Expats love to rant about how wonderful China’s infrastructure is – reliable wireless in cities, extensive subway systems, and incredible cell phone reception – many of us are particularly fond of the rail system. The high speed segments in particular are quite nice. These aren’t free, however, as this article indicates that Minsheng Bank analysts concluded that the Railway Ministry currently has Rmb1tr in liabilities (representing an assets to debt ratio of over 55%). Last year the servicing cost was approximately Rmb40bn; which incidentally is enough to build the oft-discussed maglev between Hangzhou and Shanghai (cementing the former’s status as just another one of Puxi’s suburbs).

When the ultra-high speed was opened between Shanghai and Nanjing had its inaugural opening, the Railway Bureau shut down the high speed trains on the same route, so that people had to take the slightly faster (and significantly more expensive) option. Locals indicated that this was a face saving maneuver. Tickets on the newer, faster trains are seen as expensive in general, and its a hot button social issue (particularly since those it affects most – migrants – are in the least capable position to shoulder price increases).

The answer of course is that 8% growth will soak up all of the current costs of infrastructure development (at least until this is finished). While this particular bit of Sinocentric-doctrine is rarely called into question, it would be interesting to examine more information on costs and projected revenues. Given that national GDP is somewhere between USD5-9tr (depending on your preferred methods of measuring exchange), this is a very significant number. HT IS.

Yasheng Huang’s much praised Capitalism with Chinese Characteristics has a short section in the update about China’s 2008 Labor Contract Law reforms:

On January 1, 2008, China put into effect a new labor law that requires businesses to offer permanent employment to workers with more than 10 years of employment. This new labor law will be very damaging to the economy. Labor market rigidity will reduce the incentives of entrepreneurs to create businesses and will drive away existing businesses to countries such as Vietnam and India. Aggregate employment may drop and thus further exacerbate the weaknesses of domestic demand, even though the intention of the law is to provide relief to China’s long suffering labor…

… There is little recognition that many of the social problems in China today are a result of a malfunctioning economic process, such as the blockage of small-scale entrepreneurship, and that the right recipe to correct these distortions is further liberalization. The 2008 labor law is one of many examples.  (Huang 2008, p. 297)

Throughout the book Huang is very critical of the constraints placed upon local entrepreneurial activity, as well as the pro-government and pro-foreign bias of many of the investment policies promoted in the 1990s and early 2000s.  He acknowledges that Hu Jintao has been a positive force in reversing some of these trends, though using the same set of state-centric tools to support rural development.

The interviews I conducted in Wuhan were primarily concerned with whether the 2008 labor law succeeded in providing basic contract enforcement to workers, regardless of permanent or non-permanent status (personally I’m not sure what the legal distinction is between the two categories; presumably the former are much more difficult to fire.) One of the justifications given for the labor contract law was that, prior to 2008, a large number of migrant workers would not even be given copies of their contract. This obviously meant that they had little recourse in the event of a labor dispute. Still need to write more about that. In general, most of those I interviewed were positive about the impacts from the contract reform, and would use the normal dispute resolution process in the event of a problem. Admittedly I only talked to those who didn’t yet run into any problems, though many indicated they were familiar with someone who had (garnishment of wages being the most common.)

“China is too pro-foreign” and “policy changes risk shipping Chinese jobs overseas.” Both true; not things one hears much as of late.

Having opined extensively on this topic previously, I will attempt to be brief. My general feeling has always been that appreciation is inevitable, and calls for it were somewhat self-serving and probably detrimental. Regardless, the scale of ensuing changes will of course depend on how fast appreciation occurs. Maoxian projects that the Rmb could reach 5 to the dollar by 2020, which seems a bit conservative, given that 2007-2009 were rather unique in terms of market performance. Though there’s no explicit relationship between equities and currency trades, it seems evident that policy makers use major indices as barometers, and no properly Confucian party apparatchik wants to be behind a yuan revaluation if exports collapse and riots start.

Recent inflation figures probably gave pro-appreciation groups (Ministry of Finance, PBoC) the cover they needed to push this through. I’m less convinced that the move was blatant a nod to G20 as some other commentators believe, though timing was still an issue. Properly Confucian party apparatchiks absolutely do not want to be seen as heeding foreign demands, and the last several weeks have been the only time period in recent memory where there hasn’t been a high-profile meeting with some barbarian global dignitary calling for a yuan revaluation. After the G20 meeting would have been unthinkable,

There’s obviously a a large amount of concern that short-term inflows will rush into China, so much so that authorities will in all likelihood depreciate in order to send a signal. After that, volatility and an upward (downward?) trend to a stronger Rmb.

This seems to have been lost against the export-rise noise: May CPI and PPI figures came out recently (3.1%, 7.1% respectively) making an interest rate hike by the central bank appear inevitable, probably in late June or early July. This will affect anyone who’s purchased a flat using a mortgage – given property bubble concerns – how this plays out could be interesting. It’s my understanding that local governments are also exposed to interest rate hikes in the form of various types of investment vehicles meant to supplement expenditures (from FT Alphaville):

LGFVs are conduits, like the Special Investment Vehicles (SIVs) were for western banks, used by local government to borrow and spend on infrastructure and other projects (like real estate).

Local Chinese governments share relatively meagre incomes from the country’s central tax pot, yet they’re charged with some pretty huge infrastructure and stimulus projects. What’s more they’re unable to run deficits, or get bank loans, or issue bonds without special central authority permission.

Enter the LGFV. Using these conduits, local governments are able to finance their projects in a rather roundabout way, borrowing money from banks in exchange for some collateral –often local land.

The scale of local borrowing is unclear; some put it as high as 150-160% of GDP (combined with national debt) which puts China comfortably in developed world debt ranges.

“… what impact will banning third-home-purchases on credit have on the world’s second largest economy? If that’s what China is relying on, there are some serious structural issues.” Though I understand the situation is complex, and metrics applied elsewhere may not be applicable in a context like China, here’s some more evidence for the ‘bubble’ crowd: Zhao Xiao, a professor at Beijing University of Science and Technology, estimates that, among home buyers, at least 40-50% are doing so purely for investment purposes. He’s quoted in this article, citing a survey which examined residential energy usage statistics, and concludes that:

• There are at least 65 million empty apartments in 660 cities throughout China.

• This translates into (assuming 100 square meters per apartment) 6.5bn square meters of unused space.

• That’s enough to essentially add three more Shanghais to the country without batting an eyelash.

• The amount of space, the report notes, is equal to 7.7 times the amount of property sold in 2009, and 11.3 times the amount of new space constructed.

If this is accurate, it would seem that orgies of new construction all over the country are merely a drop in the bucket, when examining aggregate, unused space. There’s a good long term argument that this space will be soaked – 65 million units is enough for, say 190 million people, which is about equal to various estimates of China’s long-term floating population of migrants. The question of whether or not they’ve settled within the cities is extremely relevant, in determining how fast this excess space will be used up. There does appear to be considerable retail demand for decent living space, though price currently deters these people from buying into nicer properties. If incomes continue to rise, however, it’s simply a matter of time until there’s a break even point.

That said, the break even point could be a decade from now, and if structural investment does not shift, the housing boom seen in the last decade may very well have represented a tremendous waste of resources.

赵晓表示，根据国家电网利用智能网络在全国660个城市的调查，发现大约6540万套住宅电表读数连续6个月为零。“以每套住宅平均100平方米计算，65.4亿平方米的空置商品房相当于2009年住宅竣工面积的11.3倍，这相当于2009年住宅销售面积的7.7倍，说明中国当前住房空置率远比想象的严重，也说明一些有钱人正用大量资金在房地产市场上兴风作浪，不断激化社会矛盾，炒房大军明显已经成为加剧我国房地产市场疯狂的毒药。”

The State Council just issued new regulations, in an attempt to curb real estate speculation and rising property prices. As of today, major property developer stocks are down about ~9%, with the broader index down approximately 5%. Conservative estimates coming from brokerages indicate that, if none of the regulations are altered, property prices will fall about 30% by the end of the year. Details on the regulations: down payments on first homes was raised from 20% to 30%, on second homes from 40% to 50%. Loans for second homes must be at least 110% of the benchmark interest rate (first homes can still be purchased with a 20-30% discount, so long as the down payment is 40% of the purchase value, making the new rules even more punitive than they seem at first glance for anything but a first home purchase). Loans for third home purchases have been completed suspended.

These rules were obviously meant to address concerns that many were using real estate purely as an investment tool, buying apartments and having them sit, empty, without even putting them on the rental market. Having written previously about concerns of a housing bubble, the really interesting thing will be to see how much of a recession this move precipitates (caveat: the term “recession” will be tossed around here if year over year growth approaches 8%). The high GDP numbers, and recent real estate price climb certainly motivated this move – it’s not often one sees regulators poking at bubbles, especially when the consequences could be so problematic. In the long run, constantly rising house prices would have been very damaging for social stability, so it’s a positive signal that authorities are trying to be proactive. This may end up illustrating, however, how very difficult it is to pop asset bubbles, assuming they can even be accurately identified. From the outside looking in, it’s fascinating, and how things play out over the next twelve months will shed light on several open questions: the composition of a lot of recent infrastructure investment and actual levels of urbanization/retail demand for housing.

Meanwhile, well-off poor local friends are losing money hand over fist, when all they wanted to do was settle down and marry a nice lady. Boo.

There was a story at FT China, 中国私募业的“红色贵族,” (“Chinese Private Equity’s ‘Red Aristocracy’”) which not only was blocked but also seems to have been removed from the site completely. The English version is still up and accessible here, “China: To the Money Born.” A copy of the Chinese can be found at GFWBlog. It covers how party officials’ sons are beginning to set up private equity funds, seeking to cash in on the spate of deals that are becoming available as formerly state owned firms undergo restructuring. That de facto Communist royalty is getting involved in mainland PE is unsurprising, everyone is. In fact, the group structure of many large firms here mean that even clothing retailers are getting involved with mutual funds and securities companies, approximately equivalent to the Gap Capital Management (ah China). Still, these individuals are high profile, though someone apparently doesn’t want to much attention being focused on them at this juncture. From the article:

“Private equity is a very good area for princelings because with these sorts of connections you can get into companies ahead of their IPOs and make a lot of money in a short space of time,” says Professor Victor Shih of Northwestern University. “It is an easy way to make money because everyone will be willing to back them because of their connections. Everyone will do it willingly in order to potentially get favours from senior leaders in return.”

… But the constant jockeying for position within the party behind closed doors in Beijing is set to intensify as the next big leadership transition approaches in 2012. Some analysts say the private equity activities of the more aggressive younger princelings could be used by political enemies as a weapon against their parents.

One could argue in defense of this sort of nepotism, since private equity is as relationship driven as anything is here, and these guys, quite reasonably from their perspective, see the most opportunity there. The articles are more interesting as an example of exactly what is blocked. Since the Chinese version isn’t available, even behind a VPN, it means that the FT removed it, potentially after a suggestion from the Ministry of Truth.

Normally, journalism that focuses on economic/financial topics can get away with more in terms of potentially sensitive topics. Magazines like Caijing built their reputations on pushing these boundaries. At times, though, someone hits a soft spot.