The average monthly wage of migrant workers grew 11.8 percent in 2012 from the previous year to 2,290 yuan ($370). That marked a sharp slowdown from the annual 21.2 percent surge in 2011, according to the latest survey by the National Bureau of Statistics.

[…] The survey reinforced signs that China’s export-oriented coastal provinces face growing competition from their inland counterparts as more migrants seek and find jobs closer to home.

The number of migrants working in their home provinces rose 3.6 percent in 2012 from the previous year, outpacing the 2.3 percent rise in the number of people working outside their home provinces.

[…] Provincial officials in the interior have rolled out the red carpet for foreign companies trying to escape higher costs in the more developed coastal areas. [Source]

Even at their reduced growth rate, migrants’ wages far outpaced a 2.6% rise in China’s consumer price index over the same period.

South China Morning Post’s Anita Lam presented a range of reactions to the report:

“Wages jumped 53 per cent over the three years to 2012, which translates into an annual average growth of 17.6 per cent,” said Liu Kaiming, the director of a Shenzhen-based labour rights group.

“So it would be natural for wage growth to slow down at some point. I believe it will slow further in the next two years.”

[…] The Federation of Hong Kong Industries, 90 per cent of whose members operate factories in the Pearl River Delta, said the slowing of wage increases last year was a warning that manufacturers could no longer bear the recurring double-digit salary rises.

[…] Chong Shing-hum, the president of the Hong Kong Exporters’ Association, said he expected wages to grow annually by an average of 10 to 12 per cent in the next two years because labour supply is shrinking faster than demand.

“Few youngsters want to join the manufacturing industry these days,” Chong said. [Source]

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Post tags: demographics, manufacturing, migrant workers, rural migration, wages
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In just 30 years, China has risen from long-standing poverty to being the second largest economy in the world – faster than any other country in history.

From angry farmers to weary migrant workers, powerful politicians and everyone in between, what China says and does, has become of undeniable importance to the entire world.

Episode 1: The Dramatic Rise, focuses on the divides created in Chinese society by the rapid economic reforms:

Episode 2: Power and the People, looks at how Chinese citizens get their voices heard in the Internet age:

Episode 3: The Fire Inside, examines the fight for women’s equality in China:

Episode 4: Made in China, has not yet been broadcast but will look at China’s role in the global economy.

Read more special media reports on China, as well as more about China’s rise, via CDT.

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At Crocs, 65% of its colorful shoes are expected to be made in China this year through third-party manufacturers, down from 80% last year. Coach will reduce its overall production in China to about 50% by 2015 from more than 80% in 2011 so the handbag maker isn’t too reliant on one country, a spokeswoman says.

Some migration of apparel manufacturing from China is expected, and even encouraged by the government, as the country’s economy matures. As other Asian nations become efficient at mass manufacturing, China must embrace research and high-technology production to transform its economy as South Korea and Japan once did. But healthy economic growth requires that China expand its service sector and create higher-skilled manufacturing jobs at a rapid clip to compensate.

“If costs continue to rise, but China is unable to become more innovative or develop home-grown technologies, then the jobs that move offshore won’t be replaced by anything,” says Andrew Polk, a Beijing-based economist for the Conference Board, a research group for big American and European companies.

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Counterfeit goods make up about 2% of world trade, worth about $250 billion a year, according to a report released today (April 16) on transnational crime in Asia by the United Nations Office on Drug and Crimes (UNODC). And, 67% of those counterfeit products were manufactured in China […], according to data on goods seized worldwide between 2008 and 2010.

Global counterfeit trade, considered a “soft crime” by the UNODC, is made up of seemingly innocuous items like knock-off designer handbags and watches, but also includes more dangerous goods like fake medicine or toxic toys. Since its emergence as the world’s factory, China has developed a reputation for exporting fake, dangerous goods from pesticides, to fatal diet pills, cold medicine and herapin, a blood thinner, that killed 81 in the US in 2008. Recently, US custom regulators have charged companies for selling counterfeit made-in China toys with dangerous levels of lead.

For more on counterfeit goods, see ‘The Status of Fakery in China‘ at CDT, and Stan Abrams on the often ignored distinction between fakery and counterfeiting.

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

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

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

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

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

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

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

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“This is not a cost-cutting exercise […] It’s a direct result of our strategy to have production close to the core markets. This factory will not supply Europe or North America,” Lego spokesman Roar Rude Trangbaek said, adding that the Lego factory in China will be able to supply 70% to 80% of the Lego bricks sold in Asia in 2017.

[…] Currently, Lego sources a small portion of its Lego and Duplo bricks from Chinese suppliers as well as the majority of its electronic and textile components.

But the coming Lego factory in Jiaxing, about 100 kilometers from Shanghai, will be a complete factory, a replica of Lego’s four existing factories in Denmark, Mexico, Hungary and the Czech Republic.

Lego’s total global sales reached $4.1 billion last year.

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In March 2012, CCTV reported that Shantou’s toy manufacturing industry was habitually using toxic materials to make its products. After a public outcry, the city’s deputy mayor apologized, and vowed to make fundamental quality improvements in the industry.

However, any improvement sparked by the television report was short-lived. A revisit from CCTV reporters found that local processing workshops are still providing toxic materials, such as medical waste made from plastics, to toy manufacturers.

[…] At the processing workshops, plastic materials and used medical devices, which are often found in garbage cans, are simply smashed, rinsed and dried, and then sold to toy producers. Sometimes the workshops even added ground-up stone in the materials to make it heavier, with the hope of making more money, CCTV reported Sunday.

[…] Toy retailers at a Chenghai district plastics city, a marketplace for the city’s retailers, told CCTV that quality certification can be easily printed on the toys without any inspection by governmental supervisory body.

Xinhua reported last month that students at 21 Shanghai schools had been warned not to wear their uniforms after one batch was found to contain carcinogenic dye.

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Wang Zengsong is desperate for a steady job. He has been unemployed for most of the three years since he graduated from a community college here after growing up on a rice farm. Mr. Wang, 25, has worked only several months at a time in low-paying jobs, once as a shopping mall guard, another time as a restaurant waiter and most recently as an office building security guard.

[…] “I have never and will never consider a factory job — what’s the point of sitting there hour after hour, doing repetitive work?” he asked.

Millions of recent college graduates in China like Mr. Wang are asking the same question. A result is an anomaly: Jobs go begging in factories while many educated young workers are unemployed or underemployed. A national survey of urban residents, released this winter by a Chinese university, showed that among people in their early 20s, those with a college degree were four times as likely to be unemployed as those with only an elementary school education.

See more about China’s “ant tribe” of un- or underemployed graduates via CDT.

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The HSBC flash purchasing managers’ index (PMI) rose to 51.9 in January, the highest since January 2011 and above the 50-point level that shows accelerating growth in the sector from the previous month.

The PMI, the earliest preview of China’s economic health in 2013, is the latest indication that the world’s second-largest economy is steadily recovering from a near two-year cool-down.

“Despite the still tepid external demand, the domestic-driven restocking process is likely to add steam to China’s ongoing recovery in the coming months,” Qu Hongbin, chief China economist at HSBC, said on Thursday.

The Wall Street Journal points out that HSBC’s PMI reading, which focuses more on small and medium-sized private business as opposed to the SOE-focused official PMI, has been above 50 for three straight months:

“The positive momentum is likely to be sustained in the first half of the year,” said Li Wei, China economist at Standard Chartered. “The general feeling at the moment is that growth is picking up—we should see good growth at least in the first two quarters.”

Meanwhile, at the World Economic Forum in Davos, the head of China’s National Economic Research Institute claimed that China is in the midst of a recovery:

Fan Gang told a session on China’s growth prospects at the World Economic Forum in this Swiss Alpine resort that the world’s second-largest economy should grow faster in 2013 than it did last year.

China posted growth of 7.8 percent last year, its weakest performance since the 1990s, but its economy started reviving at the end of the year when growth rose to 7.9 percent, up from the two previous quarters.

“Now I can say the ‘soft landing’ has landed last year, and now it’s under way to recovery,” said Fan, whose institute is part of the Chinese government.

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Post tags: Davos, economic growth, HSBC, manufacturing, PMI, soft landing, World Economic Forum
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The Ullens Center for Contemporary Art in Beijing has an intriguing new take on China’s place in the debate over Apple, iPhones, and the people who make them. While Americans hash out the moral ups and downs of having our electronics produced by Chinese factory hands, a young performance artist named Li Liao decided to jump into the middle of it. He got an assembly-line job making iPads, and forty-five days later he used his wages to buy one. As an exhibit, he put the iPad on a pedestal, tacked up his uniform and badges, and framed his contract. The effect, on a white gallery wall, is a strangely addictive ready-made tableau about the intersection of money, aspiration, and technology. I watched two young men separately linger over it for very different reasons: one was a hip Chinese gallerygoer in chunky glasses and a camel-hair coat, taking it all in; the other was a gallery security guard in a borrowed suit and white gloves. He was studying the details of the contract.

Did the experience change your perceptions of Apple one way or the other?

I worked at Foxconn for forty-five days. Before that, I was already an Apple consumer. I don’t think this experience changed my perception of the products; it only made one thing clearer: many of the products in this world actually have nothing to do with the workers who made them. To most of the workers there, Apple was just a name, a logo.

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When Ms. Pu was hired at this Foxconn plant a year earlier, she received a short, green plastic stool that left her unsupported back so sore that she could barely sleep at night. Eventually, she was promoted to a wooden chair, but the backrest was much too small to lean against. The managers of this 164,000-employee factory, she surmised, believed that comfort encouraged sloth.

But in March, unbeknown to Ms. Pu, a critical meeting had occurred between Foxconn’s top executives and a high-ranking Apple official. The companies had committed themselves to a series of wide-ranging reforms. Foxconn, China’s largest private employer, pledged to sharply curtail workers’ hours and significantly increase wages — reforms that, if fully carried out next year as planned, could create a ripple effect that benefits tens of millions of workers across the electronics industry, employment experts say.

Other reforms were more personal. Protective foam sprouted on low stairwell ceilings inside factories. Automatic shut-off devices appeared on whirring machines. Ms. Pu got her chair. This autumn, she even heard that some workers had received cushioned seats.

The changes also extend to California, where Apple is based. Apple, the electronics industry’s behemoth, in the last year has tripled its corporate social responsibility staff, has re-evaluated how it works with manufacturers, has asked competitors to help curb excessive overtime in China and has reached out to advocacy groups it once rebuffed.

Foxconn, which manufactures electronics for the likes of Apple, Dell, Samsung and others, pledged earlier this year to improve conditions in its factories after the Fair Labor Association published a report finding violations of both Chinese law and industry codes of conduct. Apple also issued a statement to The New York Times in response to its questions for the article:

“Apple takes working conditions very seriously and we have for a long time. Our efforts range from protecting to empowering to improving the lives of everyone involved in assembling an Apple product. No one in our industry is doing as much as we are, in as many places, touching as many people as we do. Through years of hard work and steadfast commitment, we have set workplace, dormitory and safety standards, sought help from the world’s leading experts, and established groundbreaking educational programs for workers. Since 2008, more than 200,000 factory workers have taken free classes including college-level courses provided by Apple, and over one million employees have been educated on their rights through our worker empowerment training program.

“We believe workers everywhere have the right to a safe and fair work environment where they can earn competitive wages and express their concerns freely. Our suppliers have to live up to that if they want to do business with Apple.

…

“Apple is in a unique position to lead and we have embraced this role since the earliest days of our supplier responsibility program. We do all these things out of respect for our customers and, most of all, the people who make our products.”

See also the New York Times’ previous in-depth reporting on Foxconn as part of their iEconomy series: Part 1: How the U.S. Lost Out on iPhone Work and Part 2: In China, Human Costs Are Built Into an iPad . Read more about Foxconn, Apple and labor conditions in China via CDT, including, “This American Life’s Foxconn Retraction: Reactions,” which looks at recent coverage of Foxconn.

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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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During its traditional disassembly of one of Apple’s latest desktops, however, repair guide site iFixit noted that “Interestingly, this iMac claims to have been assembled in the USA.” While custom-configured, American-assembled Macs are not unheard of, other reports have also surfaced of new, standard-configuration iMacs bearing the “Assembled in USA” marking. At 9to5 Mac, Seth Weibtraub tried to unravel the mystery:

The “Assembled in USA” label doesn’t just mean that foreign parts screwed together in the U.S. either. The U.S. Federal Trade Commission assumes that a ”substantial transformation” must happen in the U.S. for the label to be used.

Specifically, the FTC states that the label “Assembled in the USA” should be the following:

A product that includes foreign components may be called “Assembled in USA” without qualification when its principal assembly takes place in the U.S. and the assembly is substantial. For the “assembly” claim to be valid, the product’s last “substantial transformation” also should have occurred in the U.S. That’s why a “screwdriver” assembly in the U.S. of foreign components into a final product at the end of the manufacturing process doesn’t usually qualify for the “Assembled in USA” claim.

[…] Perhaps Apple is still outsourcing the manufacture to Foxconn and others, but it is actually assembling the products in a U.S. plant? To the surprise of some, Foxconn has a few locations in the U.S., but it isn’t known if they are actually making anything here.

Weintraub also pointed out another case of an iMac “Assembled in Ireland”.

The discovery coincides with a feature at The Atlantic by Charles Fishman, on America’s “Insourcing Boom”. Fishman explains how rising oil prices and wages in China, booming natural gas production and greatly increased productivity in the U.S., and unanticipated benefits from designing and building appliances in the same location have, in many cases, reversed the logic for manufacturing in China. He focuses on General Electric’s huge Appliance Park facility in Louisville, Kentucky, whose workforce hit a low of 1,863 last year after a 1973 peak of 23,000.

[… T]his year, something curious and hopeful has begun to happen, something that cannot be explained merely by the ebbing of the Great Recession, and with it the cyclical return of recently laid-off workers. On February 10, Appliance Park opened an all-new assembly line in Building 2—largely dormant for 14 years—to make cutting-edge, low-energy water heaters. It was the first new assembly line at Appliance Park in 55 years—and the water heaters it began making had previously been made for GE in a Chinese contract factory.

[…] In the midst of this revival, [GE CEO Jeffrey] Immelt made a startling assertion. Writing in Harvard Business Review in March, he declared that outsourcing is “quickly becoming mostly outdated as a business model for GE Appliances.” Just four years after he tried to sell Appliance Park, believing it to be a relic of an era GE had transcended, he’s spending some $800 million to bring the place back to life. “I don’t do that because I run a charity,” he said at a public event in September. “I do that because I think we can do it here and make more money.”

Immelt hasn’t just changed course; he’s pirouetted.

[…] What’s happening in factories across the U.S. is not simply a reversal of decades of outsourcing. If there was once a rush to push factories of nearly every kind offshore, their return is more careful; many things are never coming back. Levi Strauss used to have more than 60 domestic blue-jeans plants; today it contracts out work to 16 and owns none, and it’s hard to imagine mass-market clothing factories ever coming back in significant numbers—the work is too basic.

[…] And of course, manufacturing employment will never again be as central to the U.S. economy as it was in the 1960s and ’70s—improvements in worker productivity alone ensure that. Back in the ’60s, Appliance Park was turning out 250,000 appliances a month. The assembly lines there today are turning out almost as many—with at most one-third of the workers.

See also ‘Made in US, But Sold in China‘ at CDT.

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

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

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

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

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

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

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

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

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

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

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

Big Bad Loans

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

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

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

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

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

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

Other News:

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

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Post tags: Andrew Rothman, bad loans, China PMI, credit crisis, economic growth, economic reform, economic slowdown, employment, exports, GDP, Li Keqiang, manufacturing, michael pettis, Nick Lardy, Xi Jinping
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That the relatives of a powerful Chinese politician have used their connections to enrich themselves probably surprised nobody – the staggering net worth of China’s top public servants is well known – but the timing of the report, with the 18th Party Congress just two weeks away, clearly rankled a Communist Party hoping for a smooth path into its once-a-decade leadership transition. Furthermore, Wen had championed himself as a reform-minded man of the people from humble roots.

The report also did no favors for a Communist Party trying to distance itself from the fallout of the Bo Xilai scandal, a tale of corruption that the party would like to convey as isolated and not indicative of systemic impropriety at the upper levels of its leadership. And as The Economist points out, Li Keqiang “will be among those squirming” as he gets set to take over for Wen. A recently-published Brookings Institution report claims Li faces a conflict of interest as he pursues healthcare reform while his younger brother maintains an influential role in China’s tobacco industry.

Chinese censors worked overtime to quash the Wen story over the weekend, and Wen’s family lawyers issued a statement challenging its allegations, as the story diverted a fair amount of attention away from the debate over whether China’s economy has indeed turned a corner and begun to stabilize heading into year-end. HSBC had published its flash purchasing managers index (PMI) data for October, which showed that China’s factory sector had remained in contractionary territory but had shrunk at a slower pace than in previous months. So is the glass half full? The Financial Times’ Kate MacKenzie dove into HSBC’s summary, which showed falling inventories and rising input and output prices, but also showed a shrinking labor force, and concluded that “it’s a little too early to say if manufacturing is truly recovering” on the mainland.

Also for The Financial Times, guest contributor Linda Yueh of Bloomberg TV took a step back from the manufacturing data and asked whether China is destined for a cyclical turnaround or whether it has reached a “new normal” as it continues to structurally evolve to suit its next phase of growth:

Along with getting closer to the technological frontier, which is associated with a growth slowdown as the “catch up” phase begins to end, another reason for China is demography. RBS’s Louis Kuijis, the former Beijing-based World Bank economist, estimates that the working-age population is growing at 0.5 per cent per annum, a third of the previous pace when an 8 per cent growth rate was thought to be necessary to maintain employment. He infers that the trend growth rate may now be around 7.5 per cent.

But, it’s hard to discern if a slowdown is structural or still predominately cyclical. Another difference with 2008/9 is that the current export slowdown was expected so firms could adjust and there is a more flexible renminbi to help the adjustment in the real economy. It appreciated by a record 4.4 per cent in 2011 alone against the dollar and a wider trading band has helped to better insulate against a balance of payments shock. Export falls require more real adjustment if the currency is less flexible as China’s was in 2008/9.

Elsewhere, The New York Times had more on the reaction to the data among the foreign analyst community:

Analysts said the improvement in the October reading reflected the effect of a steady drip of stimulus measures introduced by Beijing. A gradual improvement in overseas demand in recent months also has helped. A subindex measuring new export orders, for example, rose to a five-month high of 47.3 points as orders for the Christmas season came in.

The reading provided a “positive sign,” and “further evidence of a pickup for the fourth quarter,” economists at Australia & New Zealand Bank in Hong Kong wrote in a research note. At the same time, however, the October number was still below 50 points — the level that separates expansion from contraction, showing that the companies polled in the survey still faced considerable challenges.

Analysts on the mainland also maintained an optimistic tone and suggested that the central government would retain a cautious stance with regards to any near-term fiscal or monetary policy action. Their comments echo a recent front page article from the People’s Bank of China’s self-published newspaper, which argued that policymakers have “no grounds for further loosening of monetary policy” to spur growth. And a Bloomberg survey conducted from October 18-22 predicted that China’s central bank would likely forego any further cuts to benchmark interest rates or the reserve requirement ratio:

With growth momentum improving and inflation picking up toward the end of the year, “the likelihood of further interest-rate cuts in the rest of 2012 is diminishing,” JPMorgan’s Zhu said in an Oct. 18 research note.

“In addition, the busy political agenda going ahead also implies that the prospect of meaningful monetary policy easing in the near term becomes more remote,” Zhu wrote.

Finally, reform has become as big a buzzword as any as the state propaganda machine churns its way toward next month’s party congress. A China Daily piece over the weekend argued that the government should pursue reform to seek new sources of growth, and Xinhua cited a senior official as pledging reforms for state-owned enterprises, from railway, telecom, power and natural sectors as well as others, to lower the barriers to entry in such industries.

A key focus for investors will also be the extent of reform in China’s securities industry. The China Securities Regulatory Commission (CSRC) is eyeing new regulations governing credit ratings of bonds traded in the inter-bank market, according to Reuters, and The Global Times reports that the CSRC is also considering a new dividend tax scheme intended to discourage short-selling. Last month, vice premier Wang Qishan spoke of reform in a meeting with the CSRC’s International Advisory Council. From The China Daily:

Despite the rapid development and huge changes achieved by the country’s capital market in recent years, it still appears comparatively immature, he told the 20-strong delegation.

Wang said China’s capital market would learn from successful international capital markets, accelerate institutional innovation, strengthen market regulation and take active and steady steps to open up further to the outside world.

He also called for the protection of investors’ interests.

Other News:

• From Dongguan in Guangdong province, The Globe and Mail’s Mark MacKinnon highlights the efforts Chinese companies are now taking to entice workers increasingly seeking better pay and working conditions.
• Bloomberg reports that Chinese aluminum stockpiles have hit their highest level in two years, as supply outpaces demand.
• Caijing warns that local government debt has reached an “alarming level” and should be watched closely ahead of a repayment hike in the next two years.
• Canada’s Nexen expects its takeover bid by state-owned CNOOC to close by year-end, according to Reuters.
• Three ratings agencies from China, The United States and Russia announced that they will jointly launch a new agency to challenge the current global ratings system dominated by the “big three” US agencies.
• Bank of China’s profit jumped 17% in the third quarter, helped by an improved lending margin, and China Construction Bank similarly beat profit estimates.
• A Commerce Ministry think tank expects 2012 exports to rise 6-7%, and remain below 10% next year, according to Reuters.
• The China Daily reports that farmers in Wenzhou can now use pigs and cows as collateral to help obtain loans.

© CDT Money for China Digital Times (CDT), 2012. | Permalink | No comment | Add to del.icio.us
Post tags: 18th party congress, Bo Xilai, corruption, economic reform, fiscal policy, income gap, Li Keqiang, manufacturing, monetary policy, PMI, securities law, state-owned enterprises, Wen Jiabao
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