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• OPINION
   
  
  
•  Sep 23 2015 at 9:11 AM 
   
  
  
• Updated 1 min ago 
  

Asian banks prepare for possibility of China's financial contagion

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As China's economy further slows, investors are increasingly focusing on the potential for financial contagion to banks across Asia.

NaN of
[img=620x0]http://www.afr.com/content/dam/images/1/m/d/s/w/q/image.related.afrArticleLead.620x350.gjss6t.png/1442973461101.jpg[/img]The biggest risk to offshore lenders is that a vicious Chinese slowdown would translate into higher losses on the cross-border loans they've made to Chinese borrowers. Bloomberg
[Image: 1435478719294.png]

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by Karen Maley
Will the growing strains in China's financial system cause problems for Asia's big lenders?
As China's economy continues to slow, and the problems of widespread industrial overcapacity become more glaring, investors are increasingly focusing on the potential for financial contagion to banks in the Asian region.
Such contagion has been highlighted in recent weeks amid growing signs that thousands of Chinese investors, who ploughed their money into high-risk financing schemes are racing to pull out their savings.
These unregulated financing schemes, which promised Chinese investors high returns, were extremely popular while Chinese economic activity was strong, but are losing their allure now that slowing growth is causing more loans to sour.

Although some of these were outright Ponzi scams, others were more legitimate, channelling investors' funds into high interest  loans for smaller private companies, particularly in the property sector, that struggled to get loans from the country's banks.
At the same time, investors are worried about the financial strains being felt by many of  China's lumbering and debt-laden state-owned enterprises.
This week, Beijing decided to bail out embattled capital equipment maker China National Erzhong Group, which had previously warned there was a risk it could default on a payment to bondholders. Beijing's decision to  rescue the troubled group, at a time when Beijing is trying to make SOEs more efficient, is a clear sign China's policymakers are worried about potential financial turmoil  from allowing a large state-owned group to default.
The biggest risk to offshore lenders is that a vicious Chinese slowdown would translate into higher losses on their cross-border loans tto Chinese borrowers. It is estimated that Hong Kong-based banks are responsible for about 80 per cent of the cross-border loans to China, with Singapore-based banks providing most of the remaining 20 per cent.


Until the September quarter of 2014, when the problems with slowing Chinese growth became more apparent, foreign lenders were keen to lend to Chinese borrowers. For instance, in the first nine months of 2014, Hong Kong banks boosted their lending to China almost 20 per cent, providing loans totalling more than $HK3 trillion ($545 billion).
HK TRADE SOURS
While some of this represented genuine borrowing by Chinese companies to fund their growth, some borrowers were also looking to take advantage of the combination of higher Chinese interest rates, and the rising yuan. Chinese groups, especially those with Hong Kong offices, were able to borrow at low interest rates from Hong Kong banks and then deposit the funds back in China, where they enjoyed a higher rate of interest. The fall in the yuan in the past month makes this trade much less attractive, which means that Chinese borrowers are likely to be repaying these borrowings.
What's more, trade finance – backed by guarantees and credit support from mainland Chinese banks – also represents an important component of the foreign banks' exposure to China. Most trade finance provided to Chinese entities is backed by letters of credit from Chinese banks, which means they will cover any losses if the borrowers fail to repay.

But this reliance on guarantees from Chinese banks can make foreign lenders vulnerable to any disruption in the Chinese banking system.
Direct lending to Chinese borrowers accounts for just under 20 per cent of the Hong Kong's exposure to mainland China. While the bigger banks tend to focus on the large Chinese private businesses and state-owned enterprises that have high credit ratings, some of the mid-sized Hong Kong lenders have built up exposures to riskier private Chinese companies.
All the same, if the Chinese economy suffers a severe slowdown, foreign lenders are likely to fare much better than their Chinese mainland competitors. That's because foreign banks have limited exposure to riskiest parts of the market, such as loans to local government vehicles or to the country's troubled shadow banking sector.

Caixin China PMI slumps to 6.5 year low

• BUSINESS SPECTATOR
  
• SEPTEMBER 23, 2015 11:46AM
  

Michael Roddan
[Image: michael_roddan.png]
Reporter

[b]A key gauge of China’s manufacturing activity has plunged to a six-and-a-half year low, adding to the concerns surrounding the slowdown of the world’s second-largest economy.[/b]
The Caixin preliminary manufacturing index fell to 47 in September, down from 47.3 in August, dropping further below the 50-point mark which separates expansion from contraction.
The Australian dollar slumped on the news, dropping from the US70.85c mark to US70.25c in less than a minute following the release of the data.
Caixin chief economist He Fan said patience would be needed to see the results of fiscal stimulus from Beijing, which is designed to promote stability in the sector.
“The decline [in manufacturing activity] indicates the nation’s manufacturing industry has reached a crucial stage in the structural transformation process,” Dr He said.
“Fiscal expenditures surged in August, pointing to stronger government efforts on the fiscal policy front,” he said.

• Sep 23 2015 at 5:29 PM 
   
  
  
•  Updated Sep 23 2015 at 5:29 PM 
  

A day in the life of Xi: American Rom-Coms and rum cocktails

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NaN of
[img=620x0]http://www.afr.com/content/dam/images/g/j/t/7/7/5/image.related.afrArticleLead.620x350.gjsx3l.png/1442993399847.jpg[/img]In Washington State, Xi Jinping and his wife Peng Liyuan are also planning to visit Tacoma's Lincoln High School. AP
[Image: 1426320227568.png]

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by Lisa Murray
 
Facing a sceptical audience of business executives in Seattle, concerned about cyber espionage, opaque regulations and China's sharper-than-expected economic slowdown, President Xi Jinping went on the charm offensive.
In his first public address of a week-long United States visit, Mr Xi attempted to lighten the mood by engaging the audience with a series of American cultural and intellectual references.
He said the city had become a household name in China because of the 1993 filmSleepless in Seattle, insisted his anti-corruption campaign was not a House of Cards power struggle and rattled off a list of his favourite authors, including Mark Twain, Walt Whitman and Jack London.

Special mention was made of Ernest Hemingway as Mr Xi confided he visited the place in Cuba where the author wrote The Old Man and the Sea. He even ordered a mojito at one of Hemingway's favourite bars.
The speech, delivered confidently by Mr Xi in front of 750 business executives, is the latest in a series of public appearances both at home and overseas aimed at projecting a friendly image of a modern-day leader.
"He is demonstrating that he is a modern leader who understands American culture and values, who has visited there," said Joseph Cheng, who recently retired as a political science professor at City University of Hong Kong. "He is more self-confident than his predecessor, Hu Jintao, and he has been more active in working on that personal touch."
This includes talking often and openly about his teenage years during the Cultural Revolution, when he was sent to live in a remote village in the northern province of Shaanxi, working as a farmer and sleeping in a hill-side cave.


Mr Xi told his audience in Seattle that he had returned to the village earlier this year and it had paved roads, internet access and residents were eating plenty of meat, a symbol of China's progress.
In Washington State, Mr Xi and his wife Peng Liyuan are also planning to visit Tacoma's Lincoln High School. The Chinese president is returning to the school after touring Tacoma 22 years ago when he was Party Secretary of the coastal Chinese city of Fuzhou.
These personal connections are important as Mr Xi attempts to present a strengthening of ties with the US at a time when tensions are high over issues like cyber security and China's island-building in the South China Sea. Few analysts expect any concrete agreements to come from this week's visit but it is important for the domestic audience that Mr Xi is well-received and doesn't appear weak.
Mr Xi is also facing strong competition from Pope Francis' visit to the US this week, which is expected to attract more attention.

"This summit is unlikely to deliver concrete results as right now, Xi Jinping cannot be seen to be weak in dealing with the US and cannot afford to grant too many concessions," said Mr Cheng. 

China becomes Asia’s biggest securitisation market

• FIONA LAW
  
• THE WALL STREET JOURNAL
  
• SEPTEMBER 25, 2015 12:00AM
  

[b]China’s fledging securitisation market is soaring, as Beijing looks for new ways to ease lending to firms amid the country’s slowest period of economic growth in more than two decades.[/b]
In the past few months, ­Chinese officials have laid out rules to expand and quicken the process for carmakers and other lenders to issue debt by bundling together pools of underlying loans. Issuance of asset-backed securities in the world’s second largest economy rose by a quarter in the first eight months of 2015 — to $US26.3 billion ($37.8bn) from $US20.8bn in the same period last year, according to data publisher Dealogic. Australia’s market in 2014 was a little over $US18bn.
Though the Chinese securitisation market took flight just last year, it has already become Asia’s biggest, outpacing other, more developed markets such as South Korea and Japan.
Asset securitisation helps free up capital from banks or financing firms to support smaller businesses and projects that typically have less credit available to them. Leading the drive are state-owned and medium-size lenders seeking to unload loans from their books by packaging them into products known as collateralised loan obligations. Such firms account for the bulk of the market — CLO issuance totalled $US20.9bn between January and August, a third more than $US15.9bn over the same period last year.
While securities backed by car loans comprise a smaller piece of the market, issuances from the financing units of carmakers including Ford and Volkswagen have increased fivefold to $US4bn from January to August, compared with $US1.8bn over the same period last year.
The State Council, China’s cabinet — which sets the country’s total issuance of asset-backed securities — said in May it would allow companies to issue up to 500bn yuan ($122bn) of such securities. That compares with $US49bn in all of 2014. The central bank and the banking regulator also will speed up the process by allowing select borrowers to issue securities after registering with regulators. Previously, each issuance had to be approved on a deal-by-deal basis.
China began allowing asset securitisation on an experimental basis in 2005. It put the pilot program on hold in 2009 when bonds backed by subprime mortgages were hit during the global financial crisis. In 2012, Beijing revived the program, and the State Council said in 2013 it would expand a trial stage.
While officials have pinned hopes on the funding alternative to help boost lending, the relatively small market hasn’t yet proved a game-changer in stimulating growth. Since late last year, Beijing’s other steps to ease lending, including five interest rate cuts and targeting loans to specific industries, largely have fallen short. As doubts grow about China’s ability to meet its year-end growth target of about 7 per cent, officials are looking to pull more levers.
Beijing’s move to expand the securitisation market also marks a step in Premier Li Keqiang’s two-year-old pledge to pursue market reform. In his first state visit to the US this week, President Xi Jinping said China would press ahead with plans despite slowing growth and market fluctuations.
While more securitisation could help free capital for banks and financing firms to extend loans, some risks still loom: ­notably whether borrowers of the underlying securities will pay back the loans on time.
The lack of a track record for the securitisation market also could make investors skittish.
“The assets and the market as a whole haven’t been tested by stressed conditions,” said Standard & Poor’s analyst Aaron Lei.
Unlike established markets in Europe and the US, the majority of products are CLOs, which are concentrated with a small number of underlying loans, said Lesi Zuo, head of capital market solutions at Standard Chartered in Hong Kong. That could make China’s CLOs riskier.

The price of cement in China has collapsed ... and that is not good

[/url]If China's economy is growing at 7% or more per year, why has the price of cement there dropped by 25% in the last two years?
You can't build anything permanent without cement. It's a great indicator of how the underlying, real economy is actually doing: If people are buying a lot of cement then it means they have the cash to build large, new, permanent objects. Houses, roads, bridges and cities. If building and construction are on the decline then the price of cement should fall.
This is what Chinese cement looks like right now, according to a fantastic note to investors from Macquarie's Chief China Economist, Larry Hu:  
[img=112x0]http://static5.businessinsider.com/image/55fadf74bd86ef19008bb0f1-714-732/screen_shot_2015-09-17_at_16_28_25.png[/img]Maquarie
The Chinese government is "serious" about keeping GDP growth at 7%, says Hu. 
Macquarie reckons "fixed asset investment" growth — spending on infrastructure and buildings basically —   should be steady at about 20% growth each period since 2013. Official numbers say China GDP remains above 7%:
[img=46x0]http://static1.businessinsider.com/image/55fae07a9dd7cc1a008baff7-804-744/screen%20shot%202015-09-17%20at%2016.37.32.png[/img]Macquarie
This doesn't make sense ... unless you are one of those people who believe that China is lying about its GDP growth. Outside observers suspect it may be as low as 4% in reality. That's still pretty good growth in an economy of that size.
But [url=http://uk.businessinsider.com/chinas-stock-market-crash-just-started-up-again-2015-8?r=US&IR=T]China's stock market is collapsing, it has a massive debt overhang, objective indicators like electricity consumption look soft, and the country is about to go through a generational reversal that will erase its population growth advantage. 
And now cement prices have collapsed at about the same time as ... Chinese metal prices, as Goldman Sachs noted recently:
[img=98x0]http://static2.businessinsider.com/image/55fae18f9dd7cc19008bb199-1047-666/screen%20shot%202015-08-18%20at%2015.41.33.png[/img]Goldman Sachs
None of this looks good, unless you believe that the Chinese have figured out a way to grow their economy at 7% a year without using concrete or metal.

(24-09-2015, 11:46 PM)BlueKelah Wrote: [ -> ]The price of cement in China has collapsed ... and that is not good

[/url]If China's economy is growing at 7% or more per year, why has the price of cement there dropped by 25% in the last two years?
You can't build anything permanent without cement. It's a great indicator of how the underlying, real economy is actually doing: If people are buying a lot of cement then it means they have the cash to build large, new, permanent objects. Houses, roads, bridges and cities. If building and construction are on the decline then the price of cement should fall.
This is what Chinese cement looks like right now, according to a fantastic note to investors from Macquarie's Chief China Economist, Larry Hu:  
[img=112x0]http://static5.businessinsider.com/image/55fadf74bd86ef19008bb0f1-714-732/screen_shot_2015-09-17_at_16_28_25.png[/img]Maquarie
The Chinese government is "serious" about keeping GDP growth at 7%, says Hu. 
Macquarie reckons "fixed asset investment" growth — spending on infrastructure and buildings basically —   should be steady at about 20% growth each period since 2013. Official numbers say China GDP remains above 7%:
[img=46x0]http://static1.businessinsider.com/image/55fae07a9dd7cc1a008baff7-804-744/screen%20shot%202015-09-17%20at%2016.37.32.png[/img]Macquarie
This doesn't make sense ... unless you are one of those people who believe that China is lying about its GDP growth. Outside observers suspect it may be as low as 4% in reality. That's still pretty good growth in an economy of that size.
But [url=http://uk.businessinsider.com/chinas-stock-market-crash-just-started-up-again-2015-8?r=US&IR=T]China's stock market is collapsing, it has a massive debt overhang, objective indicators like electricity consumption look soft, and the country is about to go through a generational reversal that will erase its population growth advantage. 
And now cement prices have collapsed at about the same time as ... Chinese metal prices, as Goldman Sachs noted recently:
[img=98x0]http://static2.businessinsider.com/image/55fae18f9dd7cc19008bb199-1047-666/screen%20shot%202015-08-18%20at%2015.41.33.png[/img]Goldman Sachs
None of this looks good, unless you believe that the Chinese have figured out a way to grow their economy at 7% a year without using concrete or metal.

told you many times over... the whole world is heading for a collapse... think of something more positive as bad news is no value added now

China state-owned enterprises: Beijing ducks hard questions

• THE AUSTRALIAN
  
• SEPTEMBER 26, 2015 12:00AM
  

Rowan Callick
[Image: rowan_callick.png]
Asia Pacific Editor
Melbourne

[b]China’s 52,000 centrally owned state-owned enterprises and 103,000 owned by local governments, with assets valued at $24 trillion, cast a long shadow over the nation’s economy.[/b]
But announcements from the central government over the past few days about what it plans for the vast sector indicate that this is a key area where its decisiveness has deserted it.
Premier Li Keqiang said state-owned enterprises were “in urgent need of reforms as languid mechanisms and poor management have resulted in declining profits”.
The official Xinhua news agency has mentioned plans to dispose of “zombie” enterprises from which the lifeblood has been drained. The State Council or Cabinet has talked of introducing “mixed ownership”, and even of foreign investment being permitted in “an orderly manner.”
But as details start to be finalised for the next five-year plan to be launched at the annual National People’s Congress session in March, the party-state is expected to maintain a tight grip on the sector. A new report on SOEs about to be released by Beijing-based, Australian-managed research centre China Policy, and led by research manager Charles Horne, summarises that “the top-level plan for fixing China’s bloated and inefficient state sector, 22 months in the making, disappoints.”
It says: “The (ruling communist) party’s determination to retain control of economic management shows no sign of abating.”
A move to challenge the State Grid’s monopoly has been released, and 14 sector- or task-specific plans are in the works. “But as President Xi Jinping approaches his third year in power, no single champion to carry forward SOE reform has emerged.”
The reform-focused Third Plenum or meeting of this party central committee embraced “the market’s decisive role in allocating resources.”
And demonstrable progress, the China Policy report says, has been made in bringing runaway local budgets under control, in ensuring that public service and social security spending is sustainable, and in creating broader capital markets to disperse risk and better serve the needs of the real economy.
These remain leaders’ top priority, “if driven by central command rather than market principles”.
Progress has been made in such goals because they have the needed “political space” — with Finance Minister Lou Jiwei and central bank governor Zhou Xiaochuan “given unparalleled autonomy to reconstruct the fiscal system and to liberalise the financial system”.
And the losers from these moves — such as local governments, banks, property developers, the construction industry — lack the political capital to oppose them. “By contrast,” the report says, “no anointed acolyte or unitary vision exists for SOE reform.”
Further capital reforms could create a more robust foundation for listing SOEs and privatising assets. But “without stronger market-oriented institutions, implementation can only be centrally-administered and on a one-off basis.”
Hu Shuli, China’s most highly regarded business journalist, editor-in-chief of Caixin, says a deep ideological debate on the party’s role in SOEs remains unresolved. While boards are to be granted enhanced authority, the party remains paramount, China Policy points out, with passages in the new government plan suggesting he party should oversee boards and control major appointments.
Although CEOs will increasingly be paid by market standards, they would “report to public servants and be evaluated according to party allegiance”.
This does not point to any failing on the part of President Xi — “part of his mission is to renew the party’s mandate by institutionalising its role in societal and economic management”.
This echoes the determination of the Fourth Plenum, which focused on legal reforms, both to enshrine the rule of law as the basis of governance while also placing the party at the top of the judicial hierarchy, while “seeing no contradiction” in doing so.
A major change for the vast sector, directed by Finance Minister Lou, is that 30 per cent of SOE earnings must be sent to the national budget rather than given to the State-owned Assets Supervision and Administration Commission to reinvest, usually back into SOEs, as in the past.
In return, SASAC’s responsibility is being extended to a larger number of SOEs.
The report warns that “potential private investors” in SOEs “may be deterred for fear of overstepping retroactively applied legal interpretations,” for instance of ownership of assets.
The government’s announcements divide SOEs into those deemed “competitive” that can compete with private counterparts, and others, allowed an “orderly exit.” But such terms are undefined, as are those deemed “special” and thus protected — SOEs in national security, “natural monopolies,” pillar industries, “strategic emerging industries,” and carrying out vital national projects. There is no timetable for the step towards “mixed ownership,” although there will be pilots.
Conglomerate SOEs may list on the sharemarkets, whereas previously they listed via subsidiaries. Boards of supervisors will be introduced — apparently to review boards of directors. The party’s central Discipline Inspection Commission will provide the backbone of SOE governance.
Change is afoot. But as those involved with China’s economy have become accustomed to, not in a way that fits familiar Western-style narratives.

CCP mah what can anyone reasonably expect? How come nobody complain about Putin?

Chinese President's U.S. visit
Xi's inner circle gives West cold shoulder

   Mr Wang Huning (second from left) and Mr Li Zhanshu (second from right), advisers to President Xi Jinping, at an event with Boeing staff in Seattle on Wednesday.PHOTO: REUTERS
Published
3 hours ago

Advisers' icy remove and secrecy of Xi administration a challenge for other nations
BEIJING • When Mr Wang Huning, a policy adviser to the Chinese president, made a six-month trip to the United States in 1988, he returned with notes for a 400-page memoir.
As President Xi Jinping made his first state visit to the US, with a day packed with pageantry and diplomacy at the White House yesterday, Mr Wang was among a small group of advisers at his side.
People who knew Mr Wang say he has become unapproachable and ignores invitations for conversations. American officials find it difficult to talk to him casually on the sidelines of international forums.

Quote:DEALING WITH STRANGERS
One of the problems we have in US-China relations now is that we basically don't know these people... I don't think we have a very good understanding of who below Xi Jinping speaks for him.
DR DAVID M. LAMPTON, director of China Studies at the Johns Hopkins School of Advanced International Studies

They and other Western officials say that this icy remove is true not only of Mr Wang, but also of other advisers with whom Mr Xi travels, including Mr Li Zhanshu, essentially Mr Xi's chief of staff, and Mr Liu He, his top economic adviser.
The problem presents a huge challenge for the US and other nations. By some standards, Mr Xi's administration is the most secretive in 66 years of Communist rule.
In past decades, foreign officials could speak with senior Chinese officials or aides and trust that those people were proxies for their leaders. The most famous example is Mr Zhou Enlai, the Chinese premier under Mao Zedong, with whom Dr Henry Kissinger secretly negotiated the US-China rapprochement.
With Mr Xi, those channels do not exist. "One of the problems we have in US-China relations now is that we basically don't know these people," said Dr David M. Lampton, director of China Studies at the Johns Hopkins School of Advanced International Studies.
"I don't think we have a very good understanding of who below Xi Jinping speaks for him."
The refusal of Mr Xi's inner circle to develop ties with Western officials is consistent with a fundamental belief that has become widespread in the system here - namely that Western ideas and influences will undermine the Communist Party and lead to a "colour revolution".
There is also broad agreement that Mr Xi keeps colleagues and advisers - especially technocrats in state ministries - at more of a distance than other Chinese leaders did and that he relies mainly on his own knowledge and instincts in making decisions.
When he wants to listen, he turns more to party groups.
He is the head of seven of 22 "leading small groups", opaque policy councils that weigh in on matters ranging from economics to cyber security. And he created the National Security Commission, another secretive group that aims to coordinate security policy to defend the party against internal and external threats.
"I believe it is President Xi who is calling the shots," said Dr Su Hao, a professor at China Foreign Affairs University in Beijing. "He is the paramount leader, and the major policies will have to come from him. Others can only help him during the process."
"We're seeing something new with Xi," said Dr John Delury, an author of Wealth And Power, a book on modern Chinese history. "Never has the gap been bigger between No. 1 and everyone else."
That Mr Xi keeps a tight grip on authority and does not divest power could be a result of his experiences during the Cultural Revolution. "The thing they don't have is trust," Dr Delury said of that generation.
Others say Mr Xi learned a lesson about the importance of hoarding power after seeing how his predecessor, Mr Hu Jintao, was weakened by Mr Jiang Zemin, the former president who kept pulling levers after his retirement.
"It taught him a lot about what not to do," said Mr Christopher K. Johnson, a former China analyst at the Central Intelligence Agency who is now at the Centre for Strategic and International Studies in Washington.
"Don't let these alternative power sources develop under you. Keep everyone a little off balance."
NEW YORK TIMES

• Sep 25 2015 at 1:30 PM 
   
  
  
•  Updated Sep 25 2015 at 2:29 PM 
  

Outlook for Chinese economy brighter than you think

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There is no shortage of numbers to worry the China sceptic, but according to other metrics the Chinese economy looks pretty strong, writes Patrick Commins.

NaN of
[img=620x0]http://www.afr.com/content/dam/images/g/j/u/u/m/n/image.related.afrArticleLead.620x350.gjttfc.png/1443171670598.jpg[/img]At the movies: box office sales in China are growing at an annual rate of 40 per cent. Getty Images
[Image: 1426050253275.png]

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by Patrick Commins
The Auckland harbour bridge was completed in 1959. A mere 10 years later work was under way to make it wider. The bridge was "literally too small from the very first day it was opened," note analysts at research firm Bernstein.
The point of this little bit of trivia is not to take a dig at our Kiwi cousins (although with the Rugby World Cup in full swing we should be taking every opportunity while we still can), but to highlight the fact that building infrastructure on a "just-in-time" basis – that is, to satisfy immediate rather than future needs – is a mistake, and it's not one Chinese policymakers can be accused of.
Instead, China this century has invested lavishly to build masses of infrastructure today to accommodate tomorrow's demand. The issue is clear: if they built the right things in the right places to provide the springboard to the next phase of consumer-led growth, then officials in Beijing look like geniuses and paying off the mountains of money borrowed to build all those bridges, railways and airports will be a doddle.
If, on the other hand, they built the wrong stuff in the wrong places, or too much of that borrowed money got gambled away in Macau or frittered away in the boutiques and real estate agencies of London, then a faltering Chinese economy risks being lumped with a mountain of unserviceable debt.

None of this is new. Through all the recent China-related panic it remains the "core controversy" within China today, the Bernstein analysts say, as it has been for a number of years. The trouble is all the recent headlines of sharemarket crashes and currency devaluations have spooked investors (and, apparently the US Federal Reserve) and led them to focus almost exclusively on the decline of the "old economy", and ignore the emergence of the new.
BETTER MEASURE
And declining it is. The famous "Li Keqiang index" is named after the Prime Minister who, at a state dinner in 2007, reportedly told the US ambassador that a combination of loan growth, electricity generation and rail freight usage data was a far more reliable way to measure economic growth, at least in one specific industrial region, than the widely distrusted official GDP numbers. The Li Keqiang index suggests that the country has been in recession for most of 2014, and is only just now emerging into growth.
There is no shortage of numbers to worry the China sceptic. For example, 200,000 excavators were sold in China in 2010, and 11,000 bulldozers. Last year sales for both bits of construction machinery were at most half those levels.


All of which hasn't been great news for cement makers such as Anhui Conch Cement, says Joseph Lai, who runs Platinum Asset Management's Asia fund.
Anhui Conch has increased its cement producing capacity from about 75 million tonnes in 2006 to 250 million tonnes today. Unfortunately, that heavy investment in supply is now running into lagging demand from a new, less resource-hungry economy. Cement prices have gone from around 350 yuan ($78) a tonne or so at their peak in 2011, to around 210 yuan now – a decline of around 40 per cent. The Hong Kong-listed stock in Anhui, which has actually been one of the better performing businesses in the industry, has gone from fetching over $HK40 (about $7) at its peak in 2011 to around $HK23 now.
But how much does Anhui Conch's experience tell us about China's economic reality today? Not a lot, the Bernstein analysts would argue. They estimate 80 per cent of the country's economic growth in the first half of this year came from the services sector – a sector that makes up half of the country's GDP. You don't transport services on a freight train, the sector requires a fifth of the energy of the industrial part of the economy, and is less capital intensive and therefore less likely to require debt financing. So how would the Li Keqiang index capture growth in the services industry? It wouldn't.
MORE OPTIMISTIC STORY

Instead, the Bernstein analysts prefer to look at things like airline passenger numbers, auto sales, movie box office sales and residential property prices. The story those data tell is more optimistic. Box office sales are growing at an annual rate of 40 per cent. Airline passenger numbers are growing at a rate of around 10 per cent. Car sales are weaker, but property prices are on the improve. A year ago prices were lower in all 70 cities surveyed. At the beginning of the year that number was 49, but in July only 29 of those cities recorded falling house prices.
China Mobile is a company that illustrates this growth in the consumer-led corners of the economy. While Anhui Conch is battening down the hatches, the country's biggest mobile network operator is picking up 20 million new 4G subscribers every month. That's equivalent to the entire population of Australia – every month.
Lai's fund has a big position in the telco giant, which is listed in Hong Kong and is ploughing tens of billions of dollars into building a 4G network across the country. New 4G customers use four of five times as much data as on the old, unreliable and slow 3G network, says Lai, meaning they are much more lucrative for China Mobile. About 200 million of the telco's 820 million customers have already converted to 4G from 3G, and the majority will move over in the next couple of years, says Lai. "A huge group of middle-income consumers is lapping this up," he says. Faster, more reliable mobile data services is also enabling for the country's internet businesses, such as ecommerce firm JD.com and social network Tencent, to expand their businesses at an increasing rate.
How much do movie theatre ticket sales, airline passengers numbers or new 4G subscribers really tell you about the Chinese economy? Not everything, but they are the metrics you would be wise to keep an eye on. If they take a sharp turn for the worse, then they would be "telling you something extraordinarily negative" about the Chinese economy and would be "an early warning system" that the Chinese story really is going off the tracks, say the Bernstein analysts. At the moment, though, "they look pretty strong".

• Sep 29 2015 at 2:38 PM 
   
  

What if China's economic stats aren't as dodgy as we like to think

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[img=620x0]http://www.afr.com/content/dam/images/g/j/8/3/k/4/image.related.afrArticleLead.620x350.gjx86o.png/1443501727904.jpg[/img]China's Premier Li Keqiang sparked his own 'index', but even that is hard to believe with the rise of the service sector in China. RUBEN SPRICH
by Gabriel Wildau
That China's official economic data cannot be trusted is now received wisdom among western economists, investors and policymakers. To treat the numbers as authoritative is to invite ridicule: believers are naive at best and, at worst, stooges for Communist propaganda.
The problem with this conventional wisdom is that, aside from the closely watched and politically sensitive real gross domestic product growth rate, other official data vividly depict the slowdown in China's economy that sceptics insist is being concealed. If there is a conspiracy to disguise the extent of harder times in China, it is an exceedingly superficial affair.
The surprise devaluation of China's currency in mid-August fuelled scepticism about official GDP data, as many interpreted the move as evidence that Beijing was taking drastic action to rescue an economy in deep trouble. 
China officially posted 7 per cent real GDP growth for the first half of 2015, bang on the full-year target that Premier Li Keqiang announced in March. To the sceptics, it was both too convenient and incongruous with other data that suggested a deeper slowdown in manufacturing and residential real estate construction, the country's economic powerhouses.

Experts on China's national accounts data broadly agree that the quarterly real growth figure is subject to politically motivated "smoothing" aimed at reducing the appearance of sharp swings in the economy, especially in response to external shocks like the Asian financial crisis in 1998 and the global financial crisis in 2008.
This goal is achieved mainly by tweaking the inflation metric used to convert between nominal and real growth, known as the "GDP deflator". By understating inflation, China's statistics masters can create the impression of faster real growth.
TREND SETTING   
Yet the shortcomings of this single data point do not seriously impede our understanding of trends in the Chinese economy. One need look no further than nominal GDP figures, which express economic output in current prices, without adjusting for inflation, to observe the bleak state of the country's main industries.


"China has some of the least volatile real GDP growth of its kind in the world, but nominal GDP data look more reasonable in a number of key aspects," Wei Yao, China economist at Société Générale, wrote last month.
Nominal GDP growth in China's industrial sector, which includes manufacturing, mining and utilities, grew at a paltry 1.2 per cent in the second quarter of 2015, down from an average of 5 per cent in 2014. For construction, second-quarter growth was 4.1 per cent compared with 9.8 per cent last year. Meanwhile, services are now the fastest-growing sector of China's economy. 
Nominal growth is more important than its inflation-adjusted counterpart for most purposes. A company making revenue projections, for example, has little use for real growth rates. 
Similarly, commodity exporters in Latin America and Africa see the slowdown in Chinese commodity imports reflected in customs data on both import volumes and product value.

Carsten Holz, an economics professor at Hong Kong University of Science & Technology who has also taught at Harvard and Stanford, is a stout defender of China's official data. He says Beijing's use of the deflator as a fudge factor is "intensely annoying to detail-oriented analysts but only marginally relevant for practical purposes".
He doubts that Mr Li or his deputies directly instruct the National Bureau of Statistics to report a particular growth figure, but he acknowledges that the agency faces pressure to meet targets and avoid stoking economic pessimism. In theory the GDP deflator should be the broadest measure of inflation for all goods and services produced in China, including those not counted in the consumer price index. CPI covers consumables but not investment goods or services like logistics or law. 
The official statistics agency provides few details on how the GDP deflator is calculated. But Mr Holz believes that only the five-person Communist party cell within the statistics bureau would be privy to final deliberations. That group includes commissioner Ma Jiantang and his three deputies, including Xu Xianchun, head of the national accounts department. 
"Xu Xianchun sits at the table, and he knows, 'Well, we should push it up a bit if we can.' He looks at his documents and he says: 'We can use this deflator, or we can equally justify using that deflator. OK, we're going to use that one because it leads to a tiny bit higher growth rate,'" Mr Holz says. 

HARDLY CONFIDENCE INSPIRING
This is hardly a confidence-inspiring vision of Chinese data compilation. Yet Mr Holz sees no better alternative. He has stress tested the official growth rates using several alternative deflators based on published price indices like CPI and the producer price index, which tracks wholesale goods. 
He concludes that China's average annual real growth rate between 1978 and 2011 - officially 9.8 per cent - may have been as low as 9.1 per cent or as high as 11 per cent. That still leaves the official rate as the best guess.
"I prefer the official data. I think they are the best data out there. I agree that there's a range of final [real GDP growth] figures, all of which are equally justifiable. The 7.0 [per cent] figure for 2015 could be in an interval of 6.5 to 7.0 per cent or [even] 7.2," says Mr Holz.
For his part, Mr Xu last month used the People's Daily, the Communist party mouthpiece, to defend his agency against accusations that the GDP deflator has understated domestic inflation in recent quarters by failing to adjust for the impact of falling commodity prices. 
Mr Holz's most formidable intellectual antagonist is Harry Wu, economics professor at Hitotsubashi University in Tokyo. He first offered an alternative assessment of China's GDP data in 1995 and has spent 20 years refining his methodology. 
DIFFERENT TAKE
His latest research finds that China's average annual real GDP growth for 1978 to 2014 was 7.1 per cent, 2.5 percentage points below the official estimate of 9.6 per cent. That is more than double the margin for error that Mr Holz calculates. Mr Wu says growth last year was 3.9 per cent, compared with the official figure of 7 per cent. 
Mr Wu initially mentored Mr Holz but their intellectual dispute later caused the two to fall out with each other. 
"It got to a point where Harry Wu wasn't talking to me and wasn't citing my work," says Mr Holz. "I didn't agree with his work. It just didn't convince me. I thought it was actually wrong." 
As worries about China's economy have seized global headlines, analysts in London and Singapore - some new to the study of its national accounts - have weighed in on the data's reliability. 
Michael Parker, economist for Bernstein Research in Hong Kong, is illustrative of that approach, but he disagrees with the sceptics. "The idea of getting tens or maybe hundreds of thousands of accountants and statisticians across China to march consistently in a crooked line - and to do that for a decade or more - sounds, to us, implausible," he says. 
To follow the debate between Mr Wu and Mr Holz, by contrast, is to plunge down a rabbit hole of benchmark revisions, input-output tables and competing hypotheses about productivity growth in the services sector. Few analysts have tried to score the match punch by punch. Yet what is striking is how much the two agree on. In particular, both point to problems with how the NBS, the statistics agency, measures the industrial sector, the backbone of the economy. 
DOESN'T ADD UP
The NBS stopped publishing raw figures for industrial output in 2008. Glaring problems had become an embarrassment to the extent that by 2007 monthly production data from large-scale enterprises showed that such output was greater than the total industrial output reflected in quarterly GDP data. Logically, that is not possible. 
Such paradoxes are blamed on over-reporting of output by companies and local governments. Local GDP growth has traditionally been an important factor used by the Communist party to evaluate performance and decide who is to be promoted up the ranks, though that is slowly changing.
Where Mr Holz and Mr Wu differ is largely their response to these flaws. 
Mr Holz broadly trusts that Mr Xu of the NBS, acting as a gatekeeper, is able to filter out the most glaring over-reporting when his national accounts division receives data from colleagues in the industrial statistics division and transforms it into the industrial component of GDP. For him, nominal GDP figures are mostly accurate, leaving the deflator as the main issue. Mr Wu, by contrast, considers the industrial GDP data irredeemably flawed by the need of local officials to hit targets. 
Both men see shortcomings in China's data collection, but Mr Wu's calculations diverge from the official data most acutely during crisis periods. His conclusion is that the error is "not mainly caused by methodological deficiencies, but instead by political influences".
His scepticism propelled him to create a parallel data series for industrial output built around a Soviet-style list of names and quantities of industrial products manufactured in China each year from steel pipes to toasters.   
"If local governments want to fabricate or manipulate commodity production stats, they can't do it. There are too many, and it's too complicated. You would need to be professional," he says. 
INDUSTRIOUS TRUTH SEEKER   
To Mr Holz, Mr Wu's alternative series, which contributes to a much larger downward revision of China's real growth rates over decades, does not offer any improvement over the official data that both agree are flawed. 
He argues that it is impossible to reliably derive industrial output in value terms because of difficulties in measuring improvements in product quality and assigning inflation-adjusted prices to newly developed goods. The quality question is crucial for whether price increases are interpreted as additional real output or simply inflation. 
Mr Wu says his methodology incorporates reasonable assumptions about product quality and new development. Yet this is an awkward moment for his radical rejection of China's industrial production data. The monthly industrial output series, long viewed as suspect, shows a sharper decline than is reflected in the overall GDP growth rate. Indeed, this incongruity is the biggest source of scepticism about China's true GDP growth rate. 
The likelihood that the growth rate is subject to manipulation reflects institutional weakness, notably the lack of independence of the NBS. But it also results from an analytical failing by those who assess China and other economies. If the emphasis on this single number were not so excessive, the incentive to massage it would be less. 
The sooner real GDP growth loses its totemic significance, the sooner we are likely to receive more accurate data. For China and other governments for whom economic growth is the main guarantee of political legitimacy, the temptation to fudge will always exist. But in a scenario where China's economy is in such dire straits, that stability is threatened, relying on a single figure to persuade that things are great is unlikely to prove an effective political strategy.
THE LI KEQIANG INDEX
The surest way to sound smart and hard-headed on the issue of Chinese growth in recent months is to cite the so-called Li Keqiang index. 
This alternative growth metric is based on comments reportedly made by Mr Li, now premier, to then-US ambassador Clark Randt in 2007, and revealed by WikiLeaks. Mr Li, then party secretary in the north-eastern province of Liaoning, reportedly said data on gross domestic product were 'man-made' and therefore unreliable. Instead, he preferred to use three direct indicators of economic activity supposedly less subject to exaggeration: electricity consumption, rail freight volume and bank lending.
Today, the Li Keqiang index is  exhibit 1 for the case that quarterly GDP data are soft-pedaling the extent of the economic slowdown. Other monthly indicators like fixed-asset investment, industrial production and retail sales - which have all slowed more sharply than real GDP over the past year - are similarly offered as evidence for the prosecution.
Yet these metrics fail to capture activity in the services sector, now the fastest growing area of the economy. 
"Steel production, for example, is significantly more energy intensive than entertainment, so the demand for electricity has fallen sharply as the structure of the economy has evolved," Nicholas Lardy, senior fellow at the Peterson Institute for International Economics and an observer of the Chinese economy, wrote last month.
"Assuming that electric power growth is a good proxy for China's overall economic expansion is like trying to drive a car by looking in the rear-view mirror," he added. Apart from the long-term evolution of the economy, one-off factors early in 2015 also enabled other sectors of the economy to make up for the decline in smokestack industries. 
The stock market boom helped output from financial services increase 27 per cent annually in the second quarter. Yet such growth is certain to have slowed since the stock market rout that began in late June.