a similar trip of his own last week. The Chinese Academy of Social Sciences even warned last week that China’s economic imbalance had reached alarming levels that would hamper growth in the absence of bold action. Such a warning comes as a new survey indicates that China’s Gini coefficient, or measure of income inequality, may be far higher than previously thought.

While China will need reform to ensure that growth returns to the 8% level that the state-run Bank of China predicts for 2013, not everyone has bought into the rhetoric. MarketWatch’s Craig Stephen wrote Sunday that “once again it looks as if talk is easier than action when it comes to economic reform in China.” The Financial Times’ Kate Mackenzie echoed that sentiment today:

Don’t be misled by the proclamations of ‘reform‘ or ‘quality growth‘ from China’s central economic work conference at the weekend. It’s more of the same, at least for the time being.

The more concrete message was that economic and monetary policies would “remain stable for year ahead”. In other words: keep pursuing for just a little longer the brittle policies of property price inflation, more infrastructure investment, and looser money and credit.

Dr. Robert Lawrence Kuhn, however, does see some key reforms on the horizon. From Forbes India:

I expect substantial changes in the economy in the months following March. In China, it is a (cultural) tradition of new governments to carry on with policies of the earlier regime for a long time. Any change is thought to be disrespectful. But this time, it seems, the risk of not reforming is much higher than the risk of change. For example, there have been a series of corruption scandals. The new leaders will be under more pressure to change much quicker. While I do not expect much change on international policies—the rigid nationalism and tough rhetoric—there will be quick changes on the economic front. Xi Jinping’s opening speech showed this. The address was rational, without the usual political jargon, and offered hope. One feedback I got from his aides is that “the biggest concern now is high expectations”. The seven top leaders are the first batch not picked by Chairman Mao Zedong or Deng Xiaoping. This marks a very important transition for China.

One question I am asked very often is for how long will China be able to retain its edge in manufacturing? From the leadership’s standpoint, the answer is clear: Wages have to go up. The economic divide is at several levels—the coastal population versus those living inland, urban versus rural, basically rich versus poor. For decades, rural wages have been increased by moving population to the cities. In the past 40 years, about 500 million people have moved to urban areas. So, the rural population has halved, while income levels have doubled. It is only possible to increase workers’ wages if the margins on manufacturing go up.

The bottom line, according to Asia advertising executive Tom Doctoroff, is that reform is no longer a luxury and all eyes are on Xi Jinping and his new regime to inspire public confidence in his blueprint for economic progress:

Many now ask whether the contradictions of society — between rich and poor, urban and rural, young and old, politically connected and “small potatoes” — are approaching the breaking point. While crisis is not imminent, loss of absolute confidence in the future of the country has manifested itself in many ways, from 200,000 local protests to a slowdown in sales of luxury goods, real estate and autos. According to C-trip, bookings mid-level travel destinations such as Hainan island, usually popular amongst the new middle class, are down dramatically. Job-hopping, perhaps the greatest indicator of economic optimism amongst ambitious Chinese, has slowed, a sign of diffused anxiety.

…

However, until Mr. Xi outlines specific, incremental steps of structural reform — intra-party checks and balances, independent commercial courts, urban residency reform, rural land-ownership reform, further strengthening of the welfare net and other institutional mechanism to safeguard the economic interests of individuals — consumer confidence will wane. If so, “rebalancing” will remain a long way off, and the China’s potential under-realized. China will certainly not flirt with Western-style democracy or laissez-faire capitalism. But the Chinese, supreme pragmatists that value stability above all else, know the status quo is unsustainable.

Have China’s Trade Statistics Been Inflated?

November export growth of 2.9% may have disappointed, especially when compared to robust figures of 9.9% and 11.6% in September and October, respectively, but what explains the big swing? Forbes’ Gordon Chang points to a couple of reasons why fake transactions may have distorted the trade data:

Are we to believe China had an export boom lasting just two months?  Anything is possible, but a more likely explanation for the anomalous September and October figures is that they were distorted by fictitious transactions.

Anne Stevenson-Yang of J Capital Research in Beijing, in one of her November e-mail alerts, suggests that the uptick in exports may have been partly due to hot-money inflows caused by currency speculation.  Exporters, she notes, are overstating sales, allowing them to book revenues in dollars.  They then use the paperwork to get permission to sell dollars for renminbi.  The result is that exporters made money with their currency transactions, but the byproduct is that the Ministry of Commerce’s trade figures overstate China’s exports.

Tom Holland of the South China Morning Post reports an even more ingenious scheme that has artificially pushed up Beijing’s trade statistics.  There is, he notes, legitimate trade where goods go from one part of China to another through Hong Kong.  For example, it makes sense to transport through Hong Kong components manufactured in Shanghai for final assembly in Shenzhen.  Since 1997, Hong Kong has been part of the People’s Republic, but it is not considered as such for customs purposes.

Other News:

• Japan may have overtaken China as the largest holder of U.S. debt, according to The Wall Street Journal.
• The Wall Street Journal reports that as part of its push to boost domestic demand, China will lower tariffs on a range of imported items next year.
• Bloomberg reports that power consumption posted its biggest monthly gain since February.
• MarketWatch’s Craig Stephen writes that China’s regulator is taking steps to heal its sickly stock markets.
• The State Administration of Foreign Exchange has removed the $1 billion limit for foreign sovereign wealth funds, central banks and monetary authorities investing in China through the QFII program, according to Reuters.

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More importantly, as The Economist points out, consumption (55%) topped investment as the country’s biggest driver of growth during the first three quarters of 2012. While it remains to be seen whether such a trend is sustainable, The Financial Times’ Simon Rabinovitch puts that data point into perspective:

This is exactly what everyone from Wen Jiabao, China’s premier, to the World Bank has said is necessary to make for a more sustainable economic model. In recent years, investment has accounted for nearly half of China’s total economic output, a record for a major economy in peacetime.

The ghost cities, empty apartment buildings and unused convention centres that dot the country are the physical manifestations of this excessive investment, and investors remain concerned that much of it will translate into bad debts for the banking sector.

So increasing consumption is unambiguously good news for China.

Nevermind that September’s manufacturing purchasing managers index (PMI) remained in contractionary territory, or that non-manufacturing PMI fell nearly 3 points, or that growth in electricity consumption slowed for a second consecutive month. The balance of positive news boosted Asian stocks, according to Bloomberg, and Reuters reports that Hong Kong’s benchmark index neared its 2012 high. Chinese stocks extended their rally into today, rising to a six week high, and even the much-maligned cohort of U.S.-listed Chinese companies saw their longest stretch of gains since April. Today, ratings firm Fitch issued a report claiming that China’s economy would avoid a hard landing.

The People’s Bank of China also reversed course during the past week, according to The Wall Street Journal, withdrawing approximately US$35 billion from the banking system after injecting funds for three straight weeks. The move suggests that the central bank sees a smoother road ahead, one paved with sufficient liquidity and a more stable growth trajectory. The China Daily reported that premier Wen Jiabao took part in economic talks last weekend and similarly expressed confidence that China would achieve its full-year economic goals, but he also warned that the effects of the global financial crisis had yet to subside and reiterated his call for reforms to facilitate balanced growth.

As The Wall Street Journal’s Tom Orlik and Bob Davis write, however, China’s incoming leaders face a dilemma over whether to “take a risky political bet on reforms” that may create more pain in the short term:

The traditional methods of kick-starting growth—cutting interest rates and boosting investment—would risk exacerbating economic imbalances, increasing investment returns at the expense of salaries and spending money for households.

Spreading the gains from China’s growth means challenging some of the most powerful groups in the country’s body politic: local officials who benefit when their governments flip land bought on the cheap from farmers, and state-owned enterprises whose low taxes translate into less money for welfare programs. The winners in such a gamble would be China’s lower and middle-income households, which are increasingly looked to as the source of future growth.

Revamping the state-owned sector so the firms operate in a more commercial fashion could cost as many as four million jobs as the companies slim down and shed political tasks and subsidies, said Minxin Pei, a China expert at Claremont McKenna College. “It wouldn’t be privatization; it would be departyization,” Mr. Pei said.

Despite the risks, will the new leaders heed Wen’s advice? Reuters reports that the State Council has tasked policy think-tanks to draft “their most ambitious economic reform proposals in decades” and spoke to five policy advisers involved in the process. According to their sources, policy priorities include curbing the privileges of state-owned enterprises, overhauling China’s tax code, and moving towards a more market-based system of lending and resource allocation.

Domestic companies have long felt squeezed out by massive state-owned enterprises, but lately foreign companies have also grown increasingly frustrated with their lack of fair access to the Chinese market. Earlier this month, The Economist explored the foreign pressure mounting on the Chinese government to level the playing field:

One of the biggest complaints lodged by the multinationals is that they are largely frozen out of government procurement—a market estimated to be $1.3 trillion in size. China promises to join WTO accession protocols that would bring its rules in this area in line with global norms, but has been dragging its feet for years. Strikingly, the EU Chamber has issued a thinly veiled threat on reciprocity: if China does not open up soon, the relatively free access its firms enjoy to the EU’s market may become “untenable”.

The American Chamber of Commerce is more diplomatic, but its political system is not. A congressional committee is investigating Huawei and ZTE, two Chinese telecoms firms, for alleged links to the Chinese army (its conclusion is due on October 8th), and President Obama has just upheld a ban on a Chinese firm owning wind farms in America on security grounds.

It is revealing that the heavyweights of global business have chosen this moment to speak out on reform. One reason, to be sure, is to play to domestic audiences: China-bashing is always popular during American elections, and the euro crisis has turned Europeans sour on China too. But China also gets new leaders soon, and making noise is sure to get their attention.

A broad consensus for reform may exist within the Chinese government, but it remains to be seen who will push any such changes through after China’s next generation of leaders takes the helm following the 18th Party Congress. And while the Party’s power brokers may have agreed on the expected promotions for vice-president Xi Jinping and vice-premier Li Keqiang, the other members of the Politburo Standing Committee will have a large say about what shape any reforms will take. The New York Times reported today that Wang Qishan, a favorite of the international community and the man probably most qualified to have day-to-day control over China’s economy, may have to settle for a lesser role on the Standing Committee and cede the reins of economic policy to the younger and less experienced Li.

Capital Flight – Fact or Fiction?

China does not report on capital inflows and outflows, but that has not stopped some analysts from trying to piece together a picture of its fund flows from available information. A closer look at the investment data, both into China from abroad and by the Chinese elsewhere, seems to support claims that China is suffering from capital flight. The China Daily reported on Saturday that foreign direct investment dropped in September for the 10th time in the last 11 months, declining nearly 7 percent year-on-year as investors shied away from rising costs and a shrinking number of opportunities. On the flipside, The China Daily also reported that investment from China into the United States reached a record high through the first nine months of this year:

During this year’s first three quarters, Chinese businesses invested $6.3 billion in the US, according to a report released on Thursday by New York-based Rhodium Group, which tracks Chinese investments.

The deal pipeline is strong, with major acquisitions pending in the aviation, auto parts and energy sectors, according to Thilo Hanemann, Rhodium Group’s research director.

“While energy and advanced manufacturing continue to land the most investment dollars, 2012 deal flow suggests that Chinese investors are increasingly interested in US service firms, including entertainment, hospitality, finance and information technology,” he said.

The Wall Street Journal also looked at the case of Yan Shuling, who was convicted of money laundering in 2009 and later exonerated, as an example of how Hong Kong has become the gateway for Chinese looking to dance around the mainland’s capital restrictions and move their money abroad. One data trend that does not mesh with the theory of capital flight, however is the recent performance of the yuan against the dollar. The Financial Times’ David Keohane notes that China’s currency has nearly completely rebounded from its summertime plunge, and questions whether any perceived capital outflow has already reversed.

Other News

• China’s National Development and Reform Commission (NDRC) has called for increased efforts to reach this year’s railway investment target - with 3 months to go, investment had yet to hit 70 percent of the RMB 500 billion goal set for 2012.
• An anonymous official told The China Daily that ”nearly one-third of Chinese manufacturers of textiles, garments, shoes and hats ”are now working” under growing pressure” and have relocated elsewhere, mostly to Southeast Asia.
• The Financial Times’ Kate Mackenzie dives into China’s September lending data and asks if it indicates that shadow lending has finally been reeled in by the regulators. On a related note, The Wall Street Journal tells readers why they should worry about China’s wealth management products.
• The WTO sided with Barack Obama and the United States in its steel case against China.
• The China Securities Regulatory Commission announced it would allow overseas investors to hold higher stakes in the country’s securities firms.
• Foreign Policy’s Victor Shih and Susan Shirk explain why China’s currency isn’t taking over the world.
• The People’s Daily reports that China will likely export more than 1 billion mobile phone units in 2012.

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But the latest Pew survey of 3,177 Chinese residents finds that many Chinese have grown more anxious over the past four years–only 59% said they like the pace of modern life, down from 72% in 2008. The economy has grown at an average of around 9% per year over these four years–in fact, 70% of the respondents said they are better off financially than they were 5 years ago–but it turns out growth isn’t all that matters.

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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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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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Faced with sluggish domestic demand and the record cost of fattening animals — the result of a steep rise in the prices of corn and soybeans as drought grips the top exporter, the United States — Chinese hog producers are being forced to sell their herds.

China’s food price cycle is driven in large part by pork, the country’s staple meat. And while it is in abundance now, in about six months, meat stocks are expected to fall as a result of the sell-off, resulting in a surge in prices.

Any increase in food price is expected to push up inflation, which now sits at a comfortable level, having cooled from last year.

But inflation is still one of China’s biggest economic concerns given the possibility that rising prices might lead to social unrest.

Xinhua reported on Tuesday that prices for a number of foodstuffs had risen for a sixth consecutive week, but pork remains relatively cheap, increasing the risk of sudden, steep rises next year.

The wholesale prices of 18 types of vegetables monitored by the ministry increased 1.2 percent from one week earlier, with the prices of eggplants, cabbages and celery rising 7.5 percent, 7.1 percent and 5.1 percent, respectively, according to a statement posted on the ministry’s website on Tuesday.

The retail price of eggs continued to climb, up 3 percent week on week but still down 2.8 percent from the same period last year.

The wholesale price of pork, a staple meat in the country, rose 0.8 percent from the previous week but was still 22.7 percent lower compared with the same period last year, according to the statement.

Read more about China’s food prices and inflation via CDT.

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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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