Why a US crisis is good for China - Paul French

Paul French

Never short of a provocative statement, our Chinabiz Speaker Paul French argues in his Access Asia Weekly update why a possible economic collapse of the US economy would be good for China, despite having a trillion or so in US dollars and other paper assets.

The other week, we made the argument (which apparently surprised a few of you) that the current vocal crop of China nay-sayers were ignoring a raft of economic evidence and that the economy is in pretty good shape, and holding up well, despite exaggerated consumption numbers. But, said a lot of you, what about the coming American recession? Won’t that throw one almighty spanner in the works? Well, by way of an answer, we say no, and we have one word for you if you think American’s cutting back on spending will cause the roof to fall in here – Japan.
Why Japan? Well, quite frankly, we are old enough, and very long in what is left of our teeth, and we remember when you could shop all day in a booming Tokyo and never see a Chinese made product. Japan boomed and China didn’t get much of the action. When Japan went pop, consumers traded down, ¥1,000 stores and discounters boomed, cheap-and-cheerful chains such as UNIQLO flourished and stores filled up with made-in-China goods. Put simply, the Japanese recession was good news for Chinese manufacturers.

His argument: a crisis in the US will have similar benefits for China's manufacturers.

"Where were the guys at Mattel?" - Bill Fischer

Bill Fischer

Blaming China for anything that goes wrong has become fashionable, writes IMD-professor and Chinabiz Speaker Bill Fischer in his latest column for Chinabiz.

... where were the guys at Mattel or the dog food companies when these products were being accepted for sales in foreign markets? Were they asleep? Are they not getting paid for doing a job that they didn't do? If you want to outsource anywhere, you need to be vigilant in ways and places that you didn't have to be before. And, if you can't do that, then it's not China's fault, it's yours!

Green knights, on your horses

Earlier this year I listed the long row of urgent priorities by the central government. I found the list impressive and actually none of the subjects could be missed there. Without addressing each of them, China would develop a massive problem. Since then, with the product quality scandals and a few more, the list has only grown. At that time, I was also wondering which of those priorities would survive the year-end. Some things move faster than expected.
Politics in China is governed by negotiations between the central and many, many other governments. Much of the real power is in the hands of local power brokers and state-owned companies and only by getting their consent, the central government can realize some of its priorities. The question is therefore: what urgent priorities will drop off the list?
I have been discussing the subject with a range of fellow China-watchers and there is a consensus that the environment has dropped out. Some actually say, it has never been on it, but for a while at least investments in environmental projects went up. Local authorities do not mind those, since they benefit from every investment.
A few times over the past months, the government departments in charge of the environment had to take severe political hits. One report by the World Health Organization on the number of environmental reports in China and one developed with the World Bank on the Green GDP, a pet-project of Hu Jintao, where killed. They still had some effect because they of course leaked out, but it gave a clear signal that the environment as an issue should back-off.
Some of my friends dismissed those reports anyway as meaningless propaganda tools. That might be true, but when even meaningless propaganda kits gets killed, there is something rotten.
What those reports could and should have done is creating a climate for real measures, like a stiff increase of energy prices, so the usage of energy could slow down and that could force even the economy at large to cool down, something the central government has not yet been able to do. But when anything goes against the interest of the local power brokers, it is a slowdown of the economy. Those in charge are making money on the booming economy now and do not want to share that with a next generation of leaders.
Of course, China is never going to remove the environment as an issue from its political agenda. And of course, next year Beijing needs to have some breathable air for at least a few weeks in August as the Olympics take place. In the official propaganda, the environment will remain an issue, but not one with a high priority.
Knowing this, what can be done?

First, the environmental struggle has seen severe setbacks and the prospects do not look good. But not all is lost yet and the green knights should get on their horses and get their act together.
Second, companies involved in environmental projects should get their things implemented as soon as possible. Funding that is available should be used as much as possible, because a drop on the political agenda will be followed by a drop in funding
For the record, of course I hope this gloomy analysis is wrong.

Taking apart Thurow's nonsense

Bill Fischer

Sometimes you are looking at a piece, and have to read it again because you cannot believe what it says. That happened to me when MIT professor Lester Thurow tried to explain why he thinks China's economic growth is six percent at most and possibly lower in the New York Times.
Fortunately, IMD professor Bill Fischer, and a speaker at Chinabiz Speakers, found the time to explain at his weblog why Thurow is thoroughly wrong.

Professor Thurow, you’ve missed the entire point! Over the past thirty years, China has moved roughly 20% of the world’s population from the 19th century to at least the late 20th; and in some places the 21st. Chinese people are better fed, better read, and better off than possibly at any point in the 7000+ years of Chinese civilization. Chinese workers take holidays! Chinese basketball players play in the NBA. Chinese peasants take foreign tours! A Chinese automobile manufacturer has reached 1 million units, while a Chinese computer company now bears the “think-pad” brand. Chinese cosomonauts are planning to walk on the moon. Chinese movies are in our theatres. And, China is no longer irrelevant to the global economy, as it was just three decades ago.

What did Mattel do to stop the toys? - the WTO column

Do not get me wrong. All the upheaval about the millions recalled toys and other quality-related issues regarding products from China is long overdue. Even a hundred TV-shows cannot hide that something is seriously wrong in the way quality control is done in this country. And yes, there is now a fair amount of China-bashing going on, but that is very well deserved China-bashing.

But the question what Mattel, and other companies, have been doing to stop this scandalous export of faulty products is a question that is all too easy ignored. Of course it is awful that millions of American children might be in danger when they bite on their toys, but has anybody already looked after the thousands of Chinese workers who have been painting those toys? They must have been exposed to much higher dangerous levels of lead than any of the children involved.

Quality and quality control ask for a comprehensive approach. When there is no guarantee that the working conditions at the suppliers are not adequate, the end products are also at risk, as we see now. Unfortunately, and it has been argued here and here over and over again, the strategy of policing your Chinese suppliers has been declared bankrupt. It is failing, has been failing for a long time, and might never have worked really well.

In the light of that discussion it is shocking to see that Mattel get almost the role of a victim, in stead of that of at least a fellow conspirator.

I do not want to follow this line and put also a part of the blame with the consumer, who has been more than happy to get nice products for an every cheaper price. It is the task of the producers, Chinese and others, to make sure their workers and their consumers do not get hurt in the process. The Mattel-recall should be an opportunity to get safer products, both for the consumers and the Chinese workers.

That is most likely against a higher price, but that price the consumers should be willing to pay.

Fons Tuinstra

Chinese failing the language test

Paul Denlinger at the ChinaVortex brings up an interesting issue: Chinese were by there US or European employers assumed to be fluent in Chinese. Only when the Goldman Sach's proposed co-head for China Richard Ong failed that language test, the investment bank discovered what some of us already news: many Chinese do not speak Manderin.
Even within China, where five major languages are being spoken, the China Daily annually brings the news that more than half of the Chinese actually speak Chinese. For those brought up outside China, without the compulsory Chinese education, that percentage will be much lower. For example in the Netherlands, the majority of the Chinese comes from the region of Wenzhou and mostly spoke at home their wide variety of local dialects. A special language institute in Hangzhou helps them to learn Chinese when they come for business of other reasons to China.
Paul Denlinger certainly touches on a hot topic. He will in the future write more regular about this and other topics for Chinabiz, as he is becoming one of our core speakers.

Internet and business at EU Chamber Shanghai

Sam Flemming

Sam Flemming, one of our expert speakers, will be speaking on Friday next week at a morning session of the European Chamber of Commerce in Shanghai on Internet and business in China.
Of the other speakers I only know Ken Caroll of ChinesePod and he also has a great story to tell. The other two I do not know, although hear from the CEO of Ebay China could be fun too, if he is willing to share why his company is doing so badly in China. Mostly though that is not a favorite subject for business people at public events. (Remember to make a reservation on Wednesday at the latest.)
Our Chinabiz Speakers site has its own "internet" section, but I'm still missing some of our speakers there: the site is still under construction. Sam is there, but we should also have there Shaun Rein, Kaiser Kuo and Isaac Mao. And soon many more.

China's middle class debate

to buy or not to buy

During the preparation of our Chinabiz Speakers Bureau (still under construction)an array of interesting ideas is coming up. Our speakers are opinion leaders in many areas, but that of the emerging middle class in China is one where our speakers take very different position.
On one hand Paul French, supported by CEQ-editor Arther Kroeber (no profile yet) say we should forget about the middle class in China. Here in today's Wall Street Journal Paul French repeats their position:

Most retailers encounter more mixed fortunes. IKEA still operates only two stores and has managed to grow sales largely by decreasing prices by an average of 44% since 2000. Most foreign retailers have discovered that China is a volume-driven, fiercely price-competitive market, which means wafer-thin- to non-existent margins. You can expand and open more stores in such a large country and you can potentially sell a lot. However, if you have to slash margins to the point of eradicating them altogether, what's the point? You end up giving your merchandise away. Same-store sales for many western retailers in China are flat. The growth is coming from new store openings and that is simply not sustainable in the long run.

Paul should look into his figures every now and then, since IKEA has today four stores in China, but I guess that would not change his position.
Our speaker Shaun Rein, who in a previous life as a VC has been bringing in companies like McDonalds and IKEA into China, stands on the other side of the argument, defending what so many foreign business people think they can see with their own eyes: a booming Chinese middle class. In CSMonitor:

The emergence of a solid middle class, in cities and towns across the country, will transform the Chinese market, predicts Shaun Rein, founder of the Shanghai-based China Market Research Group.
"The second- and third-tier cities are where the real money is going to come from in the next 10 years," he predicts, referring to the provincial cities that do not yet enjoy the prominence of Beijing, Shanghai, or Shenzhen. "Everybody is starting to understand that that is where they need to be."

In the same article others join his argument:

And that market is set to grow even larger as 300 million more Chinese move into urban areas over the next 10 years in a continuing mass population shift that will see 100 cities grow to a population of more than 3 million.
The bulk of these new urbanites will become members of the middle class, though their incomes - around $5,000 a year - will be modest to begin with. In China, however, $5,000 buys a lifestyle that would cost four times as much in America, and there will be a lot of families with that much money: Grant expects 700 million Chinese to have joined the "consumer class" by 2020 compared with less than 100 million today

Now, this smells like an interesting debate that is long overdue.

Raising the prices

Inflation is hitting the country and much of the debate focuses on price-hikes. China moved from the last period of stiff inflation in the 1990s into a situation that might sometimes more or less resemble those in a market economy. But how to deal with rising prices is an art that still dates from the planned economy, as Shanghai Scrap points out.
Time for some re-education of the officials who have to discover that price-fixing is not done in the open, but like in the West in secretive and illegal meetings that will be prosecuted when discovered by the government.
Meanwhile, prices are really going up. This week I saw the price of my breakfast, mostly a set of baozi's, go up from 0.8 rmb per piece to 1.0 rmb: more than twenty percent.

Update: And the government is starting to investigate price-fixing cartels. As they should.

China losing heavily on Blackstone investment

Billsdue is looking thoroughly at the first endavour of the Chinese central government in the international investment and wonders whether they have been screwed.

China's state foreign exchange investment company invested $3B in Blackstone's BX) IPO at a 4.5% discount, so they paid $29.605 per share. Blackstone's stock closed Friday at $24.30. China has on paper already lost 18% of its investment, or approximately $540m.

China has effectively lost half a billion US dollar in a month time: a painful way to reduce the trade surplus.

Quality issues in perspective

One of the arguments that comes up when quality is being discussed in terms of quality is that as time moves forward, quality will go up - for all kind of reasons. Well, Paul Midler, founder of the outsourcing firm "China Advantage" does not agree and has some good thoughts about that.
And when you dive into the issue, read also the material Paul Denlinger provides in his new weblog "China Vortex".
This debate is only starting.

China invests in Barclay

After China's surprise investment into Blackstone, the question was how China was going to spend the rest of its massive trade surplus and how it would buy the world. Well, next is the British bank Barclays, who needs capital to purchase the Dutch bank ABN-Amro, reports Marketwatch.
A newly formed state-investment department would then obtain 7 percent in equity of the bank. That stake would be smaller if the purchase of ABN-Amro would fail, and according to the Dutch media shareholders would prefer at this stage another consortium of banks that would have a better offer.

stock blogger faces jail

According to the Financial Times the weblog of Wang Xiujie (35) was more popular than that of Jinglei. One his weblog "Big Brother Leader 777" he gave advice on how to invest on the stock market and he also had a popular sms-service. He now has a problem:

Wang Xiujie, 35, was arrested in the north-eastern city of Changchun after an investigation into his unauthorised investment consulting business, Xinhua news agency reported. No charges have yet been filed.

The China Opportunity - the WTO-column

Shanghai - "Are you positive or negative about the effects of China on the world?" I tried to look no too cynical when the leader of a European delegation formulated last week the questions he wanted me to answer. Shanghai and China are flooded by delegations full of curious business people, government officials, NGO's, eager to find out how China is going to change the world. Most of them seem genuinly lost when it comes to the more fundamental questions.

All to often those relative newcomers try to fit China's development in some easy to catch cliches, since making a real assessment of what is going on is darned difficult. I try not to let them get away with all too easy ways of framing the China story. My task is to confuse you, I tell them, rattle their all to simple assumptions about the dangers and opportunities in China, try to liberate them from the all to simple ideas they might have had about China.

By the time I meet them, most visiting delegates have already made one simple but rather essential observation. "This is a huge country." While everybody might know the figures, only when you are traveling here, face the huge distances, the internal differences, people start to realize that even Shanghai - with mostly a bigger population than the region they come from - cannot be described in cliches only.

It is a delicate balance: trying not to deny the huge problems China is facing, while at the same time also avoiding all too easy doomsday scenario's that sell very well in the media. China's voracious hunger for energy and raw materials. The water crisis in Wuxi, the dead fish in China's lakes, the growing number of stories about social unrest: it's sizzling economic growth does seem to come at a price that might be too high.

China as a country has been used to an almost permanent state of crisis management and has become pretty good in managing crises of all kinds of nature. That is not meant as a compliment, but might help to understand why despite an endless row of serious incidents, there might be a way to continue economic progress without turning the environment or global economic relations into a real disaster mode.

What strikes me in China is the high level of inefficiency in using energy, labor, raw materials, almost anything that is needed for fuel its economic growth. Getting more coal and oil in has been the most important strategy to deal with the growing need for energy. But there could be another way. The level of inefficiency is so high that even a marginally successful program to save energy could make a huge difference and allow years of economic growth without the need for more coal or oil.

I'm not familiar with the current figures, but a few years ago China needed eight times as much energy to generate one US dollar worth of products compared to the United States, for sure also not a country that has a clean record when it comes to energy saving.

Efficiency is going to be a key word in the years to come. That might go against the slight anarchistic nature of China and its citizens, but when there is no other way out, China's crisis manager will find that way.

Fons Tuinstra

A way to clean up the banking sector

Victor Shih detects a path Chinese authorities are following to clean up the banking sector:

I am beginning to detect a pattern where middle level and senior regulators and officials get to rotate to a commercial bank, where they enjoy a few years of high salary. Then, they can either choose to stay or return to poverty. If this can reduce corruption, I think that would be a pretty good system.

Counting gray income: dream on

One of the challenges in trying to figure out how much Chinese actually earn is the gray income. Peking Review has another go at it, but the issue itself seems as old as the tax system is. Because of the fast growing economy, the gray parts has of course also increased in volume.
So, there are basically two ways of looking at it. The conservative approach, where we sadly conclude that for the foreseeable future the absence of a Chinese middle class might not support many of the corporate dream about Chinese consumers. Or the optimistic line where we hope that the gray economy might support those dreams.
Since that cannot be calculated very easy, it is probably the best ways to keep on dreaming.

China's internet users make fast more money

Not only poor students in internet cafes

For a media training I'm checking some of the firm assumptions I have on the Chinese internet users. For that purpose I have been comparing the CNNIC reports that were published in January 2002 and January 2007 for the demographics of the internet users. Some interesting conclusions.

First, everybody knows the basic figures: the number of internet users has grown dramatically, from 33 million in 2002 to 137 million in 2007. But despite those changes, many of the demographics remain rather stable. The division between men and women, married and unmarried. Also the educational level does not show a big shift in terms of percentages. The percentage of high school students goes up a bit but not dramatically.

What is shifting dramatically is the earning capacity of internet users. I have clustered the income-groups CNNIC into four and then you get this (annual income in Rmb per month)

• - 1,000 drops from 61.2% to 47.6%


• 1,001-4,000 goes up from 35.4% to 43.3%


• 4,001-10,000 goes up from 2.6% to 7.5%


• 10,001+goes up from 0.8% to 1.6%

That means that the argument for not investing in online marketing tools is still there: a fairly large amount of internet users in China has very little to spend. But the number of people that does make money increases fast, both as a percentage of the internet users and of course also in absolute numbers. Nine percent of 137 million people earn more than 4,000 Rmb per month and that is only bound to go up faster.

Inflation hits my lunchbox: 10% up

pork

Not only the stock market is (again) going up, also food prices. Today my lunch box (both pork and chicken) went up ten precent in price. A potentially dangerous move, since the competition among lunch box providers is very competitive in this part of Shanghai. For the time being we put up with it, too busy to be bothered by one Renminbi extra.
The Wall Street Journal looks at the ups and downs of the pig cycle in China:

"It's just like the stock market," says Guo Qiurong at her farm outside Beijing, which houses its pigs in long, low-slung concrete buildings. "If you can take the risk, you get in. If you can't, you get out. Once they start losing money, farmers just stop raising pigs."
China's pork prices generally tend to rise and fall in major cycles of three to four years; the last big surge came in 2004. (That this year's price spike comes during the Chinese zodiac's year of the pig appears to be a coincidence.) The pattern is now well enough established that farmers should, in theory, be able to smooth out the fluctuations. The main problem: bad information and poor planning that leads too many farmers to pull out of the market, or jump in, at the wrong time.

China is again heading for an oversupply of pork and dropping prices next year.

Update: The delivery boy only charged the old prices the the lunch box. Perhaps too much negative feedback.

Getting dividend - the WTO-column

The story that the central government from now on will ask state-owned companies for dividend got very little attention, while it potentially can be a turn point in Chinese politics. Power depends very much on the ability to control money and the central government has been very much lacking that ability. The government abolished the dividend system at the beginning of the 1990s when there was not much to ask anyway, since most of the state-owned enterprises was close to bankruptcy.

"We have a strong central government, we have also a very strong local government." A famous Chinese economist summarized one of China's most difficult problems quite pointedly a few months ago at a dinner. Because the central government is, compared to local governments in the richer provinces, relatively underfunded, it often has more slogans than money to offer when trying to solve the nation's problems. When looking at the total take from the government of China's GDP, that is as a percentage not so much different from other countries. The China problem is that most of that revenue comes from land use rights and property rights and stays out of the hands of the central government. Of course, tax revenue has gone up too with the booming economy, but is still lagging behind, leaving education, health care and social care greatly underfunded.

Already in 2002 the World Bank figured out that when the government would get 4.8 percent in dividend from the state companies, all school tuition could be waived. Now, a few more fees could be waived.

Actually, that is what the central government has been doing by waiving much of the school fees at the country side and abolishing the agricultural tax in the past few years. While those decisions were being applauded, it was only one half of the action that was needed. By abolishing the agricultural tax individuals had a bit more too spend, but if left local governments at the country side virtually without money. One of the consequences has been that the experiments with grass-root democracy have ran into trouble, since nobody wants to run for a government with no money to spend.

Allowing the central government - and to a lower degree other government departments holding state-owned assets - to collect dividends again might shift the power balance from the local governments to the centre.

Not surprisingly the destination of this new revenue stream has been the cause of much internal quarrels. An argument between the Ministry of Finance and SASAC, the State Asset Supervision and Administration Commission, has halted the execution of the plan up to recently. In the compromise the Ministry of Finance had to give in and cannot use the dividend for health care or education directly, but the money has been earmarked for R&D that would benefit the state-owned companies directly.

That means that another struggle is laying ahead. But by creating this new fund, the central government does have a bit more leverage over competing departments.

Fons Tuinstra

Panic-selling at the stock exchange

The Shanghai stock exchange has taken another dive south on Tuesday, after it already fell 8 percent on Monday. In the morning of Tuesday it was well below 7 percent at some stages. It show that some panic-selling is taking place and it would be worthwhile to stroll along some of the selling points in the city.
The question is when the money moves back in the market and how much damage investors have suffered by selling. In my estimate at the first point when the drop seems to ease, the market will go up very sharply.

Update: Indeed, the swing upwards came faster than I expected. After reaching a few now lows today, the Shanghai stock market ended more than two percent positive. Expect this trend to continue for the days to come.

China's contraction not likely to have big effect - Bloomberg

Just ahead of the second larger contraction in China this year, Bloomberg explains why the effects might not be as harsh as Mr. Greenspan and the rest of the world might think. They asked a wide range of experts:

They say China's economy shows little correlation with its stock market, and the fact that foreigners are mostly excluded from owning shares -- even Chinese participation is limited to less than 10 percent of the population -- means the effects of a bursting of the bubble would remain contained.

What is the fun of our local financial circus when nobody panics anymore? We might have to switch the subject.
Much attention is focused on the 100 million accounts that have been opened on the Chinese stock markets, but that figure also needs a reality check. Some of the Chinese media report that only 60 million of those are actually active. Because China has two stock markets, one in Shanghai and a smaller in Shenzhen, each investor opens typically two accounts at the same time. That reduces the number of active investors to about 30 million, actually a pretty low number.

Increased stamp duty causes second contraction

A sudden increase of the stamp duty of trade at China's stock exchange of 0.1 to 0.3 percent has cause a second contraction this year at the bourses, as the Shanghai stock exchange fell more than 6 percent by noon.
The increased tax on securities transactions is largely symbolic, but did not miss its effect. The tax used to be 0.6 percent but was lowered in the past as the stock markets were in the doldrums.

Learning from the mistakes by others - the WTO column

Half a decade ago I met a former editor of the Harvard Business Review here in Shanghai and asked him why there were so few case studies about companies in China. There was one famous one about Qingdao's Haier, but that was done in 1995 and there were very few others. Harvard Business School developed this new teaching method where future business leaders would only get case studies, in stead of solid bookkeeping and other traditional elements of their business training. Other business school have taken over that strategy, at least in part. The case studies would feature mostly a major company that faced a "challenge", as disasters are called in the MBA-jargon. The case studies would have an open end, allowing the students to come up with their own solution. The cases were in theory fictive, but in most cases it would not take a lot of trouble to identify the real company behind it.

"We did not think we could learn from those cases in China," the former editor said. "There is nothing to learn for us in China."

I was shocked at the time, since I had had the opportunity to witness some of the corporate challenges in China very closely and I certainly thought others could learn from them. Since then the attitude has changed dramatically and the number of business case studies on China has exploded dramatically. No business school in the world can allow itself not to have a China-program.

A newly released set of China case studies "China CEO: A Case Guide for Business Leaders in China" by Juan Antonio Fernandez and Liu Shengjun is a welcome addition to those case studies. The book is a follow-up of the already very successful China CEO: Voices of Experience from 20 International Business Leaders by Juan Antonio Fernandez and Laurie Underwood, where 20 China CEO's got their opportunity to explain their successes. The main weak point of the first China CEO's book was of course the lack of distance and self-reflection those CEO's sometimes could show, but that has been greatly made up in the second book.

It documents some of the 'causes celebres' in recent China business history, like the early failure of the Peugeot operation in Guangdong, the GM versus Chery case and one of my all-time favorites: the illegal expansion of Carrefour in its early years in China.

The official story is always that foreign companies are in the long run better off when they stick to the rules and regulations of the country they operate in. I then always use the case of Carrefour, the French retailer, to point out that this rule is not set in stone. Carrefour went, with the blessing of local authorities, 100 percent against the restrictions the central government had imposed on the industry. While they were not alone in ignoring those rules - Taiwanese and Hong Kong companies did likewise - other foreign competitors watched their technically illegal expansion with amazement and shock, since it gave the French a huge competitive advantage. Carrefour ignored all the warnings it got.

In the end Carrefour got into trouble and was ordered to stop its expansion for six months. A Carrefour manager at the time summerized me their strategy after they really got into problems: "We went to Beijing and said we we sorry. Then it was ok." The competion was even shocked as the government allowed Carrefour to get away with their illegal practises.

In the book both participants in the process, foreign and Chinese, give their viewpoint and each case it commented by some experts, both from major business schools and experienced people in the industry. I enjoyed it.

Fons Tuinstra

China CEO. A case guide for business leaders in China, by Juan Anthonio Fernandez and Liu Shengjun. John Wiley & Sons, 2007. ISBN 9780470822241.

Greenspan does not impress Chinese markets

Chinese shares in the US took a dive yesterday after former Federal Reserve Chairman Alan Greenspan predicted a "dramatic contradiction", but the stock markets in China - as expected - ignored this trend at the opening of the trading.

Mr. Greenspan spoke by satellite to a conference in Madrid, wrote Bloomberg yesterday.

China Petroleum & Chemical Corp., Asia's largest refiner, led a decline in energy companies on the New York Stock Exchange. Shares of China Life Insurance Co., the country's largest insurer, also retreated.
Speaking to a conference in Madrid by satellite, Greenspan said the rally in Chinese shares ``is clearly unsustainable.'' He joins Li Ka-shing, Asia's richest man, in voicing concern about the stock market in China, where the benchmark CSI 300 Index rose to a record today.

"Government will not meddle with stock market" - Fan Gang

Fan Gang

The government will not meddle in the stock market, according to Fan Gang, a famous economist and member of the policy committee of the central bank, according to AFP. Rumors about the bank's involvement appeared on Friday as a set of measures were taken to cool down the sizzling economy.
According to Fan Gang the measure were not targeting the stock market at all, and were also ignored by the investors on Monday.

"The government will not issue policies to support the market or intervene in the market... The market must bear its risks on it own," Fan was quoted as saying. "The market is becoming mature and so is the government."

Fan Gang is also part of our China Speakers Bureau. When you are interested in having him as a speaker, do drop me a line.

Where are the foreign reserves?

Here is a question from a lay person whose knowledge of the financial markets stops more or less at the ATM-machine. China has a foreign reserve of US$ 1,200 bn and has in a flare of generosity now decided to buy a tiny piece of the US buy-out fund Blackstone for a tiny part of that US$ 1,200 bn. My question is: where is the rest?
I do not assume that the equivalent of uncle Scrooge in Beijing is continuous counting to see if nothing is lost, but at least part must be physically there. Is there a Chinese Fort Knox?
And how much is really virtual commitments? Would they be gone when - for whatever reason - the electricity goes down for a fortnight in the US?
It kept me awake last night.

Propaganda: stock market falls

Chinese media are sometimes a pretty funny bunch. They would rather tell what they think the government would like to hear than tell their audience the truth. I just saw a headline in the Shanghai Daily, telling the stock markets went down today.
It is eleven in the morning, so too early to cheer, but when I looked it up the Shanghai stock market was just a bit positive and climbed up from a -3 percent during the opening of the exchange.
So, as I already assumed yesterday, not many big things will be happening. Compared to for example Hong Kong the number of Chinese investors is still pretty low, despite the high growth rates. Still enough room to go up.

China's business press history summerized

China Law Blog points at this neat overview of China's business press during the economic reform by Cha Shao Bao, a weblog I have missed till now. (It is on wordpress so in China you need a proxy.) It is based on a media class at Princeton University by Arthur Kroeber, amongst others editor-in-chief of the China Economic Quarterly.

Useful for those who lost track on what is going on in the business media. Nice was his short summery of Caijing's position in this field. They decided to push the envelope when SARS broke out in 2003 and this is what happened then:

Finally, the government decided that Caijing’s reports had gone too far and sent Caijing a serious warning. It didn’t dare shut down Caijing or impose greater sanctions because of the publication’s prominent international profile. In contrast, the local papers in the Guangdong area, where the SARS problems originated and who had also covered the social and political injustices behind SARS quite aggressively (exposing government cover-up efforts), were shut down and had their editors arrested and convicted (on trumped up charges of embezzlement).

How to cool the stock market - Hu Shuli

Hu Shuli

China's financial authorities got already much advise on how to calm down the overheated stock exchange, but when the chief-editor of the financial magazine Caijing speaks, it is time to listen. She sees basically two ways to deal with the "irrational exuberance", as she rephrases a famous says by Alan Greenspan in 1996.

First, people should not longer be punished for keeping their savings at the bank. With an inflation of 3 percent and an interest rate of 2.4 percent people want to use their money.

Secondly, the government should stop their efforts to educate people but really deal with illegal practises.

Statements such as “there are some cases of illegal operation” in the CSRC notice are too mild. Among those who are active in the market, not a few have problems with conflicts of interest. In some institutions connected with security exchanges, almost everyone trades stocks, and these institutions basically fail to function near the close of a stock-trading day. Trading stocks during working hours has become a “normal” phenomenon. Some relatives of employees of institutional investors even boast publicly about how they make money based on insider information.

(h/t China Digital Times)

SARS is back! - a column

Bill Fischer

IMD-professor and Chinabiz-columnist Bill Fischer hits out in his analysis of the recent China-related food scandals that have hit the world. China has been able to build up itself as a decent brand name, efforts that now are going down the drain. He refers to his earlier writings on SARS.

"This whole problem is not about reality, but about perceptions. It is not about what is currently happening in addressing the issue, as about what didn't happen. It is, frankly, all about fears of China being the source of the next viral outbreak, and the one after that, and the one after that."

That danger is now back in full force.
Bill Fischer is also on of the speakers in our upcoming China Speakers Bureau. When you are interested in hearing him talk, please drop me a line.
More at Chinabiz.

Update: Jeremy Gordon at the China Business Blog gives his take. His company has been involved in investigating some of the scandals.