CDT Money: Bridging The Great Divide

During a week in which Xinhua News called out the resentment brewing in China over the country’s “yawning wealth gap”, and the China Daily reported that Premier Wen Jiabao told a State Council economic conference that the government would press ahead with drafting a “wide-ranging reform of the income distribution system” before the end of the year, The New York Times nabbed control of the weekend’s news cycle when it published the findings of David Barboza’s year-long investigation into the massive wealth accumulated by Wen’s family under his leadership.

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.

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