Monthly Archives: June 2011

Beijing-Shanghai High-Speed Trains Start Service

High-speed trains start commercial service on Beijing-Shanghai run

Finally, a short respite from safety concerns and scandal. High-speed trains have started commercial service between Beijing and Shanghai. The picture above shows the first train nosing its way from Beijing South Railway Station, carrying prime minister Wen Jiabao, who inaugurated the service on the 1,318-kilometer now five-hour journey. A sister train left Shanghai for Beijing at the same time.

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China Cuts Income Tax For Low Earners

The reconsideration of income tax on low earners has resulted in the threshold for the tax to be applied being raised by 1,500 yuan ($232), 500 yuan more than originally proposed, and taking an estimated 60 million wage earners out of the tax system. From Sept. 1, tax will start being due on incomes of above 3,500 yuan a month, up from 2,000 yuan a month. In addition the number of tax bands is being cut to seven from nine, with the rate on the first band being cut to 3% from 5%.

The changes lift the threshold above the average monthly wage for salaried workers. The percentage of earners liable for tax will fall to 7.7% from 28%, costing the government 160 billion yuan, according to Wang Jianfan, vice director of the Ministry of Finance’s taxation department. Some of that will be recovered by raising taxes on higher earners. More than 82,000 members of the pubic commented on the original tax cut proposal with two our of three wanting an even higher threshold than finally agreed on.

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China’s Diplomatic Push For Its Foreign Direct Investors

Prime Minister Wen Jiabao’s European tour provides a foretaste for the sort of diplomatic push in support of Chinese investment in developed countries that is only likely to increase over the next decade in line with Beijing’s extortion to Chinese companies to “go global”. While the headlines of Wen’s visit to Germany in particular were taken by the deal intended to grow two-way trade to $280 billion by 2015, it is the mostly overlooked agreements on growing investment, struck on the other two stops on his trip, Britain and Hungary, as well, that matter more to Beijing.

Access to natural resources is the driving force behind Chinese companies’ foreign direct investment (FDI) in developing economies, but in developed nations they are looking to buy commercial assets, particularly those that can provide value-added services, brands, management and technological expertise, raising local concerns about the influx and calls for more controls to regulate it. In the U.S. in particular, where protectionist sentiment is ever lurking in the legislature, there are competitiveness concerns about technology transfer, especially if it has military application, subsidies to state-owned banks, noncommercial motivations of state-owned companies, and the routing of Chinese FDI via third countries such as Hong Kong and tax havens to disguise its origin.

China’s outward FDI , at 1% of the world’s total, lags its share of global trade (8%), but its annual flows are growing rapidly. It hit $59 billion last year, up from an average of $3.8 billion in 1995-2005. Given the size of China’s foreign exchange reserves and the growth rates of its economy, $1 trillion of FDI could come out of China over the next 10 years. Hence the diplomatic push to forestall the erection of further barriers to Chinese trade and investment and to dismantle those that already exist. Some of this is done by signing bilateral trade and investment treaties like the ones struck on Wen’s visit, and some through multilateral organizations such as the G20. It seems inevitable that Wen’s successor will be doing a lot of globetrotting to pave the way for more Chinese investment in developed economies. There is going to be a lot of it.

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China’s Local Government Debt Is Large But Manageable–For Now

The audit of China’s local government debt paints a reasonably reassuring picture. The question is how complete that picture is.

The National Audit Office put the debt at 10.7 trillion yuan ($1.7 trillion) at the end of 2010. That is 27% of GDP, far lower than the worst expectations (this is the first time the numbers have been made public). It is also much higher than the central government’s debt of 17% of GDP. Add in all the usual liabilities that goes into a country’s public debt number and China is looking at an overall number  of 80-90% of GDP, not particularly high by international standards but in such a state-centric economy, it will all come back to central government one way or another.

Much of Beijing’s stimulus package in response to the 2008 global financial crisis flowed through local government spending on public works. Local government debt rose by 62% in 2009 over the previous year, as local authorities laded up with bank debt (and the banks, state owned, with potential bad debt). The borrowing increased by a further 19% in 2010.

It also encouraged the widespread use of special investment vehicles to get round restrictions on borrowing. The audit says that there were 6,576 such vehicles, with a combined debt of $5 trillion. Yet this shadow financing system is only partially accounted for by the audit. Only loans explicitly guaranteed by local governments has been included.  Beijing is already reported to be planning to shore up local government finances with a 2 trillion-3 trillion bailout to cover the 23% of the lending to projects with neither collateral nor viable cash-flow to cover their debt service (this bailout could include some securitization of loans for resale to private investors or through the bond market). In addition, the central bank has told banks to increase their capital reserves against similar projects that are only generating sufficient cash flow to service part of their debt.

The situation seems manageable for now, though central policy makers’ concern remains acute as they work on defusing the debt bomb. Most local-government debt has long maturities and fiscal and land revenues have been strong, even if land sale revenues are now softening. The risk of a local government debt default remains low–as long as economic growth remains brisk and the state-owned banks can be made to absorb some of the worst bad debts. The tick-tock of the debt bomb may be getting a bit less audible but it is still there.


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Beijing And Tokyo Take Their Rivalry Into Football Administration

Even in the world of international football administration, Beijing and Tokyo don’t let their rivalry drop. Candidates hoping to replace the scandal-tainted Mohamed Bin Hammam as president of the Asian Football Confederation are already jockeying for position. Zhang Jilong, who is filling the position in an acting capacity following bin Hamman’s suspension by dint of being the AFC’s senior vice-president, is a candidate, but far from the favorite to head the 46 nation confederation permanently.

Although he can count on the support of the majority of the 10 members of the East Asian Football Federation (EAFF), he won’t be able to rely on that of Japan, which already thinks China has too much influence over the EAFF though itself, South Korea (and Australia) are the region’s leading soccer powers on the field. Japan’s own candidate is likely to be Kohzo Tashima, general secretary of the Japanese FA. If he runs he can expect South Korea’s support but not that of China and its EAFF allies. Beijing sees little chance of Tokyo being helpful to its push to secure a FIFA World Cup, and vice versa. Beyond that lies the bigger rivalry.

The internal regional bickering is likely to mean that a candidate from West Asia such as the Bahraini Sheikh Salman Bin Ebrahim Al Khalifa will emerge victorious. East Asia’s football federations will be left bewailing the continuing shift of power from East to West to the detriment of the growth of the sport in what should be some of its most dynamic countries.

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Two More Rail Officials Said Snagged In Corruption Probe

The corruption investigation into China’s railways has reportedly snared two more senior officials. Caixin says that Shao Liping, chief of the Nanchang Railways Bureau Chief, and Lin Fenqiang, his counterpart at the Hohhot Railways Bureau, have been detained by authorities for questioning and removed from their posts.

What remains to be seen is whether Shao and Lin are connected to Liu Zhijun, the former rail minister who was the driving force behind the rapid expansion of China’s high-speed rail network and who was sacked in February, the first domino to fall as a result of the corruption probe. Liu is still under investigation, according to a senior Party official from the Central Commission for Discipline Inspection, as safety concerns about the high-speed lines persist.


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China Said To Cut Luxe Tariffs To Boost Domestic Consumption

Here, if true, is a drop of bad news for luxury goods retailers in London, Paris and Hong Kong: China is planning to cut the taxes on high-end watches, shoes, clothes, bags, cosmetics and the like to encourage more domestic consumption, according to a report last week in the 21st Century Business Herald. (Update: Finance ministry officials have denied the report which was based on statements by Commerce ministry officials. That probably means the two ministries are still arguing over the details of how much the luxury tax and import duties will be trimmed, in what mix, on which products and how the change will be phased in. )

Duties of 65% on fine wines, 50% on cosmetics and 30% on watches have driven many wealthy Chinese to pick up such luxuries duty free on foreign shopping binges, a trend further encouraged by the spread of China Union Pay terminals abroad; Harrod’s department store in London now has 40, giving Chinese visitors ready access to their bank accounts back home. With a forecast 65 million tourists coming from China this year, up from 57.4 million last year, it is perhaps not surprising that Burberry’s says that Chinese account for half of its sales in London.

A Commerce ministry study found that prices of a sampling of 20 luxury goods were 51% higher in China than in the U.S. and 72% higher than in France, the most popular European destination for Chinese shoppers and where they spent an estimated 650 million euros ($1 billion) on duty free items in 2010, according to a survey by Global Blue, a tax-free-shopping group. The World Luxury Association, a trade organization, estimated that Chinese consumers bought a total of $10.7 billion worth of luxury goods (exceeding transport–planes, yachts, cars) in 2010 with four out of five of those dollars being spent outside China.

Even though China has lowered its average import tariffs to 9.8% from 15.3% since joining the World Trade Organization, it still has some of the world’s highest tariffs on luxury goods. The 21st Century Business Herald says that some import duties may be scrapped altogether, with the National Day holiday in October the target date for the change. (That assumes the commerce and finance ministries have resolved their trade balances vs tax revenues dispute by then; it will probably have to be refereed at State Council level.)

Most top international luxury goods retailers, including LVMH, Gucci and Hermes, have dozens of stores in China already to cash in on the fast growing ranks of China’s wealthy. Coach, a high-end U.S. leather accessories manufacturer, for example, has said it plans to increase its sales within China to $500 million from $100m within three years. Such foreign luxe retailers won’t necessarily lose sales overall because of tariff cuts; indeed they will continue to have the twin winds of growing Chinese international travel and rising wealth in their sales, but they could feel an inelegant pinch to their profit margins.

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The Persistence Of Party Power Over China’s Private Enterprises

Xinhua has lifted the skirts of the Party’s influence over private enterprises. Some 3.8 million grassroots Party organizations, which will include those in private enterprises, but also everything from private schools to non-governmental organizations, now exist, up from 2.1 million in 1978, it says. The exact number of Party cells in companies is difficult to determine, though we have seen statistics that said there were Party organizations in 250,000 companies (including foreign owned companies such as Wal-Mart) with 3 million members at the end of 2006, plus 800,000 self-employed Party members. The numbers have surely risen since, as overall Party membership has risen from 70 million to 80 million, with 23% of the total, or some 18 million people now, managerial level staff in public and private enterprises. The implication of the Xinhua piece is that the Party’s goal is to have a presence in every private enterprise with at least 80 employees.

The Party has never made any secret of its belief that it provides the political guidance for the whole economy. In a country where the Party mimics the organs of government and state and once controlled all businesses of any size, to do the same for the private-sector economy should come as no surprise. Free-market capitalism has no meaning in China, if by free is meant free from the Party’s leading role.

Yet beyond the statistical titillation of the apparent success of a policy to  grow formal representation in private enterprises that was kick started in 2002 lies the questions of whether this provides an explanation of how private companies’ business goals are kept aligned with Party policy and how it changes the structure of the country’s elites. Have the old elites secured control of the new economy: or is their power only temporarily persisting in it, to wane as market institutions eclipse the administrative power of the cadres; or are the old elites just being replaced those made newly wealthy by business?

We suspect the answer lies along the lines of the second option and that temporarily is being strung out over decades by the adeptness of local Party committees in keeping their fingers in the decision-making pie of private enterprises thanks to a institutional environment that is already based on formal and informal personal connections. For companies, sponsoring a Party cell, is as much about winning a “red hat” as it is about making a “black hat” available for local officials whose careers have been judged by their success in achieving local economic development. A vested interest shared limits the resistance to reform. Political capital is still as important as financial capital to an enterprise in China. Close ties between a company and local officials make access to scarce resources such as capital easier for a company via the Party’s network of connections, and minimizes the risk of the thing any business most dislikes, uncertainty, particularly policy uncertainty.

It is anyway a delicate line to walk for a Party whose commitment to national economic growth is taken as a basis of its political legitimacy to rule. The growing liberalization, internationalization and industrialization of the economy demands to an increasing degree professional managerial expertise in enterprises. Cadre core skills such as price controls, plan fulfillment and quota setting are not the functional expertise required of a manager in a modern company.

State-owned companies, by definition, already have a high degree of political involvement, including those with publicly-listed subsidiaries, which may prompt some interesting corporate governance and disclose-to-shareholder questions. Perhaps such companies should have to list in the their annual reports their top-ranking Party members as they are required to list their directors and top earners?

What strikes this Bystander is how the liberalization of China’s economy has been accompanied by a relatively stable power structure and the survival of the political elite, which has also acquired an extensive stake in the economy. Unlike in Russia, part, not full privatization of state-owned enterprises, particularly in the pillar industries, has been an important to prevent the creation of large areas of privately owned property in the economy beyond officialdom’s sway.  The Party has, so far at least, found a way of absorbing the rise of private power that which elsewhere in industrializing economies has led to the rise of new centers of political power. Indeed for central government, the bigger challenge is the power of semi-independent local party bosses on whom have to be imposed periodic crackdowns from the center in the form of anti-corruption campaigns.


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China’s Railways Said To Sacrifice Safety For Speed

Former railways minister Liu Zhijun sacrificed safety in pursuit of China having the world’s fastest high-speed trains, according to the ministry’s former deputy chief engineer, Zhou Yimin. In an interview with the 21st Business Herald (via Caijin), Zhou claimed that Liu overrode contract specifications by the German joint venture manufacturer, Siemens, that the trains’ top speed should be 300 kph because he wanted them to run at 350-380 kph.

Liu, the driving force behind the rapid buildout of the country’s high-speed rail network, was sacked in February following a bribery and corruption investigation. Test runs on the flagship line between Beijing and Shanghai concluded last month, but safety concerns persist, including around the settlement of the tracks, the trains’ brakes and the signalling and communications system along the line. Zhou says that there are often glitches with the trains on the high-speed network, but these are kept quiet. Several times trains on the Beijing-Shenyang have broken down, he says. Speed limits have been imposed on the whole network, in part as a cost saving measure.


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More Rain, Floods Deluge China’s Yangtze Basin

More than 36 million people have been affected by the flooding along the middle and lower reaches of the Yangtze this month (map) and the death toll has risen to 175 with at least 86 missing, state media say. More than 1.6 million people have had to be evacuated in what are being said to be the worst floods since the 1950s with many of the Yangtze’s tributaries swollen to dangerous levels. The direct economic loss is now put at 35 billion yuan ($5.4 billion).

Zhejiang has borne the brunt of the latest downpours with river embankments in Lanxi reported as being at the point of bursting. Some 80,000 residents have been evacuated. More torrential rain is in the forecast for the next three to five days. Meanwhile heavy rain and floods are also hitting Gansu in the northwest.

Update: Caixin has a series of photographs of a very wet looking Wuhan.

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