China Challenges

Runaway Central Banker? Rumors China Suffers Massive Treasury Losses

Barrons reports:

Perhaps take this with several grains of salt:

Currently circulating the Interwebs is the note from Stratfor this morning that Zhou Xiaochuan, governor of China’s central bank, the People’s Bank of China, has fled the country, apparently because of a $430 billion loss on U.S. Treasuries suffered by the People’s Republic, according to Stratfor.

The matter is clouded by the fact that a report was published on Saturday attributed to Hong Kong-based news agency Min Pao and subsequently denied by Ming Pao. But the rumor has continued to circulate anyway. Stratfor says it can’t corroborate the matter but judges the spread of the rumor as “significant” given possible Communist Party leadership changes in 2012.

Tyler Durden at ZeroHedge adds the following post-scriptum about the rumored $430 billion loss:

Assuming average 6 Year duration on holdings (completely arbitrary), and a 2% drop in rates, means $430 billion is 12% of total notional, so somehow China must be short $3.5 trillion in notional or synthetically. Not good.

Update: In a brief this afternoon, Stratfor say they are unable to verify the rumor of Zhou’s departure, noting that some blogs in China claim the man has defected to the U.S.:

Read more at the link.

China Housing Crisis: People Buying Houses Getting Younger

CN Reviews says:

In the past 3 years, the average age of first-time house buyers in the United Kingdom rose from 33 to 37 years of age. In Japan and Germany, it is 42 years old; while it is 30 years old in the United States. However in a report released by the China Everbright Bank and a real estate research firm, those applying for housing loans in Beijing have an average age of 27 years old which is younger as compared to developed countries.

So that they could own a house, many Chinese do not mind working almost half of their lives just to pay off the bank loans. Owning a house in China is not just for residential purposes. It is now considered a marriage prerequisite and shows one’s financial capability. Other than that, it reflects on the unrealistic urgency of young people agonized by material desire and the shaky housing system in China.

As Li Daokui, professor at Tsinghua University and a member of the Chinese central bank’s monetary policy committee, says, “It is more than [just] a bubble problem,” Li says. “When prices go up, many people, especially young people, become very anxious. It is a social problem.”

Read more at the link.

China Fortifies State Businesses to Fuel Growth

The NY Times reports:

BEIJING — During its decades of rapid growth, China thrived by allowing once-suppressed private entrepreneurs to prosper, often at the expense of the old, inefficient state sector of the economy.

Now, whether in the coal-rich regions of Shanxi Province, the steel mills of the northern industrial heartland, or the airlines flying overhead, it is often China’s state-run companies that are on the march.

As the Chinese government has grown richer — and more worried about sustaining its high-octane growth — it has pumped public money into companies that it expects to upgrade the industrial base and employ more people. The beneficiaries are state-owned interests that many analysts had assumed would gradually wither away in the face of private-sector competition.

New data from the World Bank show that the proportion of industrial production by companies controlled by the Chinese state edged up last year, checking a slow but seemingly inevitable eclipse. Moreover, investment by state-controlled companies skyrocketed, driven by hundreds of billions of dollars of government spending and state bank lending to combat the global financial crisis.

They join a string of other signals that are fueling discussion among analysts about whether China, which calls itself socialist but is often thought of in the West as brutally capitalist, is in fact seeking to enhance government control over some parts of the economy.

Read more at the link.

Winners and Losers in China’s Passenger Car Market

Jack Perkowski writes:

With little to use as a foundation, China’s passenger car industry has been built instead on imported foreign technology. Tiny American Motors (later acquired by Chrysler) was the first in when it established its Beijing Jeep joint venture in 1984. Volkswagen followed the next year with its joint venture in Shanghai, and General Motors established Shanghai GM in 1997. Until the country’s economy, and demand for passenger cars, moved into high gear after China joined the World Trade Organization in late 2001, cars made by Shanghai Volkswagen, Shanghai GM and other foreign-invested joint ventures dominated sales. Since then, the local manufacturers have been coming on strong.

Going forward, the foreign brands will be driving into some pretty strong headwinds. First, the local assemblers get better each year, and the technology and quality gap between the local and foreign brands continues to close. Second, the biggest part of unit growth in the years ahead is likely to be in smaller, economy models where affordability is the key consideration and where local assemblers have a decided cost advantage. Finally, foreign companies are prohibited from owning assembly operations outright and must settle for a 50 percent share or less of their China operations. That makes the foreign assemblers dependent upon their joint venture partners for further expansion. Meanwhile, those very same partners are designing and producing their own models independently of their joint ventures with the foreign companies.

Add it all up, and my prediction is that 10 years from now, market shares will be reversed. Companies like Chery, Geely, BYD, Great Wall, and a great many more that we haven’t even heard of yet will dominate the market for cars in China. How this then plays out in the global automotive industry will be the story of the coming decade.

Read more at the link.

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Gray income report sparks controversy in China

China Daily reports:

SHANGHAI - A report on China's widening income gap and a potentially high level of unreported income earned by the rich has come under fire.

The report, entitled Gray Income and National Income Distribution, suggested China's "gray income" reached 5.4 trillion yuan ($794 billion) in 2008.

"There are many flaws in the report, such as how the samples were chosen and calculations made, and the final result is significantly higher (than the actual level)," said Shi Faqi, an official with the NBS, in an article on the bureau's website.

Shi's article was commenting on a report by Wang Xiaolu, deputy director of the National Economic Research Institute affiliated with the China Reform Foundation, a Beijing-based economic development research group.

That report claimed China's average urban household income was 90 percent higher than official data, which it claims does not cover gray income such as kickbacks and bribes.

Read more at the link.

Beijing has no desire to bust the property bubble

In the CER, Leo Zhang writes:

A number of friends and colleagues in Shanghai tell me they are re-considering property investment after seeing rentals for both residential and commercial projects climb in the past several months. Others are already busy looking for apartments in the hope of capitalizing on an expected 5-10% price drop in the second half.

This is a reflection of the growing trend among Chinese people for buying property as a means of maintaining asset value. With the stock market on the rocks and interest rates still low, there are too few safe, profitable places to invest money in China. CREA’s point to the State Council about investment channels is therefore a fair one.

A residential project developed by Wharf Holdings in Shanghai’s northeastern New Jiangwan Town recently sold all 62 units available within hours of putting them on sale. These apartments, all with a gross floor area space of more than 160 square meters, were sold for an average of RMB43,776 per square meter. This would suggest that investor sentiment is rallying with regards to mid- to high-end residential projects.

The question is: At what point will Beijing deem the price situation out of control and roll out tougher tightening measures such as the much-mooted property tax?

Read more at the link.

Beijing ranked top in the world for “commuter pain”

The WSJ China Blog says:

China’s love affair with cars seems increasingly to be turning its capital into a giant, nightmarish, gridlocked parking lot. (See a slideshow.)

Following news of a 10-day traffic jam outside Beijing that has stretched up to 100 kilometers (62 miles) long, state media on Tuesday reported that average driving speeds in the capital could drop below 15 kilometers an hour if residents keep on buying at current rates of 2,000 new cars a day. At that pace, Beijing will have 7 million vehicles by 2015, according to the head of the Beijing Transportation Research Center, and the pace of movement will slow to what it was a decade or more ago when China was still the Bicycle Kingdom.

The problem is that Beijing’s roads only have enough capacity to handle 6.7 million vehicles — and that’s assuming current restrictions stay in place, such as the one requiring private cars to keep off the road for one day a week.

The results of too many tires on too little road are a daily commuter crush that’s among the worst in the world, comparable to New Delhi or Moscow and five times worse than America’s capital of road rage, Los Angeles, according to a recent IBM study.

Read more at the link.

Ok, so it doesn’t meet your standards….so what?

David Dayton writes:

“Sorry it is not the same as the sample.  We hope that you’ll accept it anyway.”

“Your QC is too strict.  No one can expect to be 100%.”

“This is still within tolerance levels.”  (No tolerance levels were ever given.)

All three of these comments were said to me this last week in discussions about active projects in China.  All three of the suppliers then moved to the dreaded show-down level of negotiations: “We won’t make it again.  You can accept this standard or cancel (part of) your order.”

I’m not sure how this type of brinkmanship helps establish long-term relationships or encourages buyer-confidence—which is what every Chinese supplier I’ve every worked with has told me is their goal.  I’m also not sure how anyone would deal with this if they were not in China with the ability to sit down with the factory and have face to face discussions about the issues.

Here’s what we did in each of the three cases.

Read more at the link.

Inside a Knockoff Shoe Factory in China

The NY Times reports:

The Obama administration has made intellectual property more of a focus. “Our single greatest asset is the innovation and the ingenuity and creativity of the American people,” President Obama said in a speech in March. “But it’s only a competitive advantage if our companies know that someone else can’t just steal that idea and duplicate it with cheaper inputs and labor.” To implement his intellectual-property strategy, Obama appointed an intellectual-property-enforcement coordinator, while Immigration and Customs Enforcement invigorated the property-rights coordination center.

Can such efforts make a difference? “You’re not going to arrest your way out of this,” Bob Barchiesi, president of the International Anticounterfeiting Coalition, told me in a despairing tone this past spring. As long as there is a demand, he insisted, there will be supply. He had just returned from a trip to China, the point of origin for nearly 80 percent of all goods seized by Customs and Border Protection in the previous fiscal year. One day, Barchiesi observed a factory raid where counterfeit jeans were seized by the Chinese authorities. The factory, its employees and all its equipment remained in place. Barchiesi called the raid a “propaganda show.”

Efforts to have intellectual-property rights honored in China are not new. Soon after Gilbert Stuart completed his Athenaeum portrait of George Washington in 1796, the one that’s reproduced today on the front of every $1 bill, a Philadelphia ship captain named John Swords set sail for southeast China. Once in Canton, in modern-day Guangdong province, Swords ordered 100 unauthorized replicas of the Washington portrait, which were painted on glass. (Two replicas had somehow already made their way to China and served as the template.) Stuart was furious when he learned of Swords’s activities and, in 1801, he sued Swords in a Pennsylvania court and won. The damage was probably done, however. Even more than a century later, Antiques Magazine observed, “a good many portraits of George Washington painted on glass are knocking about the country.”

Read more at the link.

Conflicting Deal Cycles: A New York Minute vs. a Chinese Lifetime

Andrew Hupert writes:

I’ve been back in NY for a few weeks and I was recently asked to look at a deal in progress between a US service provider and the local government of third-tier Chinese city. The US side was feeling the pain of recession so they were initially excited by the prospect of a big contract – but their first foray in Chinese negotiation was nerve-wracking and draining. They were describing progress they had made after four months of email negotiation and one visit to the Chinese hinterlands with phrases like ‘scam’, ‘backwards’ and ‘funny business’, so I was curious to get a feel for what was happening. I ran through a set of standard questions and then I gave the American management team my assessment:

“I can’t be sure, but it doesn’t sound like you are being ripped off. In fact, it seems like things are going pretty smoothly”. When I told them that they were on track for another 6 months or so of similar successes before they could expect a solid agreement, they didn’t look happy.

New York has its own special style of deal-making during the best of times, but the economic situation is wearing people down and making them even more impatient and just a bit desperate. Not only do we hate wasting time, but we always want to know exactly where we stand. We respect decisive, straight-forward counter-parties who can give us a clear yes or no. If that means doing a few small test deals to work out the kinks and test the waters, then so be it.

Read more at the link.

Vacant But Not for Sale

China economist Andy Xie writes:

Property bubbles can be divided into two kinds—quantity bubbles (too much supply) and price bubbles (too expensive). China, however, is facing a combination of the two.

The Chinese property bubble is different from that of other countries since it has a huge supply while prices also run high.

China's urban housing stock is mainly composed of housing built by enterprises or government organizations for their employees, and some 60 million private housing units built over the past 10 years. Property developers are now building about 20 million private apartments, and local government-owned land reserves may be enough for another 20 million to 30 million.

Even if the stock of empty apartments is less than 64.5 million, the number would still be equivalent to 20 percent of the total urban housing supply, which is higher than Taiwan's vacancy rate at the peak of its bubble at the end of the 1980s. Moreover, as credit policies are loosened, the stock could rise to more than 30 percent.

In mature markets, the property price is usually twice that of a person's monthly income. In many Chinese cities, the per-square-meter property price is five to 10 times the average monthly income for local residents—a clear indicator that bubbles are forming.

Read more at the link.

Why China Might Never Protect IP

Chris Meyer & Julia Kirby write:

In the past couple of years, the jawboning directed toward China has moved on from IP infringement — stealing content! — to currency manipulation — stealing jobs! Last month, China found a way to blunt the pressure without actually doing very much, announcing that the value of the RMB would no longer be fixed against the dollar, but would float at a carefully managed level — not yet noticeably different from the fixed value.

And this may be essentially the same tack China has taken with the IP issue. While various efforts to tighten IP rights enforcement have been publicized, it's not clear how heartfelt this effort has been. Research by the Business Software Alliance and IDC, for example, reveals that China's use of illegal software in 2009 amounted to a commercial value of $7.6 billion, a $900 million increase from the previous year (the largest increase of any nation).

The truth is that China is not working hard to protect IP, but the conventional wisdom in the west is that, once China's own economy begins to create intellectual property with global value — patents, drug formulations, movies for the world market — its government will see more gain than pain in a stringent IP regime.

But is that right to assume?

Read more at the link.

Why Chinese Imports Stand to Alter Grain Markets

T. Marc Schober  writes:

China is entering a “new era” of corn buying. The world’s most populous country may import as much as 15 million tons of corn in 2015, according to the US Grains Council. China has historically been self-sufficient in corn production, but demand is starting to outpace supply as the nation continues to consume more protein.

Chinese imports of corn will grow from 1.7 million tons in 2010 to 5.8 million tons in 2011, and to 15 million tons in 2014-15 according to Hanver Li, Chairman of Shanghai JC, speaking to the US Grains Council. 15 million tons of corn translates to the US exporting roughly 600 million bushels of corn, which will have a substantial impact on corn stocks.

Mr. Li expects that meat consumption per capita will grow 6.9% by 2015, and milk consumption will grow by more than 50% over the same period. Rural areas will drive meat demand, while urban centers will drive milk demand.

Read more at the link.

Could China soon lead the world in scientific research?

The New Stateman says:

Science is rising in the east. China's strategies for economic development, which are centred on creating a world-beating science base, don't sound like much. They go by odd names: the 863 Programme and Project 211, for instance, and the Torch and Spark programmes. But they are proving to be more powerful than even the Chinese government could have hoped.

Last year, following a decade of phenomenal growth, China became the second-biggest producer of scientific knowledge in the world. In 1998, Chinese scientists published about 20,000 articles. In 2009, they produced more than 120,000. Only the US turns out more.

According to figures released this year by the US National Science Foundation, there are now as many researchers working in China as there are working in the US or the EU. The state is encouraging Chinese scientists trained in the west to return home, offering them enormous salaries and access to world-class laboratories. In 2008, for example, the molecular biologist Yigong Shi, one of Princeton University's rising stars, walked away from a $10m research grant to set up a lab at Tsinghua University in Beijing. In January, the Chinese equivalent of the US National Institutes of Health was unveiled with £150m in its pockets, which will be distributed to new medical research projects.

“China is focusing on developing an elite group of institutions and the performance of these is going to go on improving," says Jonathan Adams, director of research evaluation at Thomson Reuters in London and lead author of a 2009 report into China's scientific research strategies and achievements.

Read more at the link.

China 'hukou' system deemed outdated as way of controlling access to services

The Washington Post reports:

Wang Aijun is the editor of the Beijing News, one of China's most influential private daily newspapers. Yet here in the capital, Wang said, he often feels like a second-class citizen.

He pays Beijing taxes, but his teenage son is not allowed to attend a Beijing public high school. To install a telephone or an Internet line, he must pay in advance. He is charged more for a ticket to some city parks. He doesn't qualify for a subsidized apartment. He cannot enroll his family in the city's public health-insurance program.

The reason for the discrimination? Despite having lived and worked in Beijing for seven years, Wang still does not have that most sought-after of commodities: a Beijing "hukou."

One of China's oldest tools of population control, the hukou is essentially a household registration permit, akin to an internal passport. It contains all of a household's identifying information, such as parents' names, births, deaths, marriages, divorces, moves and colleges attended. Most important, it identifies the city, town or village to which a person belongs.

The hukou dates back at least 2,000 years, when the Han dynasty used it as a way to collect taxes and determine who served in the army. Mao Zedong's Communist regime revived it in 1958 to keep poor rural farmers from flooding into the cities. It remains a key tool for keeping track of people and monitoring those the government considers "troublemakers."

Wang Aijun is the editor of the Beijing News, one of China's most influential private daily newspapers. Yet here in the capital, Wang said, he often feels like a second-class citizen.

He pays Beijing taxes, but his teenage son is not allowed to attend a Beijing public high school. To install a telephone or an Internet line, he must pay in advance. He is charged more for a ticket to some city parks. He doesn't qualify for a subsidized apartment. He cannot enroll his family in the city's public health-insurance program.

The reason for the discrimination? Despite having lived and worked in Beijing for seven years, Wang still does not have that most sought-after of commodities: a Beijing "hukou."

One of China's oldest tools of population control, the hukou is essentially a household registration permit, akin to an internal passport. It contains all of a household's identifying information, such as parents' names, births, deaths, marriages, divorces, moves and colleges attended. Most important, it identifies the city, town or village to which a person belongs.

The hukou dates back at least 2,000 years, when the Han dynasty used it as a way to collect taxes and determine who served in the army. Mao Zedong's Communist regime revived it in 1958 to keep poor rural farmers from flooding into the cities. It remains a key tool for keeping track of people and monitoring those the government considers "troublemakers."

Read more at the link.

China's Deficit in American Studies

Terry Lautz writes:

China faces a worrisome imbalance of intellectual trade with the United States. Contrary to conventional wisdom, Chinese know less about the United States than Americans know about China. Most Chinese students and scholars interested in the United States concentrate either on English language and literature or on Sino-American diplomatic history and policy studies. There are few opportunities for fieldwork in the United States, and scholarly work on American domestic politics is "woefully inadequate," according to a Peking University specialist in American studies.

By contrast, Americans have done surveys, oral histories, and archival research in the humanities, social sciences, and sciences all across China, including such sensitive areas as Tibet and Xinjiang. Since China's opening to the West, 30 years ago, Americans have acquired remarkably detailed insights about nearly every aspect of traditional and contemporary China. "Just as American scholars go to Hunan and Guangxi," a Chinese academic told me, "Chinese should know more about Arizona and Ohio in order to be familiar with the 'real' America."

I conducted interviews in China for the Ford Foundation's Beijing office last year to review the state of American studies in China and to make recommendations for increased interaction between specialists in China and the United States. Since 1989, Ford has been one of the few private providers of financial support for American studies in China, but its support has dwindled in recent years.

My survey showed that Chinese scholars and policy analysts are increasingly ready and able to move beyond the narrowly focused approach that has dominated American studies in China in the past. "We need to study the economy, society, history, and culture of the United States, not just what Obama said yesterday," said one observer. He and many others are eager to investigate the cultural, ethnic, and religious factors that help to explain America's behavior and its foreign-policy decisions. As it stands now, "China equates American diversity with chaos, not realizing it is the strength of the U.S.," says an American professor.

Read more at the link.

China's KFC Inflation Index

Patrick Chovanec writes:

None of this was particularly on my mind when I walked into my local KFC today, in Beijing, to grab lunch.  I always order the same thing at KFC:  large popcorn chicken, small fries, and a large Pepsi.  Okay, so it’s not original, but it makes for a consistent benchmark.  So it’s been subtly obvious to me for some time that the prices have been going up.

How much?  Well, according to official Chinese statistics, food inflation (a component of the consumer price index) this year has been running at about 5-6%–higher than the rest of the consumer price basket, to be sure, but not high enough to tip the balance.

How does my KFC experience in Beijing compare?  A year ago, my standard meal cost RMB 21.50.  A couple of months ago it rose to RMB 25.50.  Today, for the first time, it set me back RMB 28.50.  For those keeping track, that’s a 32.6% price hike in a single year.

There’s nothing scientific about this sample.  It’s purely anecdotal.  Perhaps KFC, or the Beijing market, is an aberration. (I’m eager to hear anyone’s theories.) But I think it’s a data point worth noting, such caveats aside.  KFC isn’t some outlier in the Chinese economy, like high-priced Starbucks that still caters mainly to young, cosmopolitan latte-sippers.

Read more the link.

Baidu causes problems in China

Shanghai Daily reports:

SHANGHAI'S legal moving companies announced yesterday that they will quit the online business platform of Baidu.com, accusing it of promoting unlicensed moving firms.

More than 20 licensed companies said they will also stop advertising and paid links with Baidu.

After the pullout, all information about moving companies on Baidu would then belong to unlicensed firms, according to a joint statement issued yesterday by the industry association.

The Shanghai Traffic Law Enforcement team said there are at least 300 unlicensed companies that use the same names as licensed firms.

Last year, there were more than 730 complaints about fake business operators overcharging or even stealing goods from customers, officials said. Some unlicensed firms were found leaving the phone number of a licensed company to customers who intended to complain.

"The fakes make the money while the real companies take the blame," said the association's statement.

Earlier this year the city closed 35 websites related to unlicensed moving companies.

Many unauthorized companies have paid Baidu to promote their links and phone numbers, the legal companies claimed.

The industry association called on Baidu to stop selling links to unlicensed moving firms as it has largely damaged the reputation of approved firms.

Read more: http://www.shanghaidaily.com/article/?id=446097&type=Metro#ixzz0wMuxQWtT

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US-Made Goods Continue to Find a Market in Growing Chinese Economy

The US-China Business Council says:

WASHINGTON, DC, August 2, 2010 -- US exports to China continue to be a driver of sales for American companies across the nation, according to a new US-China Business Council (USCBC) study.

USCBC each year releases analyses of US exports to China by congressional district to better inform the policy debate about China trade. This year's report once again confirms the growing importance of the Chinese market for the continued vitality of the US economy. The report details export growth, identifies the top-five manufactured exports, and provides a ten-year overview of exports to China by congressional district.

"Even with a global recession, American businesses and American workers continue to benefit from expanding opportunities to sell high-value manufactured goods to the China market, the world's fastest growing economy," USCBC President John Frisbie said. "A clear trend that began in 2000 continued in 2009: Exports to China continued to outpace export growth to other global markets. US exports to China have jumped 330 percent since 2000, compared to 29 percent to the rest of the world."

Read more at the link.

China's Growing Problem Loans

Cynicus Economicus says:

I have also been looking at some of the HSBC reports on China, and they have made interesting reading. China, due to the opaque nature of the government, is a country where you feel that analysis is somewhat like trying to read tea leaves for the signs of the future. One interesting report was that there are some problems on the horizon for China's local government, with this from an HSBC (1):

New Century Weekly – a financial newspaper in China – reported this week that a recent China Banking Regulatory Commission (CBRC) investigation had found that of the RMB7.7trn extended to local financing vehicles as part of stimulus funding, 23% (or RMB1.8trn) went towards projects that may ultimately have problems in servicing their loans.

The problem was that, as part of the Chinese fiscal stimulus, local governments were forced to borrow from banks to fund infrastructure projects, and these loans are now going sour. It seems that, even in a country like China, where there is a strong need for new infrastructure, fiscal stimulus presents risks that (to use a cliche) bridges will be built to nowhere.

There are plenty of other signals that suggest that the dragon may not be as fit as it appears, and it will be interesting to see how China fares in the coming year. As I have mentioned the opacity of China is such that analysis of what is taking place is never easy.

Read more at the link.

US$119.31 billion

The CER notes:

US$119.31 billion:

Difference between the sum of China's local GDP figures and the national GDP figure

Some Manufacturing Leaves China and Heads Back to USA

USA Today reports:

Faced with rising costs, General Electric is moving production of its new energy-efficient water heater halfway around the world. The country it's leaving? China. The one it's bringing 400 jobs and a newly renovated factory? The United States.

A small but growing band of U.S. manufacturers — including giants such as General Electric (GE), NCR (NCR) and Caterpillar (CAT)— are turning the seemingly inexorable offshoring movement on its head, bringing some production to the U.S. from far-flung locations such as China. Others that were buying components overseas are switching to U.S. suppliers.

Ford Motor said Wednesday that it's bringing nearly 2,000 jobs to its U.S. plants by 2012 from suppliers, including those in Japan, Mexico and India.

Experts say the initiatives could moderate job losses that have dramatically shrunk the U.S. manufacturing industry. "I think we're going to start to see a slowing of lost jobs, and we'll see some jobs coming back," says Simon Ellis, an analyst for IDC Manufacturing Insights. "At some point, it will balance out, and we'll reach an equilibrium."

There are myriad reasons for the shifts, often called "onshoring" or "reshoring." Chinese wages and shipping costs have risen sharply in the past few years while U.S. salaries have stayed flat, or in some cases, fallen in the recession. Meanwhile, U.S. manufacturers have been frustrated by the sometimes poor quality of goods made by foreign contractors, theft of their intellectual property and long product-delivery cycles that make them less responsive to customer demand.

Read more at the link.

Is the Right to Strike Coming to China?

Businessweek reports:

The name gives no hint of the revolutionary changes afoot for mainland workers. Yet the proposed Regulations on the Democratic Management of Enterprises, now being debated by the Guangdong Provincial People's Congress, could give Chinese labor the ultimate—and until now taboo—bargaining tool: an officially sanctioned right to strike. "This has been a no-go area in China for decades," says Robin Munro, deputy director at the Hong Kong-based China Labour Bulletin. All Chinese workers belong to one union, but it wields little power. "This is the first time ever Chinese authorities have said it is O.K. to strike."

The draft law could take effect by this fall in Guangdong, the industrialized coastal province where Honda (HMC) workers in June illegally and successfully struck for higher wages. The proposed law is seen by many activists and researchers as a trial balloon before a possible national rollout. The rules: If one-fifth or more of a company's staff demands collective bargaining, then management must discuss workers' grievances. Before talks begin, the union must elect local worker representatives. Until now, union reps came from management ranks.

The next section of the proposed law ventures into even more radical territory. For six decades, picketing and disrupting production have been illegal and subject to harsh punishment. Under the Guangdong proposal, as long as workers first try negotiating and refrain from violence, they're allowed to strike.

Read more at the link.

China's Value-Added Conundrum

In the CER, Patrick Chovanec writes:

For the past two decades, the "China price" has redefined global commerce. The term has become synonymous with ultra-low cost production, fueled by the ready availability of cheap labor. The country's competitive cost advantage has made it the lynchpin in many a corporation's global strategy.

Now this model is being called into question. Early in the year factories struggled to rehire enough willing workers at existing wages. Then in May, Taiwan's Hon Hai Precision Industry (2317.TW; also known as Foxconn), the world's largest contract electronics manufacturer, said it would double the salaries of its mainland workforce following a rash of high-profile employee suicides. A few weeks later, staff at Honda (HMC.NYSE, 7627.TYO) and Toyota (TM.NYSE, 7203.TYO) plants in China went on strike over wage demands.

It has been suggested that the country has crossed a critical threshold in its economic development where its pool of cheap labor has been exhausted and wages inexorably begin to rise.

Read more at the link.

China's Lamborghini Index

At the CER, Malcolm Moore writes:

Here's one way to track the amount of loose credit floating around the Chinese market - Lamborghini sales.

I guess it is as good a way as any to measure how flush the cadre of property developers and coal barons are feeling.

So last year, in the first half of 2009, directly after the financial crisis, the China Lambo index stood at a mere 26 cars sold.

Bearing in mind that you need to place an advance order for one of their super-charged, super-sleek monsters, I'm guessing that those 26 were the ones ordered during the financial crisis itself, which explains the low tally.

Between January and July of last year, of course, a tidal wave of stimulus cash and new bank loans was poured into the system, inflating both the property and stock markets. Turns out it inflated our Lambo index too, because in the second half of 2009 another 46 cars arrived in China.

 

Read more at the link.

How to Sell Online in China

Businessweek's David Michael and Yvonne Zhou write:

One crucial difference is that consumers in the U.S., Japan, and most other nations primarily use the Internet for e-mail and searching for information. In China, by contrast, 87 percent communicate online via instant messaging. More than 80 percent of Chinese users also download music and films, compared with 38 percent in the U.S. and just 23 percent in Japan.

The most important gateway into this world is QQ, the instant-messaging service owned by Tencent and arguably one of the world's most valuable digital franchises. There are more QQ accounts in China—523 million—than there are people in the European Union. Tencent illustrates the value of getting consumers hooked on a social networking platform and growing along with their needs. Many Chinese get free QQ accounts as teenagers to chat and continue to use it to build and maintain relationships. They then grow addicted to Tencent's gaming modules.

The new regulations, which among other things require gamers to register with their real names and limit sales of items using "virtual currency," may slow Tencent's momentum. But there's no denying the value of its franchise. Young professionals interviewed by BCG described how they log on to QQ when they wake up, play games such as QQ Farm and World of Warcraft during work breaks and when they get home, and buy "clothes" for their avatars on QQshow. Tencent earns revenue from games, online ads, and links to e-commerce sites.

China's younger digital generations are also growing at ease with e-commerce. Some 39 percent of university students and 49 percent of young professionals shop online, spending an average of $294 each in 2008. The majority go to the Internet first to get product information and compare prices. These groups are also more likely than others to pay for purchases electronically. And they are buying increasingly complex products, such as apparel and consumer electronics.

For many Chinese, there are big advantages to shopping online. The Internet has made prices highly transparent and offers products often not found in local stores, especially in smaller cities. But winning the trust of Chinese consumers requires lots of hard work.

Read more at the link.

China's Dodgy DVD Sellers Get Wary

Bill Dodson writes:

The two DVD shops I visited in the past week in Suzhou seemed at first glance about 80 percent smaller than they were two weeks earlier. One now just has a check-out counter fronting one wall and a back door. The second doesn’t even have a back door, but instead a short, dimly lit walkway between a high floor-to-ceiling rack of mainland and Hong Kong DVDs.

When I walked into the second shop, the proprietor pointed at the wall behind the tall rack. I didn't get why at first, but after flipping through the selection on the table at the front door I realized all the DVDs were from mainland China, Hong Kong and Taiwan (with a sprinkling of South Korean and Japanese selections). So I nonchalantly sauntered in the direction the proprietor had pointed me in and, behind the tall shelf of movies, found a doorway from which a dim light was emanating. I stepped through the doorway and found myself surprised once again.

Read more at the link.