Money Makes The Ball Go Round

A Song Dynasty painting by Su Hanchen, depicting Chinese children playing cuju.

IN THE HOME of capitalism, the purchase and employment of professional footballers are tightly regulated, almost socialistic. Unlike in the United States, in purportedly Communist China, the same enterprise is red in tooth and claw.

Money speaks. Loudly. And it is currently providing a siren song for a host of foreign professional players being lured to the Chinese Super League. The 16 clubs in its top division now number at least 75 foreign players between them, and the roster is swelling daily.

Alex Teixeira, a 26-year-old Brazilian midfielder, is only the latest, joining Jiangsu Suning, which bought him from  Shakhtar Donetsk in Ukraine for 367 million yuan ($55.8 million), a record transfer for an Asian club. The ink on the old record was barely dry: earlier in the week, Guangzhou Evergrande paid 308 million yuan for Jackson Martinez, a 29-year-old Colombia striker, who previously plied his trade for Spanish team, Atletico Madrid.

That, in turn, had broken the record set at the end of January when Brazilian Ramires moved to Jiangsu Suning from Chelsea of the English Premier League for 237 million yuan.

These are transfer fees of a size that would buy top players in Europe at the height of their careers, and there are reportedly wages to match. A host of Teixeira and Ramires’ fellow countrymen — a third of the 75 foreign players in Chinas top division are from Brazil, where they now joke that footballers have replaced commodities as the top export to China — along with Martinez and other internationals such as Ivory Coast’s Gervinho, have been vaulted into the ranks of the world’s best-paid professional footballers.

Awaiting them is a galaxy of top coaches who have between them won pretty much everything there is to win in world soccer. It includes Luiz Felipe Scolari, who coached the Brazil national team at the World Cup and is now at Chinese and Asian Champions League reigning champions Evergrande ,and Sven-Goran Eriksson, a former England coach, who is now with Shanghai SIPG.

If it is the money that is attracting such talent, the obvious question is why is so much cash being flashed now.

The short answer is that the Chinese Super League, which opens its new season next month, is on the up and up. The corruption and match-fixing scandals of recent memory are now behind it. Within a couple of years, our man among the muddied oafs tells us, the league will be drawing the third highest crowds in the world to its games, behind only Germany’s Bundesliga and the English Premier League.

But it is the long answers that are the more interesting; they involve that perennial Chinese overlap of commercial self-interest, political connections and national soft power, in this case through a ‘cultural industry’.

In October, 2014, the State Council approved a national plan to raise the sports industry’s gross output to 5 trillion yuan by 2025 — almost 16 times its value in 2012. The Chinese Football Association’s part of that is manifested in a reform plan approved a year ago, setting a goal of qualifying for the World Cup again by professionalizing the game’s bureaucratic management and promoting youth participation.

President Xi Jinping is reputedly a big soccer fan, and wants Chinese football to make its mark in the world. He understands that China has to increase its soft power along with the rise of China’s hard power. Football, which China claims to have invented (see picture above), would fit the bill.

Xi has made no secret that he would like to see FIFA’s World Cup staged in China, which would be an affirmation of the country’s global standing —  as the 2008 Beijing Olympic games were. At one point, 2036 was being talked of as the target date; now 2030 is thought to be the earliest feasible target. In the meantime, just getting the national team to qualify for the Finals is the goal.

Plenty of wealthy businessmen have stepped forward to support the cause — especially the bolstering output part — by bolstering the domestic game.

China Sports Media, a Shanghai-based cultural investment firm, outbid state-broadcaster CCTV for the broadcast rights to the Super League. This year, its 8 billion yuan five-year TV contract kicks in. Last season, the league’s domestic TV rights sold for 50 million yuan. That in itself is a marker of how fast-growing the domestic audience for the game is growing, as well as a reason that the competitive quality of the fare being served up has to be improved.

The other half of the money side of the story is that construction companies seem especially attracted to a game that needs stadiums built, which, in turn, anchor all sorts of commercial, retail and residential development. Real estate interests own 13 of the 16 teams in the Super League’s top division.

Guangzhou Evergrande is jointly owned by the eponymous real estate company and Jack Ma’s internet giant Alibaba (a smart deal for the property development group’s founder Xu Jiaxin, who paid 100 million yuan for the club in 2010 before selling half of it to Ma for 1.2 billion yuan within four years).

In the other direction, Chinese state and private investors have bought Slavia Prague in the Czech Republic and Sochaux in France. They have a stake in Atletico Madrid and are paying $400 million for a 13% stake in the Gulf-based group that owns Manchester City in England, New York City FC, Melbourne City FC and a stake in Japan’s Yokohama F. Marinos. These are all investments in which the return is learning the mechanics of professional football club management in all its commercial and sporting dimensions.

However, there is a huge divide to cross between having a richly paid foreign-star studded domestic league drawing a large TV audience and a national team capable of competing creditably against the world’s best it the World Cup, and an even greater chasm between the professional and grassroots games.

The sheer weight of population implies that the country should be capable of producing eleven men who can play football along with the best of them. Even matching the China women team’s top-20 FIFA world ranking seems far off: the Chinese men’s national team has qualified for just one World Cup finals, in 2002, and is struggling to make it to Russia in 2018.

To that end, the government has set a target of having 20,000 schools playing the sport on a weekly basis by next year as a platform for an even bigger programme. Meanwhile, Guangzhou Evergrande has built what is reputed the world’s biggest soccer academy (with a bit of help from Real Madrid).

However, developing the game at the grassroots is hard and patient work. It would always be foolish to bet against the state’s capacity to mobilize the country’s youth to create world-class athletes, but in countries, like Brazil, that do it naturally, the game is deeply imbedded in the popular culture, and played from birth in the favelas, on the beaches and in the streets, with Brazilian idols as role models.

The situation of the game in China reminds this Bystander of the United States in the 1970s. The North American Soccer League (NASL) threw huge sums of money at aging South American and European stars in the hope it would kick start the game there. The League collapsed under the weight of its financial instability.

The widespread acceptance of the game as being for anything but immigrants and expatriates took generations. The United States has a globally competitive national team, Americans play in the top leagues around the world and the domestic league, Major League Soccer, is increasingly strong and stable, having learnt the lessons of the financial excesses of its predecessor, the NASL.

The lesson for China is that it was the children of those Americans who watched the NASL who started to learn football at school and college, but it was their children and grandchildren, who had grown up kicking a ball with their fathers and mothers and each other, who became good at it.

Similarly, it will be the grandchildren of those watching Teixeira, Martinez, Ramires and the rest in the Super League this season who will be pulling on their red shirts for China in the World Cup Finals — long after this current mad spending spree by the clubs has burnt out.

Leave a comment

Filed under Sport, Uncategorized

Xi’s Jiang Dilemma

Jiang Zemin (L) and Xi Jinping seen at an undated National Day reception

LAST AUGUST, RUMOURS circulated that former but still-powerful President Jiang Zemin, then just turning 89, had been placed ‘under control’ — a measure to restrict his freedom of movement for a while.

Jiang (seen left above) slipped from public view and it was being said that this was a prelude to President Xi Jinping moving against the man who had been instrumental in elevating him to the top leadership positions, but whose desire to rule from retirement remains the greatest constraint on Xi’s political supremacy.

Jiang led the Party from 1989 to 2002, but has remained one of the most politically powerful actors since. Before retiring, he appointed acolytes to key positions and let them establish varying degrees of autonomy from the formal leadership, particularly in the security apparatus.

With Zhou Yongkang, as head of the security services, and Guo Boxiong and Xu Caihou, in place as vice-chairmen of the Central Military Commission, the Party agency that controls the PLA, Jiang had more sway over the military and the security services than the man who succeeded him as Party boss and president, Hu Jintao. And he had enough power in within the Party to promote Xi over Hu’s favoured successor, Li Keqaing, who had to settle for being prime minister.

Once in the top positions, however, Xi showed more determination that Hu to shake free of Jiang’s controlling hand. Xi’s anti-corruption campaign was directed against many associated with Jiang’s Shanghai faction. Zhou, like Xu and Guo, three of the biggest ‘big tigers’ snared, were purged and expelled from the Party. One way to view that is as a rooting out of the parallel power network Jiang had established and restoring the leadership’s centralised control.

Rumours are circulating again that Xi may now feel political secure enough to move against the biggest tiger of them all, Jiang himself. This, the word is, would not be another round of control, but a prosecution for corruption.

Xi’s frustration with what he perceives as Jiang’s hinderance of his political control and economic reforms (which Xi sees as critical to the Party’s success in the existential struggle in which he believes it is engaged, but which would financially disadvantage many members of Jiang’s ‘Shanghai’ faction) is well known.

This, rarely, bubbled into public view when an editorial in the People’s Daily referred to former leaders who prevented their successors “rolling up their sleeves and doing bold work” and sniped at leaders who, “being unhappy to retire … do everything they can to extend their power”. Most readers would have quickly parsed the list of ‘former leaders’ to one.

Darker minds talk about conspiracies by Jiang’s supporters to overthrow Xi. Meanwhile, newly published writings by Xi carry a similarly coded warning that even ‘super-emperors’ should not be spared from the anti-corruption campaign.

Prosecuting Jiang would carry enormous risks for Xi. For one, it would sweep away the unwritten promise of immunity for former Party leaders that has allowed a leadership succession every decade.

Xi might then feel he would have to hold onto power beyond the customary ten years. That and the vacuum created by ripping up the old political rules that delivered a steady escalator of professional advancement and personal enrichment could trigger a revolt in a Party where morale at many levels is already fragile.

However, Xi is also time boxed. At the 19th Party Congress next year, the new generation of leaders — Xi’s heirs — could be expected to be nailing down their promotions for the top jobs which are due to rotate in 2022. If Xi is to move openly against Jiang, he will need to have done so — successfully — before then.

The calculation, though, is finely balanced.

The purges and Xi’s reorganisation of the PLA have diminished Jiang’ s influence in the military. That will have choked off some of the ‘pay for promotion’ that has enriched the Shanghai faction, just as the anti-graft probes into the state oil industry have closed off another honeypot. But it persists in the Party, including in the Politburo — which makes the promotions at the next Party Congress so critical. Taking Jiang down now would cement Xi’s absolute grip on power from the Congress on.

However, it would also risk splitting the Party and perhaps fatally damage it at a time when a slowing economy makes it especially vulnerable to social unrest, particularly if the newly affluent middle class starts to feel the effects.

Xi may also reckon that he need not take the risk; that he has taken down enough of Jiang’s inner circle to have undercut Jiang from below, and that Jiang will finally give up the game knowing Xi has the evidence to charge him whenever he chooses.  And there is always the alternative of hoping that age and infirmity do the job for him.

Leave a comment

Filed under Politics & Society

Subsidies As High As An Elephant’s Eye

Harvesting wheat in Shulyu Village in Tangxian County, Hebei Province, June 8, 2014.

FARM SUBSIDIES, STARTING with corn and other grains, are to be withdrawn, state media report. The People’s Daily quotes Chen Xiwen, deputy head of the central agricultural work leading team, as saying, “the price will be decided by the market and [the state] will no longer play the role of subsidising farmers” (via FT).

China’s farmers have produced a string of record grain harvests in the face of natural and man-made disasters and shrinking hectarage. At an estimated 621 million tonnes, last year’s annual grain harvest set another record high for the 12th consecutive year.

However, supply still struggles to keep up with the demands of a richer and growing urban population. Stocks and imports cover the gap. China imported 3m tonnes of wheat, 3.4m tonnes of rice and a record 4.7m tonnes of corn (mostly used for animal feed) last year.

While removing incentives for grain production seems counterintuitive in such circumstances, all the state’s guaranteed minimum purchase prices — currently double world prices — is doing is building up record levels of domestic stocks. The US Department of Agriculture estimates those of corn at the end of the 2015/16 crop year will account for more than half the world total, at 113m tonnes.

Policymakers have long recognised that this structural distortion of China’s domestic agricultural commodities markets is not sustainable. So the removal of subsidies has been expected, though it will have to be implemented in ways that do not risk social instability if rural incomes fall too sharply. Subsidies provide on the order of a 20% top-up to farm incomes. Authorities have just announced a new (if sketchy) agriculture investment programme.

That level of support is not out of line with international averages, but the numbers involved are, inevitably, large. The OECD, the rich-countries think-tank, estimates China’s support to its farmers at 1.8 trillion yuan ($292.6 billion) in 2014, the latest year for which comparative figures are available. That is double the amount of five years previously (other countries have been cutting back farm subsidies over that time) and equivalent to 2.5% of GDP, making it a bill worth trimming.

However, the bigger goal is the critical need to improve agricultural productivity overall as China’s shrinking farmland runs up against the limits of what is needed for China to feed itself. The current five-year plan promotes large-scale farming as a priority. By contrast, most grain farming is inefficiently small-scale and labour-intensive.

On average, each farmer plants half a hectare. In mechanised Europe, the ratio is more than 20 times that and in the Big-Agri United States upwards of 100 times. Furthermore, Chinese farms lose or waste some 35 million tonnes of grain a year in the course of storage, transportation and processing, according to state media.

Grain also needs lots of water, an issue in an increasingly water-scarce country, and an acute one on the evermore arid North China Plain, China’s breadbasket. One of the unintended consequences of grain subsidies has been to discourage small farmers from switching to cash crops that make better use of the available land.

Policymakers see large-scale, efficient and technologically advanced farming as the way to address all those challenges — and cut some hefty import and subsidies bills.

Leave a comment

Filed under Agriculture, Economy

Sidelining The Thinking Classes

IT IS NOT unknown for Chinese intellectuals to be seen on state television confessing to their alleged crimes. It is not unknown for hyphenated Chinese, Chinese-Americans in particular, to be seen doing the same.

It is exceedingly rare for a non-ethnically Chinese foreigner to be seen doing so. That makes the case of Peter Dahlin so exceptional.

The Swede had been detained since early January amid a crackdown on human rights lawyers and activists, before being expelled from the country today.

Dahlin founded Chinese Urgent Action Working Group, commonly known as China Action, a non-governmental organization that provides legal aid to people alleging human rights violations and assistance to uncertified lawyers in rural areas.

Authorities accuse China Action of receiving foreign funding to ‘instigate confrontations’ and to have ‘trained others to gather, fabricate and distort information about China’. They say they have ‘smashed an illegal organization that sponsored activities jeopardizing China’s national security’.

Well, they would, wouldn’t they, this Bystander is tempted to say.

However, beyond the particulars of this case, what are the general implications? Is this the sending of a chilling message — as seems to have been the case of the disappearing Hong Kong booksellers including Gui Minhai, who holds a Swedish passport and who was apparently detained in Thailand in what is seemingly an early example of the exercise of the new national security law that gives security forces international reach.

Or does it fit into a broader pattern of deterrence, and, if so, a pattern of what?

Certainly, there has been a crackdown on human rights lawyers and activists since last summer. Scores of Chinese lawyers and their staff have been detained for interrogation, leaving many facing political subversion charges that carry potential sentences of life imprisonment.

Giving this operation the veneer of rooting out a Western conspiracy against China provides popularly acceptable patriotic cover. And if it is on television, it must be true.

However, the crackdown goes wider than civil rights lawyers. Last year, more than 30 university officials were accused of taking bribes or other corruption. Their number included Zhou Wenbin, the high-profile head of Nanchang University who was sentenced last month to life imprisonment for taking bribes and embezzlement. At least seven other university presidents, including that of the Communication University of China in Beijing, have been removed from their posts in the sweep.

Visiting and Chinese scholars talk of an academic chill having descended. Indeed, it may be the worst time to be an open-minded academic since the anti-bourgeois liberalisation campaigns of the 1980s following strict new guidelines on criticism of Party and government.

The leadership’s centralization of power to protect the Party’s political monopoly has imposed, inevitably, severe constraints on civil society as it represents a possible alternative centre of political activity that could challenge the Party. Notions of human rights, judicial independence and multi-party democracy are seen as particular threats to the Party’s supremacy that need to be countered.

The effect is self-censorship within academia and the avoidance of controversial issues.

Top leadership believes the Party faces an existential struggle. The example of post-Communist eastern Europe has been noted. There, professors, writers, lawyers and journalists became politicians and the intellectual leadership of new political groupings.

This distrust of potential rival sources of power coincides with the emergence of the notion among the leadership that it no longer needs intellectuals to inform it and shape policy, a traditional role that political scientists within universities have played.

The increasing prominence of ministry-sponsored think thanks taking on that role is no coincidence. At the same time, the capability of the security apparatus to gather mass information — and of ‘big data’ to analyse it — provides a new potential alternative to critical independent scholars.

2 Comments

Filed under Politics & Society

China’s Economy Is Slowing Not Melting Down

THIS BYSTANDER HAS two brief points to make about China’s newly announced annual GDP figure, which came in at 6.9% for 2015, down from the previous year’s 7.3%.

First, the economy is slowing down, not melting down. That is what fast-growing industrial economies do after their growth spurts. South Korea and Japan did the same within living memory.

Second, for all the doubts, China’s national GDP numbers are no better or worse than those of most other large economies. (The quality of provincial level data is much patchier.) The less an economy is manufacturing based, the fuzzier GDP becomes as a measure. Services account for more than half China’s economy now.

What matters more is the pace of rebalancing the economy. On that, there is more reason for concern than whether GDP is a percentage point or two higher or lower than reported.

Update: In its new update to its annual World Economic Outlook, the International Monetary Fund has confirmed its expectation that China’s economy will continue to slow over the next two years. It has left its GDP growth forecasts for 2016 and 2017 unchanged at 6.3% and 6.0% respectively, noting that:

Overall growth in China is evolving broadly as envisaged, but with a faster-than-expected slowdown in imports and exports, in part reflecting weaker investment [as the economy continues to rebalance] and manufacturing activity.

In contrast, the Fund expects a gradual pick-up in the global economy from 2015’s 3.1% growth to 3.4% this year and 3.6% next, though the two forecasts are both 0.2 percentage points down from those it made in October.

Leave a comment

Filed under Economy, Uncategorized

Markets Expose China’s Inherent Economic Contradiction

100 yuan notes

THE RECENT VOLATILITY in financial markets has brought into question the capacity and nerve of China’s policymakers when confronted with variables they cannot control politically. This heightens concern not so much about the gathering pace of the economic slowdown as about the country’s prospects for the next stage of the economy’s d development, ‘rebalancing’ away from export and capital investment-driven growth and towards domestic consumption.

In what was mostly a closed economy, policymakers had relatively few monetary and fiscal levers to pull, but they were effective when yanked. Administrative guidance was particularly efficient. As the financial system has been opened up, the less guidable animal spirits of market forces have come more destabilisingly into play. The new tools to control them have arrived piecemeal, an inevitable consequence of the deliberately measured pace of financial-sector liberalization.

The currency has been in the vanguard of the reforms in lockstep with freer capital flows, moving steadily along the path of full convertibility, whose final destination has allowed the yuan to achieve the accolade of inclusion in the International Monetary Fund’s basket of reserve currencies.

The People’s Bank of China has a deserved reputation in financial circles around the world for the high calibre of its officials. But even their competency has been questioned following their uneasy and unexpected guided devaluation of recent weeks and their attempts to bring the tightly managed onshore and market-driven offshore exchange rates into alignment, a move undertaken for SDR-related reasons as much as currency management, but done with a tin ear for timing.

The central bank’s switch to managing the yuan’s value against a basket of currencies was both poorly signaled and sent mixed signals to investors, who tend to focus on the exchange rate against the dollar.  If investors lose confidence in the central bank’s effectiveness in the execution of monetary policy, it will only feed the volatility of the equity markets, where officials have already revealed a far from sure touch in their attempts to stabilize the markets.

While it may be virgin territory for many of them, policymakers clearly miscalculated the linkage between tumbling equity prices and speculative pressure on the currency, and how quickly the currency would become the focal point of market unease about China’s economic prospects among investors. It also says something about how the world has changed that the competency of Chinese policymakers has supplanted U.S. monetary policy as the primary determinant of global investor sentiment.

It is the nature of financial markets to be volatile in greater or less degree. Policymakers will learn by experience the limits of their reach in such an environment. Three decades of history will have left them more naturally inclined to intervene than not, which will make that learning painful and slow — last summer’s lessons from the mishandling of the stock-market plunge were clearly not well learned this most recent time round.

However, the broader concern to this Bystander is that financial-market turbulence will encourage Beijing to backslide on further financial-sector reform and more broadly on rebalancing. For some months, it has been dialing back on talking up the need to reduce government intervention in the economy. The third Party plenum at which the top leadership pledged to give market competition a decisive role in the economy seems longer ago than the 30 months it was.

Similarly, the notions that powerful bureaucrats can be a panacea for all economic ills and that the state can trump the market are fading. With that will come doubts in the some senior minds that the Party can pull off the unprecedented trick of liberalizing China’s economy without doing the same to its political system, unacceptable to the Party though the later is.

The certainty that state control provides versus the benefits that free markets bring is the inherent contradiction that may have been manageable for the past 30 years of the economy’s modernization but which, as Japan and South Korea have shown on a smaller scale, becomes more not less contradictory as an economy advances and becomes too big and complex to answer to political imperatives — and to the bureaucrats imposing them.

Leave a comment

Filed under Economy, Markets, Uncategorized

China’s Turbulent Rebalancing

DAMNED CUSSED THINGS, stock markets.

After last summer’s plunge in equities prices on the Shanghai and Shenzhen exchanges, authorities put in place measures to prevent a repeat. Share sales by large shareholders were choked off for six months and ‘circuit breakers’ put in place to halt trading if prices fell by more than 7% in a session to give time for excited animal spirits to calm down.

Yet this week has seen a rerun of last June.

The circuit breakers kicked in twice this week, the second time after just half an hour of trading. The circuit breakers themselves have now been suspended, and sales restrictions on large-scale shareholders extended.

Applying rational explanations for stock price movements always risks being a fool’s errand. What is being said is first that investors at the beginning of the week were rushing to sell stocks in advance of the end of the initial restriction on large-shareholder sales, which was expected to push prices down. Second, that the People’s Bank of China’s repeated setting of the yuan’s exchange rate at the lower end of its band was effectively a managed devaluation of the currency. Third, that weakening the yuan signaled a recognition that the economy was slowing more rapidly than thought and that a beggar-thy-neighbour round of competitive regional currency devaluations was in prospect.

All this has wider implications for the global economy. Equity and commodity prices, particularly of oil, tumbled around the globe.

The bigger concern is that markets are underlining how China’s transition towards more consumption and services-based growth is moving too gradually, and thus domestic consumption is not growing enough to offset the slump in exports caused by the decline in global demand.

On January 6, the World Bank in its newly published Global Economic Prospects forecast that China’s GDP growth would slow to 6.7% this year and 6.5% next, down from 6.9 % last year and 7.3% in 2014. Manufacturing and real estate have borne the brunt of the slowdown. The Bank also warned of the risk that the slowdown could gather pace faster-than-expected.

Sticking a finger of administrative guidance into the dyke of financial markets rarely has a happy outcome. Instead, fiscal and monetary policy will have to stem the flood. We expect to see further lowering of interest rates  and required reserve ratios and additional liquidity injections.

More infrastructure investment by central government is also likely. The fiscal deficit widened to 2.3% of GDP last year, a six-year high, as Beijing’s spending offset cuts in spending at the local government level in the second half of the year. There is still room for manoeuvre on that front.

China’s foreign reserves remain plentiful, too, at 33% of GDP. The current account is in surplus. The rebalancing is underway, as the World Bank’s charts below show, and the growth slowdown is, for the most part, orderly. However, the market turbulence is not, and will continue not to be so for as long as equities are overvalued, no matter how much some authorities think markets should bow to guidance.

China economy graphs

Leave a comment

Filed under Economy, Markets