China's No. 2 but it's not celebrating

Aug 18, 2010

It's a developing country with more than 40m poor people, says govt
BEIJING: China may have overtaken Japan as the world's No. 2 economy in the second quarter, but the Chinese government said yesterday that the country still has millions of poor people.
'China is a developing country,' Commerce Ministry spokesman Yao Jian told reporters. 'The quality of China's economic development still needs to be raised. It needs more effort to improve economic quality and people's lives.'
It was the government's first public reaction to news on Monday that China overtook Japan in economic output in the April to June quarter.
Many expect China to become the world's No. 2 economy this year, just behind the United States, taking the title Japan has held for 40 years and underscoring its emergence as an economic power.
While China has seen double-digit expansion in gross domestic product (GDP) for years, Japan's growth rates have been comparatively low.
On Monday, Japanese data showed that while Tokyo was ahead of its Asian rival in the first half, its second-quarter GDP was US$1.28 trillion, behind China's US$1.33 trillion reported earlier.
But in per capita terms, China lags far behind Japan. With a population of 1.3 billion, it had a per capita income of US$3,600 (S$4,900) last year, compared with Japan's US$37,800.
China also has more than 40 million people living below its official poverty line, Mr Yao said.
'We should care not only about the GDP data, but also about per capita GDP,' he said at a regular news briefing.
'We still have an enormous gap to make up.'
Chinese state media insisted that China, while contributing to global growth and helping to drive the world's recovery from the financial crisis, was still transforming itself into a world-class economic power.
'China's economic strength is still at the level of a developing nation. So the world's second-largest economy is not the equivalent of the second-largest economic power,' the People's Daily said in a commentary.
In just three decades, China has leapfrogged Britain, France and Germany on its economic ascent and has won developing countries a bigger say in the World Bank and International Monetary Fund.
However, the official China Daily said in an editorial: 'The Chinese economy still has a lot more room to grow and can contribute even more to the global recovery.
'But for those who expect China to assume greater international responsibilities just because of the size of its economy, they should take a hard look at the enormous development challenges that the country still faces.'
The Chinese government is in the midst of a marathon effort to spread prosperity from its thriving eastern cities to the poor countryside and the western region.
It is also trying to defuse tensions over a huge wealth gap between an elite group, which has benefited most from three decades of reform, and the poor majority.

Is there a property bubble in China?

Business Times - 20 Aug 2010


There may be a visible slowdown in housing starts and construction towards the end of this year, KELVIN TAY believes
THRUST centre stage as a result of the decline in the G-7 economies in a post-2008 credit crisis world, the Chinese economy has gained a new level of significance and scrutiny that often generates unwanted, alarmist racket.
Is there a property bubble in China? The answer bears more significance now than ever before. China's construction and real estate sectors are likely to contribute to an estimated 11 per cent of its GDP in 2010. The construction industry employs 14.3 per cent of all workers in urban areas and consumes 40 per cent of all steel and lumber produced in China.
The private residential sector currently accounts for almost 40 per cent of the buildings completed by the construction industry. Never before has the health of the Chinese construction and real estate sectors been more closely followed.
Analysing a large, diverse economy like China's is complex, to say the least. Her sheer size and diversity in terms of economic development makes nationwide average figures rather meaningless. For example, from April 2009 to April 2010, residential property prices in China rose by 15 per cent and when juxtaposed with the price declines in 2008, would hardly set alarm bells ringing.
However, a closer examination of tier 1 cities revealed that in the 12-month period to April 2010, property prices rose by 64 per cent in Beijing, 39 per cent in Shanghai and actually doubled in Shenzhen.
The tier 1 cities accounted for almost 22 per cent of urban residential property sales, rather disproportionate to their share of 8 per cent of total floor space. Prices in Beijing reached a stratospheric 28,000 yuan per square metre in the same period.
Although long documented trends of urbanisation, rural to urban migration and a shortfall in the supply of public housing have resulted in property prices in China rising steadily over the last five years, what actually fuelled the extraordinary climb in prices over the last 12 months has largely been attributed to the increasing participation of state-owned enterprises (SOEs) in the property market.
Higher price
A study conducted by researchers from the National University of Singapore and Tsinghai University found that the transaction price of land tends to be 27.4 per cent higher when it is successfully bid by an SOE.
In certain cities like Beijing, the local and central SOEs' share of developers' land purchases have reached an estimated 71 per cent in early 2010, up from about 37 per cent in 2003.
Leverage, another indication of whether an asset bubble is building, has also seen a steady increase. If we assume that only urban households have access to mortgage lending, then mortgage debt as a proportion of urban household income is near 50 per cent, which makes it a tad uncomfortable.
We also need to take into consideration that in the case of China, where a large share of household wealth exists in the form of bank deposits, it is vulnerable to various forms of asset bubbles as and when households decide to shift a certain proportion to other asset classes, including property.
Although property purchases require a larger amount of capital (initial down payment), it is clearly not a major obstacle, especially in a period when property prices are escalating and return expectations get artificially inflated.
In that sense, we view the property tightening measures announced by the Chinese government in May with measured relief.
The policies are largely aimed at stabilising the market by curbing speculative demand and at the same time, increasing the supply of housing, in particular public housing.
At this stage of its economic cycle, a slowdown in China's property market is very much welcome news. If the Chinese real estate sector continues to grow at breakneck speed with little breathing space, it would certainly magnify the risk of overheating followed by a systemic collapse. This would have serious ramifications for Asia, including Singapore.
A collapse in China's property market resulting in financial contagion might affect the Singapore property market both directly and indirectly. As of July this year, Chinese nationals are currently the second largest source of foreign buyers of property in Singapore. Any crash in China's property market and subsequent economic slowdown would probably change that equation.
Furthermore, over the past two decades, systemic crises have always negatively impacted Singapore's property market. The Asian financial crisis in July 1997, Nasdaq crash in March 2000 and the credit crisis in 2008 all resulted in double-digit declines in the local property market.
However, it is the indirect impact that is actually more worrying. Since 2007, almost all home loans in Singapore are based on floating rates. Mortgage rates are usually pegged to the three-month Singapore Interbank Offered Rate (Sibor) or three-month Singapore Offered Rate (SOR), plus a premium that ranges between 1.25 per cent and 1.75 per cent.
Spike
Therefore, if Sibor or SOR spikes up suddenly and remains at stubbornly elevated levels for a period of time, property owners tied to such loans might suddenly find their monthly mortgages taking up a disproportionate amount of their monthly income.
Have there been instances when Sibor suddenly behaved erratically? The Asian financial crisis was one such example. Sibor spiked up to a high of 7.75 per cent before finally sliding to 1.9 per cent in December 1998. The average rate of Sibor during that 18-month period hovered at 4.9 per cent. As Asia was fortunately not at the epicentre of the credit crisis in 2008, Sibor did not behave erratically but averaged around 1.3 per cent, more than twice the current rate of 0.56 per cent.
So what is the likelihood of the above scenario panning out? Fortunately, we believe the chances are slim. The sharp appreciation in property prices in China have been largely restricted to the tier 1 cities, leaving the fundamentals of the broader market intact.
Although we do not expect China's property sector or economic growth to collapse, we believe that there may be a rather visible slowdown in housing starts and construction towards the end of this year, with any possibility of a reversal of the property tightening measures and/or loosening in monetary policy likely to be in early 2011. We believe this could potentially be the catalyst for the Shanghai A-Share Composite index, which is currently the worst performing stock market in Asia ex-Japan, to outperform.

China's Japanese debt buying spree soars

Aug 10, 2010

It bought 7 times previous full-year record in first half
TOKYO: China bought 456.7 billion yen (S$7.1 billion) worth of Japanese debt in June, Japan's Finance Ministry said yesterday, as Beijing further surpasses its previous full-year buying record.
For the first half of the year, China bought 1.73 trillion yen worth of debt, nearly seven times the full-year record of 253.8 billion yen in 2005.
In May alone, China bought a net 735.2 billion yen in Japanese government bonds, exceeding the 541 billion yen purchased in the four months previously.
China has sought to diversify its vast investments away from the United States and Europe since the onset of the financial crisis.
Most of the bonds bought by China are thought to be used by the government to manage its foreign reserves.
The increase coincides with renewed doubts about the pace of recovery in the US and Europe, and indicates that China is putting more of its swelling foreign exchange reserves into relatively stable Japanese bonds as a result, say analysts.
Japan's risk of default is perceived to be much lower than that for debt-hit Greece or other eurozone countries, even though its gross public debt is nearing 200 per cent of its gross domestic product, the highest among developed countries.
With around 95 per cent held by domestic investors, Japanese bonds are seen as a relatively safe bet.
China's foreign exchange reserves have ballooned in recent years.
The reserves, already the world's largest, grew 25.2 per cent to a record US$2.447 trillion (S$3.305 trillion) at the end of March from US$1.954 trillion a year earlier, the People's Bank of China said in April.
One way Beijing has diversified its investments is through sovereign wealth fund China Investment Corp, which manages around US$300 billion and has been investing heavily in resources companies.
Separately, a former senior Bank of Japan official said the yen's current rise is too rapid and may prompt the Japanese authorities to step up their verbal warnings.
Mr Eiji Hirano said Tokyo, however, is unlikely to be able to convince the US and Europe of the need to intervene in markets to weaken the yen.
'If the pace of the yen's rise is too fast, Japan may try to check it by showing its readiness to intervene,' said Mr Hirano.
'But current foreign exchange levels are the natural reflection of changing monetary policies in the United States and Europe and the fact Japan has not changed its policy. Japan is thus unlikely to obtain other nations' consent for launching a solo intervention.'
The US dollar yesterday bounced back to around 85.40 yen after hitting an eight-month trough of 85.02 yen last Friday. However, traders say it has room to fall again on expectations the US Federal Reserve could ease monetary policy even further as early as this week.
AGENCE FRANCE-PRESSE, REUTERS

MM Lee: Invest in China with confidence, guanxi

Business Times - 13 Jul 2010

(SINGAPORE) Singaporeans looking to invest in China should do so with confidence and the requisite 'guanxi', said Minister Mentor Lee Kuan Yew at the FutureChina Global Forum last night.
'Singapore's businessmen are largely welcomed in China. Many Chinese officials from the various provinces come to Singapore for training in urban management, and they understand that Singapore has a clean system,' he said in Mandarin.
'Some people say that Taiwanese are 'wu qing' (merciless), Hong Kong's people are 'wu chi' (shameless) and Singaporeans are 'wu zhi' (ignorant). But it is the ignorant that people feel are honest and reliable,' he said to much laughter from the 500 businessmen, government officials, academics and representatives of civil society present at the dinner dialogue.
The FutureChina Global Forum, organised by Business China in celebration of 20 years of diplomatic ties between Singapore and China, hopes to build a 'community of insiders' from business, political, academic, technological and cultural fields which might then hold annual or biennial gatherings here to share insights on China's developments, said Business China chairman Chua Thian Poh.
During the hour-long dialogue moderated by Singapore Press Holdings senior executive vice-president Robin Hu, Mr Lee fielded questions in both English and Mandarin on issues ranging from China's foreign relations, domestic political succession and political system, to the rising giant's relations with Singapore.
In response to a question on what Singapore might best teach China, Mr Lee said: 'Singapore is a small country, we cannot presume to teach other countries. If the Chinese are interested in certain aspects of how Singapore does things and request that we show them, of course we will do that, but we are a small country and would not have the audacity to instruct.'
'How can a population of four million teach a population of 1.3 billion how to eat rice?' he added, drawing laughs from the audience.
But there is room for mutual learning, especially between the younger generations. 'What can we learn from each other? Well, we have quite a number of mainland Chinese immigrants. They are very hardworking, they are very serious, their children do well in schools, giving our children enormous competition, that's good incentive for our children to do better,' Mr Lee said.
'What can we teach the Chinese? Bilingualism - understanding the world without translation. English is the second language of all countries that do not have it as their first language. Without it, you are at a disadvantage,' said Mr Lee. China needs to have 10 to 20 per cent of its population speaking English to create an English-speaking environment, he said.
The fundamental difference between the younger generations of Chinese in China and those in Singapore though, is one of mindset. 'We are in South-east Asia, and our outlook on any strategic issue must be from a South-east Asian point of view. They (the Chinese) are part of a huge continent and on their way to becoming a colossal power, so we start off from two different scales,' Mr Lee said.