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David Chaston with 10 more things you need to know about developments around and involving China; jobless rate falls; growth rate no longer targeted; David Mahon; Xi, Xi, Xi; rail freight; securitising rental housing; yield inversions

David Chaston with 10 more things you need to know about developments around and involving China; jobless rate falls; growth rate no longer targeted; David Mahon; Xi, Xi, Xi; rail freight; securitising rental housing; yield inversions

In a world in transition from being American-centric to one that may become China-centric, New Zealanders will need to stay up-to-date with news out of the Middle Kingdom as it influences us.

And 'influence' may be the key phrase here.

To stay on top of these issues, this weekly specialist 'Top 10', curates China news that New Zealanders should know about. Please contact me if you have items that should be in this series. [david.chaston@interest.co.nz ]

And to start this edition,

1. China's unemployment rate.

China needs to create about 15 million new jobs each year just to hold its employment position, not the least because about eight million students graduate their universities each year. And they seem to be able to do that.

They are claiming a jobless rate of just 3.95%. And that is the lowest in many years. (New Zealand's equivalent rate is 4.8%, Australia's 5.5%).

For each year from 2015 to 2020, every 1% increase in GDP is expected to equal roughly 1.8 million new jobs, so a 6% growth rate generates almost 11 million new jobs. That is some machine. On the other hand, a growth stumble would leave millions out of work and a potential social time-bomb.

But while it is positive, it is equally impressive because they are attempting some major industry restructuring at the same time.

The ministry of human resources said in April that China would need to resettle about half a million workers who lose jobs in the coal and steel sectors this year and will speed up development of a blacklist of firms with wage arrears.

2. Pollution and growth.

China's policy makers are attempting a major transition away from polluting industries. They still need the output, so to some extent, that means pushing those polluting industries off to someplace else. And the pivot will be hard to do to meet their treadmill growth requirements. You have to give them credit for trying. One consequence, one they won't be worrying about, is the impact it has on other countries. Australia for one could get a short-term boost and suffer a long-term starve, as the NY Times notes:

The campaign, which started two years ago but picked up speed in recent months, is so broad that it is starting to affect markets. Some economists have begun to warn of a possible modest slowing of the entire Chinese economy this winter.

China is so important to the global economy that a campaign against pollution here could affect economies around the world, particularly iron ore exporters. Economists in Australia are already starting to become concerned.

Australia “is absolutely dependent on China — that’s true of iron ore prices, but it’s also true of Australia’s national income,” said Chris Richardson, the chief Australia economist for Deloitte, the global accounting firm.

Although China now leads the world in its installations of solar and wind power, it still relies on coal to generate three-quarters of its electricity. Electricity use by households is rising as more Chinese consumers buy air-conditioners and adopt the trappings of middle-class life.

Turning off electricity to residential customers to reduce pollution is politically unrealistic. That means steeper cuts may be necessary for industrial users.

3. 'Be careful what you believe about China.'

When David Mahon talks about China, we must listen. He is a unique New Zealander with savvy, important views on the Middle Kingdom. He calls Beijing home. And he looks with a long perspective.

Consumption, which now accounts for 60% of annual DGP growth, co-drives the economy, says Mahon. Demand is robust, and he notes the spread of an increasingly prosperous 'commonwealth' beyond the urban middle class.

In assessing 2017's political centrepiece, the five-yearly National People's Congress (from 18 October), we must abandon Cod War 'Kremlinology', he says. Unlike the political machinations in the former USSR, China's General Secretary Xi Jinping heads no all-powerful faction, though his position is secure. The Party is highly competent, represents broad interests, and fiercely scrutinises the performance of its rising stars, he says. And, despite being selective, Xi's anti-corruption drive remains popular.

Mahon is nevertheless cautious.

"There are massive problems and some of them are not being addressed. China risks becoming a very unbalanced society in terms of the difference between rich and poor. As the country levels out, how many people will be in what we call the middle class?"

Moreover, the Party's economic model may continue to prioritise what he calls "a dumb faith in GDP growth".

Geopolitically, Mahon considers the South China Sea reclamations to be a minor part of the picture. He portrays revisionist China as asserting sovereignty – and, characteristically, ignoring international rules based on an inherited world order – but not empire building. More than the United States, he says, China understands interdependence.

He sees the country's softer power as epitomised by its Belt and Road Initiative – a mega-infrastructure project designed to create a China-centred trade network, connecting Asia, Africa, and Europe.

"So, through economic influence, China is already binding countries – not too tightly, but in a very interesting way – to itself."

4. China's rail growth impressive, but ...

Growth in China’s rail cargo shipments began to decelerate in the third quarter of this year, following a sharp expansion in the first half when companies stockpiled coal to avoid shortages that led to big price spikes last year. The recent +8.3% growth rate is considered 'slow'.

Those early gains were fueled in large part by large coal shipments during the period. In the first three quarters of the year, Daqin Railway Co. Ltd., operator of one of China’s main rail lines for coal shipping, said its shipments rose more than 33% to 322 million tons. But the growth rate was down to 26% in September, indicating people were shipping more coal earlier in the year.

The rail operator also said it is making progress on freight shipping connections between China and Europe, which have become a focus under China’s “Belt and Road” initiative, encouraging infrastructure development along the historic land-based and maritime Silk Roads. The cumulative number of trains traveling between China and Europe broke through the 5,000 barrier in the year through Sept. 7, the rail operator said.

5. Looking past 'simple' growth targets.

What Xi says is one thing. How they act is the real test.

The omission of a GDP target by Chinese President Xi Jinping during his 3½-hour speech at the opening of the Communist Party congress last week was a deliberate move to tell the country that quality of growth rather than speed now matters most for the world’s second largest economy, an economic aide to Xi said on Thursday.

“China’s growth has shifted from a high-speed growth phase to a high-quality growth phase,” Yang Weimin, a deputy director at the Office of the Central Leading Group on Financial and Economic Affairs, said a press conference in Beijing. “What is the most pressing problem? It is the issue of quality of growth,” he said.

6. Academia "not the domain of women."

China is a one-party state. It is also overwhelmingly one-ethnic group - Han Chinese (92%). Over the years they have shown they are intolerant to other groups, at least in the way we define tolerance. And one of the easiest buttons Beijing can push is the nationalist button. They find it easy to get millions on to the streets for a party or government cause, especially a foreign policy 'cause'. They don't tend to encourage street protest anymore because the numbers can be frighteningly high - and hard to control. But buying habits (boycotts, etc.) or anger on social media is easily turned on.

But these prejudices run deep. Sexism and misogyny are among them - even in their universities and places you might not expect. In fact, their new Politburo of 25 has only two females, and the seven member Standing Committee has zero.

This extract might be a bit of a shock for some readers, but Chinese society has a long way to go on equal, fair treatment. They haven't come to grips with affirmative action yet. I don't doubt they will at some stage, but it sems a long way off yet. (Not that New Zealand is perfect, but we are a lot better than China on this).

In January 2016, a survey of over 40 academic institutions in China found that 60 percent of female scholars had felt discriminated against because of their gender; meanwhile, 67 percent of men surveyed affirmed that both genders are treated equally in academia. Overall, 39 percent of instructors at Chinese universities are women. At engineering schools, this figure drops to just 10 percent.

Chen Dan, a female doctoral student in demography economics at Fudan University in Shanghai, told Sixth Tone that the belief that women are inferior to men remains deeply rooted in the minds of many Chinese people, and the fact that it’s being encouraged by academics isn’t helping. “There is indeed gender discrimination in academia,” Chen said, adding that she and some of her female peers had been treated unfairly during interviews because of their gender due to the stereotype that women prioritize their families over their careers.

“Before the two-child policy, it was easier for women who were married with kids to find jobs than it was for single women,” Chen said. “But now, a woman with one child has also been put at a disadvantage.”

Feng is not the only well-known teacher in China to have made offensive remarks about women. In April 2013, an associate professor at Guangdong University of Foreign Studies in southern China argued that women should not have to take morning classes because they require more time to dress and get ready. Besides, the professor reasoned, their dedication to beauty would give their male classmates greater motivation to study.

7. A great wall of tourists.

This is jaw-dropping. Analysts at Bernstein & Co have been studying the Chinese outbound tourism market and where it is headed. We have seen their impressive 300 page report for clients (so there are no links available) and it is quite something. The biggest takeaway is the sheer scale of everything involved. Here is a taste:

We estimate that spending by mainland Chinese travelers will increase by over ~US$400B between now and 2025 (up ~160%), based on an incremental ~125 million trips. The high-end Chinese shopper will be joined by an ever-increasing group of compatriots, with a lower propensity to buy big-ticket brands but far greater spending power in aggregate. In short, the Middle Cabin — business-class passengers paying full price for luxury brands — is about to be swamped by the Middle Seat — economy-class travelers looking for experience and adventure.

To put an incremental US$400B in context, the economic output of Switzerland is US$660B. Total annual US military spending is ~US$611B. We forecast that Chinese outbound spending during travel (business travel and tourism) will increase by this amount over the next decade. Significantly, the rate at which tourist travel to South Korea, Hong Kong, and Taiwan has suddenly dropped at various times in recent years due to rising political tensions suggests that Chinese outbound travel is positioned to become another lever for Chinese soft power internationally. 

It might be one thing to control permanent migration. Perhaps we will need to ration tourism as well in the quite near future. But doing that "by source" would involve some very tricky diplomacy indeed. But treating all sources equally will misunderstand the nature of the coming flood.

8. 'Chairman of everything.'

As we all know now, China's strongman ruler just awarded himself a higher status. He now has so many titles - more than a dozen and counting - that he has been called “chairman of everything.” Strongman rulers are all the rage these days with many populations tolerating them usurping power, basically unopposed in any organised, meaningful way.

President Xi has done what Putin, Duterte, Kim, Najib, Orban, Erdogan, et al do - surround themselves with bland obedient deputies. Apart from Li Keqiang, the rest have been promoted from non-threatening backgrounds. Active, motivated and capable deputies who might be part of a succession plan in the next generation are quite absent. It works for a while but the mediocrity signal ends up winning through, and that's when the corrosion starts, usually ending in a major upheaval.

Democracy may have its issues, throwing up its own rogue results occassionally. But it does have a natural renewal, refresher cycle.

While much of the focus in Beijing on Wednesday was on the people who had been elevated to the highest ranks of China’s power structure, three members of the Communist Party’s Politburo failed to retain their seats despite there being no obvious, or at least officially announced, reason for them to step down.

[And] not everyone touted by the pundits as a “rising star” made the grade this time around.

Shanghai mayor Ying Yong, who worked under Xi in Zhejiang province, and Guangdong governor Ma Xingrui both missed out on seats on the Politburo. Their chances of becoming the party bosses of China’s financial capital and its southern economic powerhouse are now slim, as both positions are traditionally held by Politburo members due to their importance.

9. Securitising rental properties.

More housing debt is the answer! One of China’s largest state-owned real estate companies (ex-PLA) has secured regulatory approval to securitise some of its rented-housing assets as the government ramps up efforts to expand the rental property market to help those who can’t afford to buy a home. The drive for more housing supply to control fast-rising prices is also permission to raise more debt - all in the State's name.

Regulators are opening the door for developers to raise money from their rental-property portfolios as the government has put a priority on expanding the rented-housing market amid a shortage of affordable homes. Millions of people, including young married couples and migrant workers, have been unable to get on the property ladder because of soaring prices.

The country’s first ABS based on rented-housing assets was issued by Mofang Service Apartment Group in January. It raised 350 million yuan through a sale on the Shanghai Stock Exchange ...

Xi promotes renting

Xi Jinping, the head of China’s ruling Communist Party and the country’s president, reiterated the commitment to rented homes in his political report to the 19th National Party Congress last week. “Houses are built for living, not for speculating,” Xi said, adding that the government will “make rental housing as important as home purchasing.”

The State Council, China’s cabinet, last year called on local governments to develop the rental market. In July, the central government announced that 12 cities with net population inflows had been chosen to take part in pilot programs to test various strategies.

10. Five-10 negative yield curve.

In a market that seems aimed at suckers, China sold US$2.billion of US dollar denominated five-year bonds last week on international markets at a fraction under 2.2% yield (and about 0.15% higher than equivalent US Treasury five-year bonds. This seemed to position their reputation like US Treasuries. China obviously doesn't need the funds, so the whole thing is a reputational exercise, and just another 'soft power' reminder.

This issue was 11 times over-subscribed and pointedly done without a recognised credit rating.

But, this was in stark contrast to their domestic markets where yields are rising, in fact quite quickly for five-year Chinese yuan government bonds. They are now up to 3.839%, having risen from below 2.9% at the beginning of 2017. Further, these five year yields are now higher than those for 10 years, recording a negative five to 10 yield curve. This is not the signal China really wants to present. Their domestic bond markets are far, far larger than the international US dollar-denominated markets and they are far more important given the vast amount of domestic borrowing (debt) on issue there. Rising interest rates domestically will be causing bond portfolio losses, especially for banks who are required to hold large volumes as authorised reserves. Given how leveraged all banks are, and how doubly leveraged Chinese banks are, this could cause real trouble.

Fortunately for Beijing, most of the really large banks are state-owned enterprises. Expect a flood of debt-for-equity swaps if this really does get toxic, and at mates-rates so the extent of the problem is masked. Then Beijing will allow a tiny return on equity standard for these banks to keep them afloat. If anyone is taken advantage of, it will be those offshore buyers of that recently bought that US$2 billion paper (and on-sold it into client portfolios). These buyers priced 2.2% per annum for this US$2 billion. If the real yield should be 3.839%, then their loss already should be about US$150 million. That won't happen of course because China is manipulating the US dollar market for its bond and it has enormous US dollar reserves. But you 'invest' here in a fixed market with some special risk. You are relying on Chinese 'face' to pay off - and that they care about that for foreigners.


We are aiming to produce this review weekly. If you have items you think should be included, please contact us (the details are above).

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9 Comments

Unwinding is the largest corporate stock price collapse in history (where the loss value would buy every listed company in Italy) and still significant downside.

https://www.bloomberg.com/news/articles/2017-10-29/the-biggest-stock-col...

Click bait link mate.

Some big moves there. Their restrictive policies for property are still going to cause issues. The shift to giving urban rights, or access to urban facilities, for education and healthcare to those that are renting will provide some relief. Many of the farmers who've moved to large cities have struggled to stay with the previous rules.

Ten years after PetroChina peaked on its first day of trading in Shanghai, the state-owned energy producer has lost about $US800 billion ($1.04 trillion) of market value – a sum large enough to buy every listed company in Italy, or circle the Earth 31 times with $US100 bills.

http://www.afr.com/markets/equity-markets/petrochina-the-biggest-stock-c...

we must abandon Cod War 'Kremlinology', he says...

We shall never abandon the Cod War! Snapper will rise again!

But...do I need my codpiece for this?

"There are massive problems and some of them are not being addressed. China risks becoming a very unbalanced society in terms of the difference between rich and poor. As the country levels out, how many people will be in what we call the middle class?"

Dunno, I've certainly seen my fair share of people claiming this eventuality and process is not a problem when it happens in NZ, so surely it's not a problem in China either? Or do we actually need a middle class equipped with opportunity?

Geopolitically, Mahon considers the South China Sea reclamations to be a minor part of the picture. He portrays revisionist China as asserting sovereignty – and, characteristically, ignoring international rules based on an inherited world order – but not empire building. More than the United States, he says, China understands interdependence.

"So, through economic influence, China is already binding countries – not too tightly, but in a very interesting way – to itself."

Interesting..."not too tightly", like Hong Kong? As in, a relaxed hand as long as you do what you're told?

One suggestion for you David.

Would you consider adding one or two points tracking other common wealth countries or the other five eye countries interact with China in a significant way that may be a lesson or future path for NZ?

One thing that I can think of is that UK adopted Shanghai course material for math in its primary school and the first English-Chinese bilingual school was opened in UK.

I suspect we haven't heard the last of this (Jian Yang):

http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11937380