Facebook Links

Submitted by China Economy Watch Blog

Quietly clicking my way through Bloomberg last Sunday afternoon, I came across this:

Facebook Members Register Names at 550 a Second

Facebook Inc., the world’s largest social-networking site, said members registered new user names at a rate of more than 550 a second after the company offered people the chance to claim a personalized Web address.

Facebook started accepted registrations at midnight New York time on a first-come, first-served basis. Within the first seven minutes, 345,000 people had claimed user names, said Larry Yu, a spokesman for Palo Alto, California-based Facebook. Within 15 minutes, 500,000 users had grabbed a name.

Mein Gott, I thought to myself, if 550 people a second are doing something, they can’t all be wrong. So I immediately signed up. Actually, this isn’t my first experience with social networking since I did try Orkut out some years back, but somehow I didn’t quite get the point. Either I was missing something, or Orkut was. Now I think I’ve finally got it. Perhaps the technology has improved, or perhaps I have. As I said in one of my first postings:

Ok. This is just what I’ve always wanted really. A quick’n dirty personal blog. Here we go. Boy am I going to enjoy this.

Daniel Dresner once broke bloggers down into two groups, the “thinkers” and the “linkers”. I probably would be immodest enough to suggest that most of my material falls into the first category (my postings are lo-o-o-ng, horribly long), but since I don’t really fit any mould, and I am hard to typecast, I also have that hidden “linker” part, struggling within and desperate to come out. Which is why Facebook is just great.

In addition, on blogs like this I can probably only manage to post something worthwhile perhaps once or twice a month, and there is news everyday.

So, if you want some of that up to the minute “breaking” stuff, and are willing to submit yourself to a good dose of link spam, why not come on in and subscribe to my new state-of-the-art blog? You can either send me a friend request via FB, or mail me direct (you can find the mail on my Roubini Global page). Let’s all go and take a long hard look at the future, you never know, it might just work.

China’s Imports and Global Recovery - Brad Setser Need Be Curious No Longer

Submitted by China Economy Watch Blog

Earlier this week Brad Setser was opining on his blog:

“Like everyone else, I am curious to see what China’s May trade data tells us. If China truly is going to lead the global recovery, China needs to import more – and not just import more commodities for its (growing) strategic stockpiles.”

Well Brad need restrain his curiosity no longer, since just this very morning we have learnt that:

China’s exports fell by a record in May as the global recession cut demand for goods produced by the world’s third-largest economy. Overseas sales dropped 26.4 percent in May from a year earlier. That compares with the median estimate for a decline of 23 percent in a Bloomberg News survey of 15 economists, and a 22.6 percent contraction in April.

The decline was the biggest since Bloomberg data began in 1995. And more to the point as far as Brad is concerned China’s imports dropped 25.2 percent last month, compared with a 23 percent fall in April. Hence China just one more time ran an increased trade surplus (up to $13.4bn in May from $13.1bn in April), and it is no clearer to me than it is to Brad how a country running a trade surplus can be leading a surge in global demand. Indeed this months data, far from prodiving evidence of an accelerating “recovery” continues to point towards ongoing weakness in global demand, just like the evidence we are receiving from Germany, and from Japan.

Of course, these are year on year numbers. Month on month, exports seem to have stabilised since the start of the year, while imports are undoubtedly up. As Danske Bank put it in a research note today:

The development in China’s exports was weaker than expected. According to our own seasonally adjusted data, exports edged up slightly and the overall picture remains that China’s exports have stabilised in recent months. However, the rebound in China’s exports since early this year has been weaker than in most other Asian countries, suggesting that the Chinese recovery story has been a major driver in Asian countries’ export recovery in recent months.

This is confirmed by the continued strong growth in China’s imports. According to our own seasonally adjusted figures, China’s imports soared ahead 5.8% m/m in May following an 4.9% m/m impressive jump in imports in the previous month. China’s imports of commodities such as iron ore, coal and crude oil have been extraordinarily strong, increasing speculation that China is currently building strategic inventories of the most important commodities (see chart on next page). For that reason, Latin America (not least Brazil) and the ASEAN countries have benefited recently from China’s strong import volumes.

What matters is not so much the fact that imports are rising, but what exactly the imports are. There is substantial evidence accumulating that - as Brad suggests - China is simply stockpiling commodities as a hedge against future inflation. Some of the best evidence for this came here, yesterday. If this picture is correct, then the situation is unsustainable, as is the run up in commodity prices and stocks which have accompanied it. I note Forex Blog draws similar conclusions this morning:

I would argue that the sustainability of this rally (both in stocks and in currencies) hinges on a return to GDP growth in emerging markets. [The IMF forecasts 1.6% growth in 2009 and 4% in 2010]. But given the gap between share prices and earnings, I’m frankly not convinced that investors actually care about whether the rally is supported by actual data. Instead, investors have complacently been swept up by the same herd mentality that produced the bubble of 2008, and could potentially lead to a rapid and painful collapse in what looks to be the bubble of 2009.

Investment Bonanza?

On the other hand there was a 38.7 percent year on year rise in fixed asset investment in May. This was an even larger increase than the one registered in April, when FAI rose 33.9 per cent. For the first five months of this year, investments increased 32.9 per cent from the same period in 2008, compared with 30.5 per cent in the first four months of the year and against an estimate of 31 per cent. According to Alaistair Chan, at Moody’s Economy.com.

“Fixed asset investment in China continues to increase on the back of state-directed projects … This will help keep the economy growing but there are increasing concerns about the amount of lending that has been required to fund the projects”

Quite. And as a Chinese economist friend wrote me to say: “just how much of the current property demand is speculative? I also have my doubts whether even official inventory levels accurately reflect all the inventory out there, especially when I read anecdotes like this … ”

As a Beijing homeowner myself, I’ve experienced this puzzling phenomenon firsthand. We have been told that the value of the condo we bought last year has gone up 30% based on sales of new nearby developments, but it’s impossible to confirm since there is no secondary market. Originally we tried to rent the place, but we couldn’t find takers at any price that could remotely cover the mortgage, despite a prime location. When we decided to move in instead, we discovered that while the building was sold out long ago, hardly anyone actually lives there. Same with another 800-unit project down the street: every unit went for top dollar well before completion, but now the lights are off and nobody’s home.

In fact the volume of empty apartments across the country hit 91million sq metres at the end of last year, up 32.3 per cent from a year earlier, according to official figures. But those numbers included neither the huge volumes of completed real estate projects whose owners are waiting for market conditions to improve before they put them on the market, nor the estimated 587 million sq m of apartments sold in the past five years but left empty by their owners.

And that part of fixed investment which is ending up, not in flats for inventory, but in productive capacity. Well, as MacroMan says this morning:

But as capex growth keeps humming along..(we could ask)..does the world really need more manufacturing capacity at this juncture? …..(it all)…of course, begs the question of who the Chinese plan on selling to. It’s all well and good continuing to build factories and export capacity, but the real world isn’t like Field of Dreams; just because you build it doesn’t mean that customers will come. Yesterday’s US trade figures were telling in that regard. Imports declined again in April; while an inveterate “second derivative” believer may find reasons for optimism in the slight lessening of the pace of import decline in yesterday’s data, Macro Man is rather more sceptical. And the fact that US exports declined as well suggests that domestic demand in the rest of the world remains flaccid at best.

So, and finishing up where I started, with the trade balance, as Brad said: “China needs to import more – and not just import more commodities for its (growing) strategic stockpiles”. However, to quote again my Chinese economist friend: Macroman’s data on China’s imports of commodities is surreal too. To which Claus Vistesen responded: “Yep, this was what I thought, and we should expect Brad Setser to be all over this”. We certainly should, we certainly should. On you go Brad.

China’s Prices Continue To Decline As Industry Recovers

Submitted by China Economy Watch Blog

China’s Manufacturing Industry Expands In April While Prices Fall

Submitted by China Economy Watch Blog

China’s manufacturing expanded for the first time in either eight or nine months (depending on which index you chose - see below) as the decline in export orders moderated and investment surged on the back of the government’s 4 trillion yuan ($586 billion) stimulus package.

The CLSA China Purchasing Managers’ Index rose to a seasonally adjusted 50.1 in April from 44.8 in March.

The output index climbed to 51.3 from 44.3, the first expansion in nine months, while the reading for export orders rose to 48.8 from 41.4 in March. The total new-orders index climbed to 50.9 from 43.6 and the employment index rose to 50.9 from 47.1, the first expansions in nine months for both measures.

On the other hand the official (government sponsored) China Federation of Logistics & Purchasing manufacturing index also showed growth, in this case for the second consecutive month, with the headline index rising to 53.5 in April from 52.4 in March.

There are various differences between the two indexes (for a summary of the issues raised see my last month’s post here), but the gist of the matter is that the government-backed measure is weighted more than the CLSA index toward large state-owned enterprises, which have benefited more directly from the government stimulus measures.

Is China Suffering Outright Deflation?

China’s consumer prices fell for a third month running in April and were down 1.5 percent from a year earlier, after falling 1.2 percent in March.

Producer prices fell 6.6 percent, following a 6 percent drop in March. The fall, which was largely produced by declining energy prices, was the biggest year on year drop since the turn of the century.

Bank lending also slowed in April, following three months of very strong growth. According to central bank Governor Zhou Xiaochuan lending was “approximately” 600 billion yuan ($88 billion) during the month, about a third of the record 1.89 trillion yuan in March. The official figure is due to be released this week. If confirmed, new loans of 600 billion yuan would be about 30 percent up on April 2008 which compares with a sixfold increase in March.

Manufacturing Industry Contracts Again In March

Submitted by China Economy Watch Blog

Prices Drop As Exports Fall

Submitted by China Economy Watch Blog

Perpahs one of the most heated debates which is taking place among investors and economists at the present time relates to China. Economic growth plunged in the fourth quarter of last year, and the economy may even have contracted. Yet the government has lashed out “loads of money” on a huge stimulus programme. Will this work? The Jury is still out.

Certainly some sectors of the economy are suffering badly and China’s trade surplus plunged in February on the back of a record drop in exports. The trade gap narrowed to $4.8 billion - roughly one eighth of the amount registered in January, according to data from the customs bureau. China’s trade surplus hit a record $40 billion in November. Exports dropped sharply in February - down 25.7 percent from a year earlier (following a 17.5% fall in January), while the collapse in imports slowed, falling by “only” 24.1 percent following January’s record 43.1 percent decline.

Meanwhile China announced earlier this week that its consumer inflation fell for the first time in more than six years in February, suggesting we might now be entering a period of price deflation - the consumer price index fell 1.6 per cent from a year earlier in February. This followed a 1.0 per cent rise in January .

China’s CPI last fell in December 2002, when it dropped 0.4 per cent, capping a year in which CPI fell every month save one. The latest data show the risks of prolonged general price declines - deflation - are rising. Beijing has targeted headline inflation of 4 per cent this year but it certainly now looks like the government will struggle to get prices back into positive territory and may have to confront a prolonged period of deflation. Food prices, a key component of in the Chinese CPI, fell 1.9 per cent in February from a year earlier; non-food prices fell 1.2 per cent.

Industrial Output Falls Back

China’s industrial-production growth slowed at the start of the year on the back of the export decline, with output rising only 3.8 percent in January and February from a year earlier, slowing from a 5.7 percent increase in December.

However China’s investment spending has maintained its momentum (and even increased), as the government pours money into roads, railways and power grids. Urban fixed-asset investment climbed by 26.5 percent in January and February from a year earlier.

Retail sales, on the other hand, have been slowing, and rose by 15.2 percent in February from a year earlier in current price terms (after a 19 percent rise in December) or by 16.8% in real (price adjusted) terms (given that prices fell year on year). The downward momentum in retail sales growth since the summer is evident on both measures.

Huge Loan Expansion

Central bank Governor Zhou Xiaochuan said earlier this month that loans and money supply may have grown too quickly, since Premier Wen Jiabao announced a whole year target for lending of 5 trillion yuan, so that the banks are already halfway through their target with 10 months still to go. The surge in credit has also triggered concern that some of the money is being pumped into the stock market. The Shanghai Composite Index which tracks China’s largest stock exchanges is now up by 17 percent since the start of the year.

The worries about bad debts are being taken seriously, and China’s banking regulator have told banks to boost provisions to 150 percent of their outstanding non-performing loans, according to an article in the 21st Century Business Herald. The bad loan ratios of the country’s five biggest banks — Industrial & Commercial Bank of China Ltd., Agricultural Bank of China, China Construction Bank Corp., Bank of China Ltd., and Bank of Communications Ltd., is to be raised to 150 percent from 130 percent at the end of 2008, while the requirement for smaller national banks remains unchanged at 150 percent.

Liu Mingkang, chairman of the China Banking Regulatory Commission, has described such moves as “prudent”, and in line with the regulatory decision to carry out spot checks on bank loan books to “ensure quality of growth”.

Rural Squeeze

But while the banks dole out the money, and stocks surge, China’s rural population are feeling the pinch as farm incomes drop this year on the back of falling agricultural prices.

“The pressure from declining agricultural prices is high,” Yin Chengjie, vice
chairman of agricultural and rural affairs of the National People’s Congress,
said in an interview in Beijing. “We cannot be optimistic about growth” in farm
incomes this year, he said.

Prices of agricultural products - including cotton, soybeans and corn have fallen over the past year as bumper harvests swelled stocks and restaurant sales and food processing output declined. The net consequence is that the disparity between the urban and rural population is widening, and the situation is further aggravated by the large number of migrant workers who now find themselves unemployed and have returned to their villages.

Exports Tumble As China Enters Deflation

Submitted by China Economy Watch Blog

Is China about to lead the charge out of the current slump, or is the Chinese economy about to succumb to it? This appears to be one of the most interesting and most hotly debated questions of the moment. On the one hand the latest manufacturers PurchasingManufacturers Index seemed to suggest the contraction in China’s economy slowed in January, while other data, in particular producer price inflation, loan growth and movements in external trade seemed to give a rather different impression.

External Trade Drops Sharply

China’s exports fell at the fastest rate in almost 13 years in January while imports fell completely off the cliff, plunging at the record rate of 43.1% year on year, indicating that the contraction in the world’s third-biggest economy may well be gathering rather than losing pace pace. Exports were down by 17.5 percent from January 2008.

Due to the massive fall in imports China’s trade surplus remained high - at $39.11 billion it was the second biggest on record - and this is almost guaranteed to add to tensions as global leaders seek to avoid a return to protectionism. China’s economic slowdown has already cost the jobs of 20 million migrant workers and the economy is now almost certainly contracting, rather than, as some argue, simply slowing.

Exports to the European Union fell 17.4 percent. Those to the U.S. slid 9.8 percent. Shipments of electronics dropped 21 percent. Steel slid 32.5 percent and toys declined 14.7 percent, although the numbers are possibly exacerbated by atheweek-long Lunar New Year holiday, which took place in January this year as opposed to February last year.

Chinese government researchers have already begun to advocate weakening the yuan against the dollar to support exports, and according to a Ministry of Finance’s research institute reprot published earlier this month China should “actively guide” the yuan to about 6.93 against the dollar to aid growth and boost employment, although there is no indication at this point that such a recommendation will be acted on.

It is very hard to know what is the actual present condition of the Chinese economy, which grew by 6.8 percent from a year earlier in the fourth quarter of last year, after gaining 9 percent in Q3, but this doesn’t actually tell us too much about the current rate of expansion/contraction, and things are changing very quickly this is quite important. The same goes for industrial output which was up at a 5.7 percent annual rate in December, down from 17.4 percent a year earlier.

Some commentators are suggesting that the drop in Chinese exports is not that severe when compared with the decline in other Asian countries, suggesting in effect that China is less export dependent than some.

“While the recent export slowdown has been alarming, China’s export slump has not been as severe as in some neighboring countries with a greater reliance on high-tech exports,” said Jing Ulrich, head of China equities with JPMorgan in Hong Kong. Taiwan’s exports fell a record 44 percent in January.

But this view is misleading, and possibly ill-founded. According to recent research report from DBS, two things stand out in the latest data. First, China’s exports to the US have obviously fallen considerably. In fact, they have fallen by around 9% since October (USD terms, sa, 3mma). Exports to Europe have also fallen by a similar amount. But Asia’s exports to China have fallen by four times more - or 37%. If China were simply passing along weak demand from the US and Europe to its neighbors, the drop in Asia’s exports to China ought to be roughly proportionate. So obviously they’re not.

Possibly there is some truth in both these arguments, but, in terms of quantities and in terms of timing, there does seem to be something “autonomous”going on with Chinese demand. And if its not simply about the drop in demand from the US, what is it about?

Could the end of the Olympics bubble have something to do with the disconnect, and the subsequent bust in Asian exports? It certainly seems to be more than a coincidence that China’s imports from Asia rise sharply in the run-up tothe August Olympics and then fall sharply immediately thereafter.

In particular, food prices are usually higher during the Chinese new year celebrations and for that reason consumer prices were probably higher than usual in January. Despite inflation declining less than expected in January, there are signs that inflationary pressure is easing fast and it is likely that China will enter deflationary territory in the coming months. Inflation excluding food in January plunged from 0.6% year on year to -0.6% (see chart below).

The residential component showed an unexpected large drop from 1.1% year on year to minus 2.3%. Besides food - which is running just below 5% year on year - all the other major components are now in negative territory.

“Inflation could have been close to zero or worse if not for the Chinese New Year, because vegetable prices and grain prices went up,” said Wang Tao, China economist at UBS AG in Beijing.

McDonalds, the world’s largest fast-food chain, said last week that it was cutting the prices on some of its meals in China by as much as one-third to attract customers to its 1,050 restaurants across the country.

The inflation slowdown puts more pressure on the central bank to cut interest rates further, since the key one-year lending ratestill stands at 5.31 percent (following a total of 2.16 percentage points in reductions at the end of 2008 following the collapse of Lehman Brothers, although the central bank has not yet cut rates so far this year.

Mind What You Say

This year, festive well-wishers have had to be careful which salutations they choose. “Caiyuan gungun” has been virtually banned because it sounds exactly the same as the phrase meaning “laid off and discarded”. “Xinxiang shicheng” is also out of favour because it sounds suspiciously like the Chinese for “40 per cent pay cut”.

Giant Credit Surge In January

The Chinese government has now abandoned quotas for new credit growth and has urged state-owned commercial banks to offer finance for the Rmb 4,000bn ($586bn) fiscal spending plan which is due to run over the next two years. As a result there are now plenty of signs of monetary losening, among which is the fact that new loans rose at a record pace in January while the money supply expanded at the fastest pace in more than a year. Banks extended Rmb 1,620 bn of new local-currency loans and M2 climbed 18.8 percent from a year earlier. The new lending was equivalent in size to 40 percent of the proposed stimulus spending.

Economists expect the Chinese central bank, which has cut interest rates five times since September, to ease monetary policy further. The People’s Bank of China hasn’t cut the key one-year lending rate this year from 5.31 percent after five reductions in the final four months of 2008.

“Explosive lending growth is unsustainable and will likely decelerate,” said Ha Jiming, Hong Kong-based chief economist at China International Corp. “China may face increased risks going forward if the lending upsurge is coupled with declining loan quality and loosened lending terms.”

The biggest proportion of new lending, 39 percent, was through discounted bills, which supply working capital. Medium and long-term corporate loans accounted for 32 percent. A bailout of Agricultural Bank last year completed a $650 billion clean-up of China’s banks after decades of government- directed lending that sent non-performing loans soaring.

The collapse of China’s export engine has obviously hit the most vulnerable first, and the Chinese authorities estimate that 20m of an estimated 130m rural migrant workers in China’s industrial sector have lost their jobs and returned to home towns and villages. The implied 15.3 per cent unemployment rate among migrants is not captured in official jobless numbers, which measure only urban workers who register as unemployed. That official number rose to 8.86m people, or 4.2 per cent of the urban workforce, in December, but many specialists say this number vastly underestimates the true scale of the problem.

And in this environment it is hard to see the “big switch” to a consumption driven economy moving slowly, if indeed it moves at all.

China’s Manufacturing Sector Continued To Contract In January

Submitted by China Economy Watch Blog

China’s manufacturing contracted for a sixth consecutive month in January as shrinking global demand hit the country’s export-driven economy. The CLSA China Purchasing Managers’ Index rose to a seasonally adjusted 42.2 from 41.2 in December. Since any reading below 50 indicates contraction, even though the rate of contraction dropped (and has been dropping since November, see chart below) China’s manufacturing sector (and hence China’s economy) is still contracting. What we don’t know at this point is how quickly China GDP is contracting, we won’t know that till someone with the time and ingenuity devises a way to calculate a rough and ready quarter on quarter (seasonally adjusted) output indicator. Come on, be famous for a day, go out and do it (since the Chinese statistics office apparently have no interest in the matter), I would, but I simply don’t have the time, since Europe, not China, is my focus. However, on a rough and ready, back of the envelope, basis my guess is that this months Chinese reading may be equivalent to something like a quarter on quarter contraction rate of around 0.5%, which means that what we have at this point is a 2% annual contraction rate, but we really need to see some actual data to calibrate all this a bit better I think.

In the CLSA survey, output index rose to 39.7 from 38.6 (which had been a record low) in December. New orders were up to 39.9 from 37. The index of export orders rose to 36.3 from 33.6. So the situation was better in January than December, but it is SO important to remember that these sub-components all indicate ongoing contraction.

My guess is that Chinese companies are squeezing costs and margins as far as the lemon will take it, since there is little evidence of any uptick in aggregate global demand for manufactured products, au contraire. My guess is also that they are grabbing market share by entering the supply chain in places they haven’t been before. For example, Hafei Aviation Industry Co., China’s second-largest listed aerospace company, surged to its highest level in almost six months in Shanghai trading this morning after the announcement that it had formed a venture to supply composite-material components to Airbus SAS.

Airbus plans to give 5 percent of the work making parts for A350 airframes to Chinese companies in a bid to win market share in the world’s second-biggest aviation market. The planemaker has also opened an aircraft assembly line in China, its first outside of Europe.

Harbin Hafei will start production in September, and it plans to open a new plant by the end of 2010, Airbus said. Hafei, Avichina Industry & Technology Co. and Harbin Development Zone Heli Infrastructure Development Co. will each hold 10 percent of the venture. Harbin Aircraft Industry Group Co. will own a 50 percent stake. Airbus will have a 20 percent stake.

Unemployment Surges Dramatically

Chinese manufacturers also shed jobs last month at the fastest pace since the survey began in 2004, with the employment index falling to a record low of 45, so obviously as workers lose their jobs internal consumption is also affected, and we clearly have worse to come in the immediate future.

Chen Xiwen, a senior rural planning official, estimated that about 20 million migrant workers had lost their jobs because of the nation’s economic slowdown at a press briefing in Beijing today.

More than 20m rural migrant workers in China have lost their jobs and returned home as a result of the global economic crisis according to government figures, raising the spectre of widespread unrest in the authoritarian country. By the start of the Chinese New Year Spring Festival on 25 January, 15.3 per cent of China’s 130m migrant workers had lost their jobs and returned from manufacturing centres in the south and east of the country to their home villages or towns, according to Chen Xiwen, Director of the Office of Central Rural Work Leading Group, who was quoting a survey from the Ministry of Agriculture.

Government figures show that in recent years 6m to 7m new rural migrant workers a year have poured out of the countryside to fill the factories, construction sites and restaurants of the booming cities, which means the government must actually deal with as many as 27m new jobless in the countryside. On top of that, a survey by a government think-tank in December estimated 1.5m recent tertiary graduates in China were unable to find work by the end of November and universities and technical colleges are expected to churn out another 6.5m graduates this year. According to rough official calculations one percentage point of Chinese GDP growth creates around 1m jobs.

Chinese Premier Wen explicitly declined to rule out a devaluation of the yuan in an interview with the Financial Times today, although , he said that for the moment the government was content to keep the currency stable at what he considered to be a balanced and reasonable level.

Asked if China bore any responsibility for causing the financial crisis, as a number of economists believe, he stiffens and says in a low voice: “It is a ridiculous view.” But he makes it clear that Beijing will do whatever is needed to maintain growth at “about 8 per cent” this year. “Running our own affairs well is our biggest contribution to mankind,” he says. If necessary, some of the country’s huge stash of foreign currency reserves could be put towards this endeavour – a new plan to enable the use of reserves for domestic purposes is under discussion, he says.“We must take forceful steps. Under special circumstances, necessary and extraordinary measures are required,” he says. “We should not be restricted by conventions. Success or failure depends on the pace and intensity of those measures.”

Mr Wen refuses to make an explicit commitment not to devalue the Chinese currency during the crisis – as the government did after the Asian financial crisis in 1997, a pledge that helped engineer the eventual recovery and won China a lot of prestige. But he does rule out any big shifts in the value of the Chinese currency.

“I want to make it very clear that maintaining the stability of the renminbi at a balanced and reasonable level is not only in the interests of China but also the interests of the world,” he says. “Many people have not yet come to see this point that if we have drastic fluctuation in the exchange rate of the renminbi, it would be a big disaster.”

The yuan fell 0.1 percent to 6.8471 against the dollar as of 12:23 p.m. in Shanghai today, a drop which is largely a by-product of the fall in the euro against USD.

Chinese Exports Fall Sharply In December

Submitted by China Economy Watch Blog

China’s exports fell the most in nearly a decade in December, with shipments down by 2.8 percent over December 2007. That compares with a 21.7 percent increase a year earlier. Over the whole of 2008 exports were up by 17.2 percent, a reduction on the 25.7 percent gain registered in 2007, and suggesting that the drop in the last two months of the year may have been very sharp indeed.

Exports to the European Union, China’s biggest export market, fell 3.5 percent in December from a year earlier. Shipments to the U.S. dropped 4.1 percent. Imports dropped even more sharply - by 21.3 percent, meaning the trade surplus failed to fall, and at $39 billion it remained the second-biggest on record. This drop in imports also suggests that domestic demand is not taking over the strain to any significant degree at this point.

The Second Great Depression Wends Its Way Forward in December

Submitted by China Economy Watch Blog

And lands in China.

Well China isn’t quite in Great Depression mode yet, but manufacturing activity - which forms the core of the Chinese economy and accounts for 43% of all activity - is already very close to a technical recession, and phew, it wasn’t very long ago that the Chinese economy was registering double digit growth. So the turn around is gigantic. The “close to technical recession in manufacturing industry” call comes from the people over at CLSA Asia-Pacific Markets, who compile the China purchasing managers index, and they base their judgement on the fact that their Chinese manufacturing index has now been registering contraction for five consecutive months.

Now for those of you who are new to the world of Purchasing Manager’s Indexes (PMIs), welcome. Basically these indexes are very useful, since they give you a “just in time” point of reference to tell you what is actually happening. These are composite indexes - measuring things like current output, new orders (both domestic and export), employment and input prices. They are not perfect, but they are reasonably accurate - the fit which you can get between composite PMIs (manufacturing and services combined) and GDP is often attractively good - and in a country like China where the main data we get is year-on-year (which in a critical moment of rapid change like this one is virtually useless) it is very hard to see what is happening. The Shanghai-based Industrial Bank estimate, for example, that GDP growth in China will be 5.6% in Q4 2008. But what does that data point - if accurate - tell us? That the economy is slowing fast, well we already knew that. But just how fast? Well GDP was 9% in Q3 - down from 10.1% in Q2. So the deceleration is very rapid, but did the Chinese economy actually manage to contract in Q4? I doubt it, but it may do in Q1 2009, although the only way we would really know would be if the National Statistics Office published quarter-on-quarter seasonally adjusted numbers, which as far as I can see they don’t. Indeed only a small group of highly developed economies actually take the trouble to do this, and you don’t even find all EU member countries doing it yet, although Eurostat (thank god for Eurostat) do require such data from members (but those of you who ever get round to checking will see there are still blanks for some countries in the Eurostat quarterly releases).

Hence you can see why, in the case of somewhere like China, the PMIs are very, very useful, for those of us who would like to try and follow what is happening as it actually happens.

As for the PMI itself, China’s composite manufacturing index contracted for the fifth consecutive month in December as recessions in the U.S., Europe and Japan bit deep into demand for exports - indeed China’s exports fell year on year for the first time in seven years in November. The CLSA China Purchasing Managers’ Index registered a seasonally adjusted 41.2, compared with a record low of 40.9 in November. On such indexes any reading below 50 reflects a contraction.

Despite the apparent small improvement in December the current output index actually fell sharply, and was down to a record low of 38.6 from 39.2 in November, so production was falling, and the index was basically nudged up slightly by other factors, such as the measure of new orders which rebounded to 37 from 36.1, driven by a rise in export orders to 33.6 from a horrific 28.2 in November. However, according to the report, Chinese manufacturers reduced the size of their workforces at a series record in December, and the employment index has now contracted for five consecutive months, to hit 45.2 in December.

So where exactly are we? Well we aren’t (quite) in the Second Great Depression yet, but the situation is deteriorating, and rapidly. Manufacturing output is now contracting at quite a sharp pace, while it was rising in the first half of the year at something like a 15% year on year rate. In a useful summary of the Chinese situation back in November, Nouriel Roubini defined a hard landing in China - which he felt was coming - as follows:

There is thus now a growing risk of a hard landing in China. Let us be clear what we mean by hard landing. In a country with the potential growth of China, a hard landing would occur if the growth rate of the economy were to slow down to 5-6% as China needs a growth rate of 9-10% to absorb about 24 million folks joining the labor force every year; it needs a growth rate of 9-10% to move every year about 12-14 million poor rural farmers to the modern industrial/manufacturing urban sector.

This is more or less the consensus view of what we used to think a hard landing would mean in China, but I think the latest data already take us beyond that. I think there is now a real risk of a technical recession in the more or less classic sense of two consecutive quarters of negative growth (let’s say that the risk is 50-50 at this point), and of serious economic and financial dislocation following in the train of this (btw, just how quickly can you burn your way through $1.7 trillion in reserves, it will be an interesting experiment I think).

Brad Setser (further down the same link) has long been more cautious on China, being sceptical about the impact of a dramatic slowdown in exports (and even more importantly in export oriented investment) on an export driven economy, but those of us who have been closely watching other export dependent economies like Germany and Japan over the last decade and a half were surely not quite so sceptical. However even Brad himself is clear that the possibility of an export downturn feeding its way back into the domestic economy - via some sort of negative feedback process - is real enough:

But the real key to forecasting China’s future growth consequently is determining whether domestic consumption and above all investment will continue to grow strongly in the absence of strong export demand. Remember, over the past few years both domestic investment and exports increased rapidly. If they fall together as well, Chinese growth will slow quite significantly. And unfortunately the latest indicators seem to suggest that they are correlated; consequently domestic demand may fall along with exports.

The $1.7 trillion question is, then, just why China is so export dependent? Doubtless there are many factors at work, but one of these is, I am almost sure, China’s very special demographics (30 years of one child per familiy policy), and the special problems that these present in the context of building a sustainable national pensions system at the same time as the population pyramid inverts. Obviously the absence of a credible pension system has to be one of the factors influencing the strong desire to save which we are seeing in China. Economics Nobel Franco Modigliani also thought this, and specifically addressed the Chinese saving puzzle in his last published paper:

China’s per capita income ranks below 100th in the world. Its saving rate, however, has been one of the highest worldwide in recent decades. In this paper, we attempt to explain the seeming paradox within the framework of the Life-Cycle Hypothesis developed by Franco Modigliani. The key LCH variables are income and population growth. Our results based on data we put together from official sources show that income growth has been the dominant factor behind the dramatic increase in China’s saving rate, as predicted by the LCH. Demographic structure and inflation also had significant impact on the fluctuations of the saving rate.
The Chinese Saving Puzzle and the Life-Cycle Hypothesis - Franco Modigliani and Shi Larry Cao

By Way Of Brief Conclusion

Well basically, the conclusion here is that there is no conclusion, at this point at least. But I would draw attention to two potential points of interest for all you “economy watchers”.

Firstly, a couple of months back my fellow blogger Doug Muir drew our attention to a very interesting point being made by US economic historian Scott Reynolds Nelson:

As a historian who works on the 19th century, I have been reading my newspaper with a considerable sense of dread. While many commentators on the recent mortgage and banking crisis have drawn parallels to the Great Depression of 1929, that comparison is not particularly apt. Two years ago, I began research on the Panic of 1873, an event of some interest to my colleagues in American business and labor history but probably unknown to everyone else. But as I turn the crank on the microfilm reader, I have been hearing weird echoes of recent events.

At the time of reading this I thought to myself hmmmm! This isn’t that simple, but he is on to something. Basically I think no two (or does that make it now three) Great Depressions are ever really exactly alike. I certainly think the resemblence between what is going on now and what happened between 1929 and 1933 is more than passing (especially for the sequencing, of which more in another post), but evidently there are elements of the 1873 one too, and Scott Reynolds puts his finger on some of them, especially in the context of surplus to requirement investment and large capacity overhangs. So my best guess is that what we have is a hybrid, and that what is now happening in China is the best example of the underlying dynamics behind that other great depression that hit our grand- (or great grand) parents and that may well be now about to come back to hit us, boomerang style.

Which brings me to my second point, the Smoot-Hawley Tariff Act, which, as wikipedia explain, was signed into law on June 17, 1930, and raised U.S. tariffs on over 20,000 imported goods to record levels. After the act was passed, many other countries retaliated with their own increased tariffs on U.S. goods, and American exports and imports plunged by more than half. Many economists now regard the Smoot-Hawley Act as having been the principal feedback catalyst for the severe reduction in U.S.-European trade, and which took it from the 1929 high down to the depressed levels of 1932 and which thus accompanied the start of the Great Depression. And here, in the spectre of a repeat performance comes just the danger we face in the wake of the dramatic contraction which is now underway in China.

It is my personal guess that the first major issue to face Barack Obama as President of the United States may well be what to do about China, and especially what to do about a China which lets - as I now suspect they may well do - the yuan float, in order to see it float DOWN as the economy unwinds. If this does indeed happen then Obama will really have to struggle to hold back the protectionist pressure I think.

China’s Manufacturing Contracts Sharply In November

Submitted by China Economy Watch Blog

China’s manufacturing shrank by the most on record and export orders plunged, providing more evidence that recessions in the U.S., Europe and Japan are sharply slowing what was previously the world’s fastest-growing major economy. The Purchasing Managers’ Index fell to a seasonally adjusted 38.8 in November from 44.6 in October, according to the China Federation of Logistics and Purchasing. The output index fell to 35.5 from 44.3, while the index of new orders dropped to 32.3 from 41.7. On these indexes any reading below 50 means contraction, and as can be seen in the chart below, China’s manufacturing industry has now been contracting (month on month) in four of the last five months. The November reading stands out though, since the magnitude of the contraction has accelerated sharply.

A separate index - the CLSA China Purchasing Managers’ Index - reveals a similar picture, and fell to a seasonally adjusted 40.9 in November from 45.2 in October. The CLSA index, which was started in April 2004, is based on a survey of more than 400 manufacturing companies.

Output, new orders and export orders had record contractions. The output index fell to 39.2 in November from 43.4 in October, while the index of new orders declined to 36.1 from 43.8. The index of export orders dropped to 28.2 from 44.3, CLSA said.

A slump in property sales and building work is also undermining growth. Construction of homes, offices and factories contracted at least 16.6 percent in October after a 32.5 percent expansion a year earlier, according to a report from Macquarie Securities.

The Contraction In Chinese Manufacturing Accelerates In October

Submitted by China Economy Watch Blog

China’s manufacturing contracted by the most on record last month as the global financial crisis cut demand for exports, a second survey showed. The CLSA China Purchasing Managers’ Index fell to a seasonally adjusted 45.2 in October from 47.7 in September. The output index fell to 43.4 in October from 46.7 in September, while the index of new orders declined to 43.8 from 45.8. The index of export orders dropped to 44.3 from 45.9.

The government-backed China Federation of Logistics purchasing managers’ index - published on 1 November - also showed a strong contraction, falling to 44.6 in October, the lowest level since the data began in 2005, from 51.2 in September.

Basically, not only does Chinese manufacturing seem to have been in contraction mode for the last several months now, the rate of contraction seems to be accelerating.

To be watched, and carefully.

China GDP Growth Slows Quite Rapidly In Q3 2008

Submitted by China Economy Watch Blog

China’s economic growth rate slipped into single digits in the third quarter for the first time in at least four years under the impact of the global credit crisis and weakness in the domestic property sector. Annual gross domestic product growth slowed more sharply than expected to 9.0 per cent from 10.1 per cent in the second quarter, the National Bureau of Statistics (NBS) said on Monday.

It was not immediately possible to pinpoint when growth was last weaker because China does not publish new quarterly data when it revises its annual GDP figures. nor was it possible to precisely calibrate the speed of the slowdown since we do not have seasonally adjusted quarter on quarter data. China’s economic expansion was the weakest since at least the second quarter of 2003, when growth slumped because of the severe acute respiratory syndrome, or SARS, epidemic.

Industrial production slowed to 11.4 per cent in the year to September, the lowest rate since 2002, suggesting that the economy was losing momentum as the quarter went on. However, the pace of retail sales and fixed-asset investment growth both accelerated last month, beating forecasts and providing reassurance to policy makers counting on domestic demand to take up the slack from ebbing exports.

The property market, which accounts for about a quarter of fixed-asset investment, is in almost in free fall due to tight credit and government curbs. Home sales by volume plunged 55.5 percent and 38.5 percent in Beijing and Shanghai in the first eight months from a year earlier, the official Xinhua News Agency reported, citing the China Real Estate Association. This decline is really still to show its ugly face in the data though, since urban fixed-asset investment climbed 27.6 percent in the first nine months from a year earlier, after a 27.4 percent increase through August, today’s data showed.

Retail sales rose 23.2 percent last month from a year earlier, matching the gain in August and close to the fastest pace in at least nine years.

Urban disposable incomes for the first nine months rose 14.7 percent to 11,865 yuan ($1,737) from a year earlier. Rural cash incomes climbed 19.6 percent to 3,971 yuan. Those numbers were boosted by inflation.

The fifth quarter of slowing growth may exacerbate declines this year in iron ore, copper and oil prices and undermine demand for exports within Asia, where economies are already contracting. The cabinet announced yesterday tax cuts for exporters and increased infrastructure investment and the central bank may be poised to cut interest rates for the third time this year.

Steel-product output in China, the world’s biggest producer and user of the alloy, fell 5.5 percent in September from a year ago to a seven-month low as weak demand and falling prices forced mills to pare production.

“China’s crude steel output fell to 39.6 million tonnes, down 7% from August and 9.1% year-on-year, indicating that many northern mills were cutting production, said market sources. China’s steel production ban for the Olympics lasted from July to September 20, so a fall in September output meant that mills were not only not resuming production, but reducing it further in the face of weak demand, said the sources. Several mills in Hebei, China’s biggest crude steelmaking province, have been cutting output or have even closed down due to sluggish demand. Some were dumping products in the market in return for cash. September output for major finished products like rebar and plate rose, however, inched up in the month but analysts said this may be due to lower crude steel exports in the month. China exported 7.31 million tonnes of crude steel in September, 1.42 million tonnes or 13.5% less…”

Output was 45.9 million metric tons last month, according to figures provided today by China Mainland Marketing Research Co., which releases data on behalf of National Bureau of Statistics. Production rose 8.1 percent to 445.2 million tons in the first nine months from a year earlier.

Prices of hot-rolled coil, a benchmark product, have fallen to 3,645 yuan a metric ton from a record 5,957 yuan in June. The slump has led to losses at almost all steelmakers, JPMorgan Chase & Co.’s analyst Zhang Feng said recently in a research note.

Export growth may plummet from 22 percent in the first nine months of this year to “zero or even negative growth” in 2009, according to Stephen Green, head of China research at Standard Chartered Bank Plc in Shanghai.

The closure last week of a big toy factory in southern China dramatised the difficulties facing the economy, which have prompted steel and aluminium firms to slash output because of slumping prices. Steel prices in China have fallen about 20 per cent over the past three months and there are reports of small steelmakers being forced to close because of shrinking demand.

Rio Tinto Give China Slowdown Warning

Submitted by China Economy Watch Blog

Rio Tinto’s chief executive, Toma Albanese, warned on Wednesday about the health of China and said the slowdown in one of the world’s fastest growing economies had led the mining company to revise its capital spending plans. Mr Albanese said there had been a marked reduction in Chinese commodity demand from the overheated levels of 2007 and added that the “vast majority of Chinese aluminium producers are now making operating losses.”

As the credit crisis unfolded over the past year, one of the few certainties in the global economy seemed to be China’s ability to plough on regardless at double-digit growth rates. Not any more. With Wall Street in tatters and Europe’s and Japan’s economies faltering, many investors are beginning to ask if China too might stumble badly. After five turbo-charged years of accelerating growth, the Chinese economy is clearly slowing.

Housing Market Evidence of Slowdown

The local government in Shanghai yesterday raised its ceiling on mortgage lending to households under a government-run program, uping available funding by 20 percent in an attempt to encourage families to buy apartments in the city. Eligible households will be allowed to borrow as much as 600,000 yuan ($87,679) starting today, up from 500,000 yuan, the city’s public housing fund agency said in a statement yesterday.

Under Shanghai’s mortgage program, most households are allowed to spend as much as 7 percent of their monthly salaries to repay loans. Employers must match workers’ contributions and borrowers receive preferential bank lending rates. Households meeting certain requirements can spend as much as 15 percent of salaries, and they are the ones eligible for the new ceiling.

The loan program covered 3.42 million people at the end of June, according to the agency. About 8.8 percent of people covered make the larger repayments, the Shanghai Daily said in June, citing the housing agency.

Housing prices in Shanghai, China’s biggest financial center, fell 19.5 percent in the third quarter from the previous three months as the volume of sales slumped, real estate broker Savills Plc said yesterday. Average transaction prices, which rose to a record in the second quarter, dropped to 9,092 yuan per square meter, the London-based broker said in a report.

The volume of transactions slid 39 percent from the second quarter and two-thirds from the same period last year to 2.9 million square meters, according to Savills.

China’s stocks also fell for a second day today, with metal producers leading the way, on concern profits will decline as economic growth slows.

Jiangxi Copper Co., China’s second-biggest producer of the metal, slid 5.9 percent after copper and zinc futures slumped by the exchange-imposed 4 percent daily limit in Shanghai. China Shenhua Energy Co., the nation’s largest coal producer, fell 3.2 percent as more affordable oil reduced the allure of alternative energy sources. Citic Securities Co. fell 2.9 percent after a second competitor in as many days reported a slump in profit.

Chinese Exports Maintain Strong Momentum In August

Submitted by China Economy Watch Blog

China’s trade surplus hit a record $29.3bn in September as exporters succeeded in defying forecasts of falling international demand – for the moment, at least.

Exports rose 21.5 percent from a year earlier to $136.4 billion after gaining 21.1 percent in August, according to data from the Chinese customs bureau. China has cut interest rates twice in the last month in an attempt to stimulate the economy as the worst financial crisis since the Great Depression undermines global growth. The surplus adds to the already existing $1.8 trillion of foreign-currency reserves.

The expanding trade surplus – up from the previous record of $28.7bn in August – will bolster China’s slowing gross domestic product growth rate but could also refocus international attention on Beijing’s effort to support exporters in recent months by slowing the renminbi’s appreciation against the US dollar.

Chinese imports grew 21.3 per cent year-on-year in September, their weakest performance for more than a year.

It is clear that the focus of government policy has shifted away from combating inflation, which hit a 12-year high of 8.7 per cent in February, and toward supporting growth. China remains relatively insulated from the current international financial turmoil. Major state banks have been extensively recapitalised in recent years and have only limited international exposure, while the government has been enjoying rapid growth in tax revenues and over $1.8bn in foreign exchange reserves.

However, local investors are already suffering from dramatic falls in stock prices and the slump in urban property markets, increasing vulnerability to any fall in export demand.

Blogroll Additions

Submitted by Experience Not Logic Blog

My rss reader has been updated way more than my blogroll. Here are the blogs I’m adding:

SourceJuice
An in depth look at sourcing from China. Plus, their team is made up of helpful, considerate people.

China Comment
Lots of long posts on a variety of topics. I particularly enjoy its “nuanced research.”

Crossroads
Rich Brubaker is prolific. And, he has been producing some intriguing videos on CSR in China.

WSJ.com: The China Journal
It’s the Wall Street Journal.

bizCult
Podcasts, lengthy blog posts. Focuses mostly on sourcing.

Posts of the Week: 9/15 - 9/21

Submitted by Experience Not Logic Blog

Wacky insider trading case at Chinese Law Prof

Economists React: After China Rate Cut, Eyes Now On Loan Quotas at WSJ: China Journal

The Impact of China’s Labor Contract Law at China Law Blog

Sinopec Sustainability Report. Different, but Good at Crossroads

Wall Street’s Meltdown and What it Means for China at Managing the Dragon

“Rule by Law” Reform at China Comment

China Joint Ventures And Really Bad Milk. What Can You Do? at China Law Blog

More Tough Talk at China Environmental Law

AIG and China: Could A “Special Relationship” Translate into Cash? at TIME: The China Blog

Terminating Employees in China: Some Practical Considerations at China Law Practice Blog

Markets surge, but little has improved at China financial markets

On the Legal Authority of Federal Bailout of AIG
Federal Bailout of AIG: Is It Legal? at Legal Blog Watch

America’s loss is Asia’s gain

Submitted by 2point6billion.com Blog

There is a brilliant white light at the end of the tunnel of U.S. financial woes - lucrative jobs in emerging Asia. As investment banks fold in the U.S. and hundreds loose their livelihoods, banks in India and China are lapping up wall street bankers by the dozens. Asian economies which are growing at an average of seven percent annually, can easily absorb these globally experienced whiz kids.

New York’s governor reckons 40,000 Wall Street jobs could go in a worst-case scenario, with talk swirling of more bank deals and mergers.

A kind of forced brain drain, the quickest talent gain for Asia came within hours of Bank of America agreeing to buy Merrill Lynch last week. Indian financial services firm Ambit hired five Merrill executives, a sign that Asia hopes to gain from massive Wall Street layoffs, Reuters reported.

BNP Paribas and Nomura Securities in India are looking to hire Lehman executives, according to investment banking sources who asked not to be named because of the sensitivity of the matter. In Hong Kong, bankers said they were considering hiring from Lehman.

“I think there’s opportunities to improve our team or bring key people into key positions relatively easily and quickly and painlessly. Normally, it’s quite expensive and difficult to move investment bankers around,” said one banker in Hong Kong.

Executives at Lehman’s real estate and capital market divisions in China said there was still huge demand for talent in specific areas such as deal making and investment banking.

While hiring talent from overseas the problem goes a little deeper - bankers and headhunters are split over whether senior level or more junior executives will be hired more easily.

“Junior and mid-level guys are more flexible and are cheaper to hire,” said one investment banker, who recently moved to a local firm in Mumbai from a multinational.

“More senior guys, unless they were really superb, may actually have a harder time,” he said.

Growth in Industrial production (%)

Submitted by 2point6billion.com Blog

Numbers: (16,7)

The Financial Crisis and US Foreign Policy Goals

Submitted by Experience Not Logic Blog

While listening to President George W. Bush give his speech at 7:45 this morning my email box started blowing up with some unusual emails from the State Department. Typically, my feed gets 3-5 emails a day. The typical subjects are new country notes, the daily press conference, and some new initiative or program. From 7:37 to 7:51 a series of emails with a scope of topics that normally don’t come in during the course of a week hit my box. Here’s the list:

• U.S. Commitment to the Millennium Development Goals
• Promoting Food Security Worldwide: A U.S. Commitment
• United Nations Management Reform
• The Universal Declaration of Human Rights
• The United States’ Response to the Darfur Crisis
• The United States’ Commitment to Human Rights
• Financing for Development

My interpretation isn’t some huge leap, but basically the Executive is saying that despite plans to use 100s of billions of dollars to setup “Uncle Sam’s Domestic Wealth Fund” we’re not giving up on our monetary commitment to our foreign policy goals around the world. Several of those above are targeting China. The Humans Rights stuff, and the Darfur stuff are telling China that we still care about that stuff. Financing for development and millenium development goals is saying that we’re still in the soft power game. Management reform is saying many of our bankers may be crooks, but that doesn’t mean we’re gonna let others get away with it. Food security is related to the Doha round of trade talks which were all but scuttled due to fallout between India, China, EU and the US over agricultural subsidies. Some other foreign policy initiatives will probably have to be scaled back, especially extremely costly ones.

Shanghai Airlines to fly Shanghai-Mumbai

Submitted by 2point6billion.com Blog

Shanghai Airlines will be the new plane on the block to fly direct between Asian economic behemoths Shanghai and Mumbai. Official sources say that the airline which will start plying between the two cities from the 29th of October, will fly twice a week on Wednesdays and Saturdays. In order to boost passenger traffic between the two cities, the airline is planning on introducing an initial offer of RMB3,250 + tax for a round trip. If this is the price offered by Shanghai Airlines, it will be the cheapest return flight from Shanghai-Mumbai.

Sources have also told 2point6billion.com that since one more Chinese airline has been given permission to fly between the two countries, Vijay Mallya’s kingfisher Airlines, which just won the rights to fly internationally will also start flying between the two countries - most probably from Bangalore to Guangzhou. China Eastern and Air India were the initial airlines which were given permission to fly between India and China.

Jet airways which recently launched daily services between Mumbai-Shanghai and San Fransisco canceled flights on Tuesdays and Wednesdays due to low passenger turnout during those days.

Shanghai Airlines plans to leave Shanghai at 16:30, reaching Mumbai at 21:40. From Mumbai the plane will depart at 22:40 and reach Shanghai at 07:10+1. The move is likely to most satisfy Star Alliance members as Shanghai Airlines is a member of the international airline alliance fraternity. Air India is expected to become a member of the Star Alliance fraternity in 2009.

1. In 2007, over half a million visitors were exchanged between India and China. These included over 4,62,450 visitors from India to China, a year-on-year rise of 48 percent and about 68,000 Chinese visitors came to India, a 14 percent increase compared to the year before. In 2005, India received 46, 805 tourists from China while 6,29,947 Indian tourists traveled to China during the same year. To boost tourism and cultural / economic and political links between the two countries India and China also inaugurated tourism offices in each others countries. The two governments have also been planning several educational, political and economical exchange programs.

China and the Markets (Basically, Some Links)

Submitted by Experience Not Logic Blog

Friend and loyal reader Chuck Billinger suggested I post something about the Shanghai Stock Exchange’s decline over the past year, particularly in relation to this week’s continued slide and the financial trouble on Wall Street. Chuck, I’m sorry, but I feel woefully inadequate in jumping into this inquiry. Sure, this hasn’t stopped me before, but this is one of those areas where it’s best for me to just lean forward and listen to what others have to say on the subject. As such, I’ll write a bit of vague doom and gloom, and then point you to some reading.

Folks have been comparing this latest financial disaster to the Great One that kicked off in the US in 1929. If I remember correctly, that Depression spread across the world resulting in rampant inflation which fueled nationalism and got some (I’ve gotta go with objectively) bad people into power in some powerful countries. International trade slowed to a trickle as protective tariffs were established. The US started something called the New Deal, which was largely ineffective. And it took years of war during which unprecedented atrocities were committed for the global economy to get back on track. The winners of the war ended as competitors, and the world entered one of its most peaceful and certainly the most dangerous period in human history. To sum up: I really hope global inflation is kept in check because instability can lead to a really crappy outcome, especially in an era when more than one country has WMDs (and today’s WMDs make the first ones look like child’s play).

That said, I am mostly optimistic, despite Russia’s stock market. I don’t know if there’s a rational reason for my optimism, but I’d rather prepare for the worst while assuming the best because I don’t know if I could fall asleep at night otherwise.

And, here are the promised links in order of most general coverage to coverage of specific things. Unfortunately, most of the news cycle on China is still focused on tainted milk:
Wall Street’s Meltdown and What it Means for China at Managing the Dragon
Is China Safe? at China Financial Markets
U.S. Meltdown Reflects Regulators’ Failures, Wu Says at Bloomberg
China to Cut Stamp Duty, Buy Bank Shares, Xinhua Says at Bloomberg
Panic dumping leads to third successive fall in index at Shanghai Daily
Seize this crisis to internationalize China’s currency at Shanghai Daily Opinion Section
AIG and China: Could A “Special Relationship” Translate into Cash? at TIME: China Blog
Morgan Stanley/CIC at Brad Setser: Follow the Money

Thailand elects fourth prime minister in two years

Submitted by 2point6billion.com Blog

Thailand’s recent politics seems to have had even more drama than a Bollywood flick packed with thrills, chills and thrusts.

In a recent twist in Thailand’s politics, ousted prime minister Thaksin Shinawatra’s brother-in-law has been elected as the country’s fourth prime minister in two years. The election comes after the country declared emergency two weeks ago following mass demonstrations outside the prime minister’s office compound and the seat of government. Overcoming internal party politics, Mr Somchai won the parliamentary vote 298 to 163.

The New York Times said the new prime minister, Somchai Wongsawat, 61, is a long standing judge and senior bureaucrat who is married to Taksin Shinawatra’s younger sister. The opposition party, People’s Alliance for Democracy, contend that blood might be thicker than water - allowing for the the governing People Power Party, or P.P.P., to carry out Mr. Thaksin’s orders and plot to quash the cases against him so he can return.

Mr. Thaksin, a telecommunications billionaire who was ousted as prime minister in a coup two years ago, remains one of Thailand’s most influential figures. He is now a fugitive in London, where he has asked for political asylum to avoid corruption cases against him. Most political analysts say Taksin’s impact and influence within the P.P.P. and Thailand maybe waning.

Mr. Somchai said his connection to Mr. Thaksin would not compromise his conduct in office. “Our government does not come here to protect the interests of any particular individual, but comes to protect the interests of every Thai,” he said.

Mr. Somchai was named caretaker prime minister last week after Samak Sundaravej was removed for a conflict of interest in accepting pay for appearing on a televised cooking show. Mr. Samak served in the top post for just over six months.

Lehman Bros send Asian markets in a tailspin

Submitted by 2point6billion.com Blog

The fallout from the collapse of Lehman Brothers caused panicked selling of banking shares on Tuesday throughout Asia, where many of the failed American company’s biggest creditors are based. Even as analysts and bankers said the effects of Lehman’s failure on Asian financial markets would be limited, the 158 year old investment bank closed operations in three of their Asian subsidiaries - Lehman Brothers Asia, Lehman Brothers Securities Asia and Lehman Brothers Futures Asia. The investment bank also ceased trade on the Hong Kong Securities Exchange and Hong Kong Futures Exchange, but its asset management company, Lehman Brothers Asset Management is expected to continue operations as usual.

The banks largest exposure in Asia was undoubtedly in Japan where it had outstanding loans worth US$1.6 billion from seven Japanese banks, including Aozora Bank in Tokyo, to which it owed US$463 million. Lehman also said it owed US$289 million to Mizuho Corporate and US$231 million to Shinsei. It also identified another half-dozen banks based elsewhere in Asia, including the Bank of China and a unit of Citigroup based in Hong Kong.

The disclosures triggered a sharp sell-off of banking stocks across Asia on Tuesday. The steepest declines were in Tokyo, where banks as a group posted their biggest single-day loss since 1987. The declines were led by Aozora, whose shares plunged almost 16 percent, the International herald tribune reported.

Lehman’s Tokyo-based unit also added to the unease Tuesday when it filed for bankruptcy in a Tokyo court. Teikoku Data Bank, a market research company, estimated that the outstanding liabilities for Lehman’s local unit totaled US$32.7 billion, making it the second-largest bankruptcy in Japanese history.

In India, Lehman Bros, the fourth largest investment bank, wiped off Rs 20 billion (US$400 million) from the market valuation of more than two dozen Indian companies in which the U.S. financial major holds equity investments, The Business Standard reported. The Sensex, the Bombay Stock Exchange 30-share index on Monday, recovered from a 728-point dive to close 470 points down. The dollar crossed the Rs 46-mark, as the rupee fell for the seventh day in a row. Oil prices also tumbled to below US$93.

On its part, Lehman recorded a loss of more than Rs 500 million (US$11 million) crashing its investments in India, which totaled nearly 10 percent of its current holdings worth an estimated over Rs 5 billion (US$87 million).

In China, prudent foreign investors watched as the New York Bank collapsed. Bank of China Ltd. spokesman Wang Zhaowen said the lender is closely watching its holdings of unsecured credit issued by Lehman Brothers Holdings Inc. According to a filling with the U.S. Bankruptcy Court, Bank of China New York Branch is on the list of unsecured creditors owed more than US$50 million by Lehman Bros.

Why the %$#@ is Melamine Added to Food?!?

Submitted by Experience Not Logic Blog

Many know why, but I’m concerned that there are plenty more who don’t keep reading below the fold (or the headline).

I subscribe to the good ‘ole theory that humans are fundamentally concerned about their own self-preservation, but that evolution has shaped our society such that self-preservation is best achieved through cooperation and building strong relationships with others. This results in the paradox that our innate selfishness drives the vast majority of us to be good, decent folk. Thus the possibility that adding melamine to baby formula was driven by some nefarious purpose is quite remote. I guess that means we have to turn to some science.

Wikipedia’s usually pretty spot on with the science stuff, and the melamine article is no exception.

First, in what products should we find melamine? Countertops, dry erase boards, fabrics, glues, housewares, flame retardants, inks, plastics, and fertilizers. These are all things we should not make a habit out of eating.

Why is melamine bad for us? Available evidence from animal studies shows that melamine alone has no significant toxic effects. The problem is when melamine is combined with cyanuric acid forming melamine cyanurate, the salt which has been found in Chinese gluten in the past. Melamine cyanurate has been linked to kidney failure in cats, and I’m not a doctor but those children in China are being hit with kidney stones.

And, why the #%&@ is melamine cropping up in Chinese food supplies? When food is tested for protein content one of the things tested for is nitrogen levels. Melamine tricks the testers by raising the nitrogen levels of the food. When the testers think there is a higher level of protein than there actually is, then the food manufacturers can place a cheaper filler in the food. In the case of powdered milk, melamine was added to dilute the amount of milk necessary for high protein readings meaning that the more expensive animal product would have actually provided.

Why aren’t US and EU food producers doing this? If China’s analogue is the US in the late 19th/early 20th century, check out The Jungle. Basically, we’ve got stricter regulations, better testing equipment, and, in the US, a tort system that will make you pay dearly for these failures. These are just things that come with time and the maturity of the legal system. And, if you look at US jurisprudence from the good ‘ole days you’ll find that industry, especially railroads, got a lot of breaks in the days before judges determined that industry was robust enough to pay for its mistakes. China, of course, has a heavy-handed criminal judiciary, but I’m hoping somebody’s filing some torts on behalf of the, at least, 1,253 families in China that have suffered.