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China’s real estate scene is reminiscent of the 2007 US market: developers are slashing prices and infuriating owners who paid top yuan for properties. Problems in the real estate market are extending into steel, banking, mining and other sectors. Vacant developments are numerous because wealthy Chinese savers have few alternatives for investing growing wealth. “Beijing’s response to the global financial crisis added jet fuel to the fire,” writes Patrick Chovanec for Foreign Affairs, arguing that investors, not urban residents contributed to the bubble. “To maintain GDP growth of nearly ten percent during a massive downturn in global demand, China’s leaders engineered a lending boom that expanded the country’s money supply by roughly two-thirds.” Developers, after ignoring warnings to ease up on capacity, have urged the government to lift restrictions on owning multiple homes. By letting the bubble pop, the government could instantly create affordable housing for less affluent Chinese. – YaleGlobal Speculation, excess inventory, vacant developments, price reductions – a host of factors are set to undermine China’s real estate market and economic growth Patrick Chovanec Foreign Affairs, 26 December 2011 Rights:Copyright © 2002-2011 by the Council on Foreign Relations, Inc.

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China’s Real Estate Bubble May Have Just Popped

This summer China passed a new law, which technically went into effect on October 15, requiring foreign workers and their employers to contribute to a social security fund. To help foreigners living in China better understand what the new social security tax means, China Real Time has compiled a list of facts that the Ministry of Human Resources and Social Security has revealed thus far:

1. Pricing

Every city will have its own pricing scheme, requiring companies to pay a percentage of an employee’s salary to the social security fund. The individual contribution will hover around 10% of the employee’s salary. The Ministry of Human Resources and Social Security recommends that every individual check with a local bureau to determine rates.

For Beijing, companies will contribute the following percentage based on an employee’s salary per month, with a salary cap of 12,603 yuan ($1,981):

2. Start Date The law will be implemented by year-end and money will be collected according to an Oct. 15 start date, requiring retroactive payments.

3. Medical Insurance The Ministry of Human Resources and Social Security says the medical insurance plan will allow foreigners to choose which hospitals they’d like to go to. An unspecified percentage of expenses will be reimbursed using the funds from the account.

Officials have not yet specified whether insurance will cover a foreigner beyond China’s borders.

Upon leaving China, foreigners will be able to collect the unused portion of the individual contribution to the medical insurance fund. Corporate contributions cannot be collected.

4. Maternity Insurance The Ministry has not yet specified if maternity insurance will cover multiple births

5. Unemployment The Ministry said it is working with employment and visa agencies to devise a plan that will allow unemployed foreigners to collect.

6. Pension Pensions can be collected if the foreigner has contributed for 15 years. They will be paid until death.

The Ministry has not specified a retirement age for foreigners or how foreigners will collect the fund.

Upon leaving China, foreigners will be able to collect the individual contribution to the retirement fund. Corporate contributions cannot be collected.

7. Contract Workers Contract workers and workers who would be forced to pay on behalf of the company and themselves can visit the local bureau of the social security office to have their cases reviewed. The Ministry will reconfigure payments for individuals.

– Laurie Burkitt and Kersten Zhang

After keeping its currency tightly linked to the US dollar for years, China in July 2005 revalued its currency by 2 % against the US dollar and moved to an exchange rate system that references a basket of currencies.

The Chinese government faces numerous economic development challenges, including:
(a) reducing its high domestic savings rate and correspondingly low domestic demand through increased corporate transfers and a strengthened social safety net;
(b) sustaining adequate job growth for tens of millions of migrants and new entrants to the work force; (c) reducing corruption and other economic crimes; and
(d) containing environmental damage and social strife related to the economy’s rapid transformation.

China is also the second largest trading nation in the world and the largest exporter and second largest importer of goods.
The PRC government’s decision to permit China to be used by multinational corporations as an export platform has made the country a major competitor to other Asian export-led economies, such as South Korea, Singapore, and Malaysia.

Available energy is insufficient to run at fully installed industrial capacity, and the transport system is inadequate to move sufficient quantities of such critical items as coal.

Technology, labor productivity, and incomes have advanced much more rapidly in industry than in agriculture.

A report by UBS in 2009 concluded that China has experienced total factor productivity growth of 4 per cent per year since 1990, one of the fastest improvements in world economic history.

The market-oriented reforms China has implemented over the past two decades have unleashed individual initiative and entrepreneurship, whilst retaining state domination of the economy.

Both forums will start on Tuesday.

But “this is just a beginning.

It also aims to sell more than 15 million of the most fuel-efficient vehicles in the world each year by then.

China’s challenge in the early 21st century will be to balance its highly centralized political system with an increasingly decentralized economic system.

Agriculture is by far the leading occupation, involving over 50% of the population, although extensive rough, high terrain and large arid areas – especially in the west and north – limit cultivation to only about 10% of the land surface.

China is the world’s largest producer of rice and wheat and a major producer of sweet potatoes, sorghum, millet, barley, peanuts, corn, soybeans, and potatoes.

Due to improved technology, the fishing industry has grown considerably since the late 1970s.

Offshore exploration has become important to meeting domestic needs; massive deposits off the coasts are believed to exceed all the world’s known oil reserves.

There are large deposits of uranium in the northwest, especially in Xinjiang; there are also mines in Jiangxi and Guangdong provs.

Hydroelectric projects exist in provinces served by major rivers where near-surface coal is not abundant.

Taiyuan and Xi’an are important centers in the less populated interior, and Lanzhou is the key communications junction of the vast northwest.

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Cough it Up: A Guide to China’s New Foreigner Social Security Tax

Kathleen Madigan is the Big Picture columnist at Dow Jones Newswires. She covered the economy for over two decades at BusinessWeek and worked in the economics departments at several Wall Street firms. Let’s all blame China. The latest episode of U.S. China-bashing is a Senate measure that would call on the White House to impose unilateral and broad-based tariffs against countries with “misaligned” currencies. The bill could take on more urgency now that the Commerce Department said Thursday that the August U.S.-China trade deficit jumped to a record high of $28.96 billion. Beijing is not pleased. The People’s Bank of Chin a has been guiding the yuan lower versus the U.S. dollar since the U.S. Senate approved the bill. Yes, Beijing manipulates the yuan. U.S. politicians, however, are wrong to think a free-floating yuan will do much to dent the U.S. trade gap or boost economic growth. The Senate bill might even worsen the outlook. The action, which might not pass muster of World Trade Organization rules, “opens the door to similar non-conforming protectionist retaliation by China,” warns Carl Weinberg, chief economist of High Frequency Economics, “The resulting trade war would see both sides of the argument lose exports and jobs. No one wants to [see] that, not in these troubled times.” The nonpartisan Peterson Institute for International Economics calculates that every rise of 1% in the trade-weighted average of the yuan would cut the U.S. global deficit by $2.5 billion to $6 billion over the succeeding 2-3 years. Continue reading on Real Time Economics

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Chinese Bashing is All the Rage — But No Antidote

House Majority Leader Eric Cantor (R., Va.) said he was curious what President Barack Obama thinks about legislation that would seek to compel the administration to take action on allegations that China is keeping the value of the yuan low to boost the country’s exports. Mr. Cantor declined to say whether he personally supported the measure, repeating several times in a press conference on Monday that he was waiting to see what the administration thinks about the potential “unintended consequences” of the legislation. At the White House, press secretary Jay Carney said officials are still reviewing the bill to make sure it is “consistent with our international obligations” and to be sure it will be effective in getting at the underlying goal of getting China to let the value of its currency rise. “We share the goal that it represents, which is to achieve further appreciation of China’s currency,” he said. “It’s important that as we pursue that goal, we do so in a way that is … both effective and consistent with our international obligations.” Mr. Carney would not say whether the review will be complete before the Senate votes. Continue reading on Washington Wire

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White House, Cantor Avoid Tipping Hands on Bill Targeting China’s Currency

By Tom Orlik

One of the first casualties of the fading global recovery—pressure for yuan appreciation.

The world’s economic elite is gathering in Washington, D.C., for the International Monetary Fund’s annual meetings, which run from Sept. 23-25. In the past, that has been an opportunity to exert a little pressure on China to allow faster yuan appreciation.

The signs in August were certainly positive. The annualized pace of yuan appreciation against the dollar picked up to more than 11%, up from an average of around 5% in the first seven months of the year. The trade weighted exchange rate—a more comprehensive measure of movements in the yuan—also gained some ground.

But August’s surge has already faded. Appreciation ground almost to a standstill in the first half of September, and it is unlikely to return to anything like August’s electric pace. There are three reasons why Beijing allows accelerating gains in its currency: strong exports, high inflation and international pressure. A fading global recovery pushes back against all of them.

August’s trade data, which showed exports near a record high, were surprisingly strong. But with the U.S. and European economies teetering on the brink the outlook is gloomy. The latest official survey of China’s manufacturers shows overseas orders falling, which will make Beijing nervous about imposing additional currency pressure on exporters.

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In recent years, China has re-invigorated its support for leading state-owned enterprises in sectors it considers important to “economic security,” explicitly looking to foster globally competitive national champions.

The Chinese government faces numerous economic development challenges, including:
(a) reducing its high domestic savings rate and correspondingly low domestic demand through increased corporate transfers and a strengthened social safety net;
(b) sustaining adequate job growth for tens of millions of migrants and new entrants to the work force; (c) reducing corruption and other economic crimes; and
(d) containing environmental damage and social strife related to the economy’s rapid transformation.

The country’s per capita income was at $6,567 (IMF, 98th) in 2009.

Some economists believe that Chinese economic growth has been in fact understated during much of the 1990s and early 2000s, failing to fully factor in the growth driven by the private sector and that the extent at which China is dependent on exports is exaggerated.

Agricultural output has been vulnerable to the effects of weather, while industry has been more directly influenced by the government.

A report by UBS in 2009 concluded that China has experienced total factor productivity growth of 4 per cent per year since 1990, one of the fastest improvements in world economic history.

By the early 1990s these subsidies began to be eliminated, in large part due to China’s admission into the World Trade Organization (WTO) in 2001, which carried with it requirements for further economic liberalization and deregulation.

The ministry made the announcements during a press conference held in Xiamen on the upcoming United Nations Conference on Trade and Development (UNCTAD) World Investment Forum and the 14th China International Fair for Investment and Trade.

According to the ministry, China’s ODI grew by 1.1 percent from a year earlier to $56.53 billion, which includes investment of $47.8 billion in non-financial sectors worldwide, up 14.2 percent year-on-year.

China is aiming to be the world’s largest new energy vehicle market by 2020 with 5 million cars.

Although China is still a developing country with a relatively low per capita income, it has experienced tremendous economic growth since the late 1970s.

Even with these improvements, agriculture accounts for only 20% of the nation’s gross national product.

In terms of cash crops, China ranks first in cotton and tobacco and is an important producer of oilseeds, silk, tea, ramie, jute, hemp, sugarcane, and sugar beets.

China ranks first in world production of red meat (including beef, veal, mutton, lamb, and pork).

There are also extensive iron-ore deposits; the largest mines are at Anshan and Benxi, in Liaoning province.

China’s leading export minerals are tungsten, antimony, tin, magnesium, molybdenum, mercury, manganese, barite, and salt.

China’s exploitation of its high-sulfur coal resources has resulted in massive pollution.

Great inland cities include Beijing and the river ports of Nanjing, Chongqing, and Wuhan.

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Yuan Takes a Breather During Euro Crisis

Author: Ronald McKinnon, Stanford University

In reforming the international monetary system, exchange rates usually get primary attention front and center — such as in numerous meetings of the Group of 20. Indeed, at the G-20 meeting in November 2010, President Obama attacked China for not appreciating its currency.

But China’s monetary policy has been oriented toward keeping the renminbi-dollar rate stable since 1994, which served China well as a nominal anchor for its domestic price level and to smooth exchange relationships with its smaller neighbours. In addition, there is no clear evidence that China’s exchange rate was, or is, undervalued vis-à-vis Europe or the United States relative to their ‘real’ multilateral exchange rates averaged over the past 20 years.

Not finding any agreement on exchange rate practices, the G-20 meetings shifted to trade imbalances. Last November, the United States suggested that countries with trade surpluses cap them at, say, 4 per cent of GDP. But trade surpluses simply reflect net saving surpluses: the difference between national saving and investment. And in market economies, governments don’t directly control either. Nor, contrary to popular opinion and that of ‘China bashers’ who are calling for China to appreciate the RMB, can exchange appreciation be used as an instrument to reduce any creditor country’s saving.

Yet in light of the November impasse of the G-20 and continuing stalemate in 2011 on exchange rate and U.S. fiscal issues, it is clear that movement on these issues will be a long time coming.

With exchange rates and trade balances off the table for now, what remains for constructive international monetary reform? Almost all emerging market economies at the G-20 meeting in November 2010, and even more now in 2011, complain about ultra-low interest rates at the ‘centre’ inducing hot money flows to the ‘periphery’. In addition, the US Federal Reserve’s ‘Quantitative Easing’ for reducing long rates (ending in June 2011) exacerbated the problem. In 2010-2011, the resulting ‘carry trade’ has induced a flood of hot money into emerging markets — which have higher growth and naturally higher interest rates.

The combination of very low American interest rates and a declining dollar have provoked large outflows of financial capital (‘hot’ money) into emerging markets for almost a decade. When emerging market exchange rates are not tied down by official parities, their ongoing appreciation induces even more hot money inflows. Speculators see a double benefit: the higher emerging market interest rates combined with their currencies appreciating against the dollar or yen.

For emerging markets exchange rate flexibility is no protection from foreign interest rate disturbances. In the short run, exchange rate flexibility may actually enhance the returns that carry traders see as the target emerging market currency appreciates against the dollar.  To slow the appreciations of emerging market currencies, central banks typically intervene to buy dollars with domestic base money.  And these interventions have been truly massive. From the first quarter of 2001 to the first quarter of 2011, the dollar value of emerging market foreign exchange reserves rose six fold, with — from $1 trillion to $6 trillion! China accounted for about half of this huge buildup.

This sharp buildup of emerging market foreign exchange reserves has been too big to fully offset by domestic monetary sterilization operations. The resulting loss of monetary control in the emerging market economies led (and leads) to inflation generally higher than that in the developed market economies. On a world scale, the most striking inflationary impulse is seen in primary commodity prices. Year-over-year to 21 June 2011, the Economist’s dollar commodity price index for all items shows an average increase of 38.6 per cent, with food prices alone rising 39 per cent.

Near-zero interest rates in the mature industrial countries contribute to commodity price inflation in two ways. First, they generate hot money inflows into the emerging market economies and emerging market demand for primary commodities rises.  Secondly, once commodity prices begin to rise, ‘commodity’ carry traders find they can borrow ultra cheaply in New York or Tokyo to fund long positions in commodity futures. Of course, this adds to the upward price momentum making commodity prices, and asset prices in general, more prone to bubbles.

What are the implications for international monetary reform? In the new millennium, world monetary instability has been (and is) provoked by large and persistent interest differentials that induce ‘carry trades’: the willingness of speculators to borrow in low- interest- rate currencies (source currencies) to invest in higher yield currencies (investment currencies). But what can governments do about this?

Central bankers from the G-20 could meet continually to monitor each other in order to prevent wide interest differentials from developing. True to its newly professed virtue, the IMF should refrain from criticizing countries who attempt to impose capital controls to stem hot money flows. It could also provide technical advice on how to do so most efficiently.

To better preserve financial and exchange rate stability in the transition, the big four central banks — Fed, ECB, Bank of England, and Bank of Japan–should move jointly and smoothly to phase in a common target minimum target — say 2 per cent — for their basic short-term interbank rates. By escaping from liquidity traps which so impair the efficiency of domestic bank intermediation, and lessening the bubbles problem, the mature economies would benefit along with the emerging market economies.

Reducing the spread in interest rates would dampen carry trades and hot money flows in an important way. But it may not be sufficient to end them altogether. So acknowledging the legitimacy of emerging markets using capital controls and other devices to dampen hot money inflows should be an important part of the new G-20 discussion. Indeed central banks in the mature industrial economies could monitor their own commercial banks to help central banks in emerging markets enforce their controls.

But there is an important asymmetry here. Capital controls are not for everybody. In particular, the United States at the centre of the world dollar standard cannot itself impose capital controls without destroying the world’s system for clearing international payments multilaterally. Thus everybody has a vested interest in rehabilitating the unloved dollar standard with open US financial markets. The first of many necessary steps in the rehabilitation process is for the Fed to abandon any thought of a QE3 while phasing out its policy of keeping short rates near zero.

Ronald I. McKinnon is the William D. Eberle Professor of International Economics at Stanford University.

1. US, Japan and EU monetary policy: Monkeying with interest rates
2. Fixing global economic imbalances
3. The China syndrome on exchange rates

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Global inflation and monetary reform: Fixing interest rates trumps fixing exchange rates

If you had to pick a capital of China’s local-currency private equity and initial public offering booms, it would likely be Shenzhen.

Shanghai and Beijing are frequent stopping points for investors, but Shenzhen could become a part of that standard itinerary, given the investing ecosystem that has built up around the city and the strong returns earned by general partners based there.

Shenzhen, a port city in China’s South near Hong Kong, was one of the first to be designated as a special economic zone when the country began liberalizing its economy. A manufacturing boom followed, creating wealth that has made the city attractive for younger money managers and seasoned veterans looking to break into private equity and venture capital investing.

On their doorstep those investors have the Shenzhen Stock Exchange, the site of both the country’s SME exchange for small and medium-sized enterprises, and the ChiNext, a technology- and growth-focused exchange modeled after the Nasdaq.

“Shenzhen has been an entrepreneurial hub in China for 30 years and has been the fastest growing city in the world for about 30 years,” said Erik Lassila, a partner with private equity firm Share Capital Partners. “Shenzhen is a petri dish for founding new companies.”

Continue reading on Venture Capital Dispatch

China’s economy during the past 30 years has changed from a centrally planned system that was largely closed to international trade to a more market-oriented economy that has a rapidly growing private sector and is a major player in the global economy.

Economic development has been more rapid in coastal provinces than in the interior, and approximately 200 million rural laborers and their dependents have relocated to urban areas to find work.

China has emphasized raising personal income and consumption and introducing new management systems to help increase productivity.

Some economists believe that Chinese economic growth has been in fact understated during much of the 1990s and early 2000s, failing to fully factor in the growth driven by the private sector and that the extent at which China is dependent on exports is exaggerated.

Its mineral resources are probably among the richest in the world but are only partially developed.

China has acquired some highly sophisticated production facilities through trade and also has built a number of advanced engineering plants capable of manufacturing an increasing range of sophisticated equipment, including nuclear weapons and satellites, but most of its industrial output still comes from relatively ill-equipped factories.

Over the years, large subsidies were built into the price structure, and these subsidies grew substantially in the late 1970s and 1980s.

Both forums will start on Tuesday.

But “this is just a beginning.

It also aims to sell more than 15 million of the most fuel-efficient vehicles in the world each year by then.

In large part as a result of economic liberalization policies, the GDP quadrupled between 1978 and 1998, and foreign investment soared during the 1990s.

Despite initial gains in farmers’ incomes in the early 1980s, taxes and fees have increasingly made farming an unprofitable occupation, and because the state owns all land farmers have at times been easily evicted when croplands are sought by developers.

In terms of cash crops, China ranks first in cotton and tobacco and is an important producer of oilseeds, silk, tea, ramie, jute, hemp, sugarcane, and sugar beets.

Livestock raising on a large scale is confined to the border regions and provinces in the north and west; it is mainly of the nomadic pastoral type.

Coal is the most abundant mineral (China ranks first in coal production); high-quality, easily mined coal is found throughout the country, but especially in the north and northeast.

China’s leading export minerals are tungsten, antimony, tin, magnesium, molybdenum, mercury, manganese, barite, and salt.

In addition, implementation of some reforms was stalled by fears of social dislocation and by political opposition, but by 2007 economic changes had become so great that the Communist party added legal protection for private property rights (while preserving state ownership of all land) and passed a labor law designed to improve the protection of workers’ rights (the law was passed amid a series of police raids that freed workers engaged in forced labor).

Taiyuan and Xi’an are important centers in the less populated interior, and Lanzhou is the key communications junction of the vast northwest.

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China’s Shenzhen Prospers as Local Investment Hub

The underworld that is China’s pirated online-game sector is a big drag on the country’s legitimate game market, affecting top titles like World of Warcraft and many others in the popular swords-and-sorcery genre. So how do you beat the pirates? Companies are generally aggressive about shutting down unlicensed versions of their games. But for China’s Shanda Games, the answer also includes efforts to win back users who have turned to unlicensed games – sometimes with help from former pirates themselves. The operators of pirated online games run them on what are called “private servers,” a term that simply refers to a privately-owned machine but which is common lingo for a server running an altered version of a proprietary online game. The pirates usually attract users both by offering the games free of charge and by changing the rules of the game. While someone playing the real World of Warcraft might have to grind for weeks to get their character up to the game’s highest level, the same feat may take just hours on a private server. Players can then dive right into the epic battles and treasure-hunting only available to top-level players. Analysts say Legend of Mir, a popular martial-arts adventure game operated in China by Shanda, is among the games most widely run on Chinese private servers. Shanda Games scans the Internet every day to find new private servers running its games and aims to shut them down, Chief Executive Alan Tan said in a recent interview. In rare cases, after a private server has been shut down, Shanda will set up its own server in the same geographical area in hopes of luring the private server’s users over to a legitimate Shanda game. Shanda may even rope the operator of the former private server into helping promote the licensed game. The other prong of Shanda’s strategy against private servers acknowledges user demand for the sort of games they offer—where the rules can be changed and players can level up without weeks of effort. For example, Shanda is developing a game platform called World Zero that will allow users to create their own game world and modify its rules, Tan said. A partner is also developing a game called “Jue Zhan Shuang Cheng” (roughly: “Decisive Battle of the Two Cities”) that imitates private server rules—allowing users to level up very quickly and engage in battles against other powered-up characters. World Zero may be tested next year and Shuang Cheng may be available this year, Tan said. Shanda’s strategy seems to have yet to catch on with the company’s biggest competitors in China. A spokesman for Netease.com said the Chinese online game company strictly combats private servers and won’t cooperate with their owners in any way. Netease operates the Chinese version of Activision Blizzard’s World of Warcraft through a licensing deal, but the company spokesman referred to Blizzard for questions about private servers running that game. Blizzard said in a statement it opposes the creation and use of unauthorized emulator servers. The private server market is sizable. Yu Yi, an analyst at Beijing research firm Analysys International, estimates the value of the online-game private-server market will be around 5 billion yuan ($776 million) this year, about one-seventh the size of the likely 36 billion yuan ($5.6 billion) legitimate market for online games running on software programs. The business can also be lucrative, as shown in a case last month in the western Chinese metropolis of Chongqing, where police said they broke up a circle called the “Knights Attack Group” that had distributed ads for private servers running a game called “Legend”—apparently referring to Legend of Mir. The group of 19 people, most of them born in the 1980s and either middle-school or high-school graduates, had made at least 70 million yuan in illicit revenue in about two years, the Chongqing police said in a statement. Among the group’s assets seized by police were several cars, including two Audis, a Porsche and a BMW. The Chongqing case also reflected how dirty competition can become in the private server business, where cyberattacks are common and victims are unlikely to seek police aid because their operations are illegal. The “Knights” group monopolized the market for Legend private-server ads because it disrupted rivals with cyberattacks, police alleged. At one point, all 20 of the top search results on Baidu for “Legend private server” were websites run by the group. The Chongqing police said they handed off the case to local prosecutors in June for further handling. The case was reminiscent of another in 2009, when police in Guangdong province said an attack launched by a private server operator escalated and, for unusual technical reasons, ultimately caused a brief Internet outage in areas of several Chinese provinces. – Owen Fletcher. Follow him on Twitter @owenfletcher

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Co-Opting China’s Online Game Pirates