Chinese Economy Monitor--- Note No 9: REAL ESTATE TIGER & HIDDEN CREDITS ICEBERG

B.RAMAN

(What will be the impact of the global financial and economic melt-down on the Chinese economy? This question should be of interest to the other countries of the South and the South-East Asian region. If the Chinese economy is badly affected, they too are likely to feel the negative consequences of the down-turn in the Chinese economy. Keeping this in view, we have been bringing out a periodic "Chinese Economy Monitor" based on open information. This is the ninth in the series)

MY ASSESSMENT

If official Chinese statistics are to be believed, the Chinese economy is showing signs of coming out of the down-turn into which it has got consequent upon the global economic meltdown of 2008 and 2009. The Chinese authorities believe that the worst in the export sector will be over in 2010 and the unemployment situation which they faced consequent upon the closure of a large number of export-dependent industries, has been satisfactorily managed. New jobs are once again being created by boosting the domestic demand through the Government’s stimulus package and many of those who lost their jobs due to the decline in exports have managed to find new jobs. The widely-predicted social tensions due to the loss of millions of jobs have been belied. The Chinese people have taken in their stride the economic difficulties of the last two years. A lot of credit should go to President Hu Jintao and Prime Minister Wen Jiabo for explaining the economic difficulties to the people through frequent touring in the affected parts of the country and the measures taken by the Government for alleviating the problems of the people. The warnings of Cassandras about a looming social explosion in China due to the economic difficulties have proved incorrect. At the same time, objective analysts---- Chinese as well as foreigners---- continue to be concerned over the inherent strength of the economy and over what they see as the lack of transparency in certain economic matters, which the Chinese authorities see as sensitive. One area of concern is the real estate sector. Many fear that there is a bubble developing which may result in an unpredicted explosion. The difficulties increasingly faced by the people in buying houses could result in large-scale social tensions. In a surprisingly forthright article on the subject, the “Global Times” of the party-owned “People’s Daily” group drew attention to the looming danger of a real estate bubble. How sensitive this subject has become for the Government would be evident from the fact that the Government allegedly ordered the discontinuance of a series of TV reportage on this subject, which was attracting a large number of viewers. Not many observers are convinced by the claims of the Government about the health of the Chinese banking sector. They suspect that there is an iceberg of hidden credits against which the economy might collide one day. Another example of disbelief in the Government claims relates to the automobile sector. The Government claims that there has been a dramatic increase in the domestic purchase of automobiles thereby reducing the dependence of the sector on exports. There is no reason to doubt the official statistics about the surge in the domestic sales of cars. These figures are corroborated by industry sources. But the skepticism arises from the fact that the increase in the domestic sales of automobiles has not been accompanied by a noticeable increase in the domestic consumption of petrol and diesel.

REAL ESTATE NERVOUSNESS

2.Mainland stocks fell for a fourth day on December 18,2009, the longest losing streak since August, due to concerns that the Government might step up measures to curb property speculation and new share sales will divert funds from existing equities. The Poly Real Estate Group Co slumped for a ninth day after the Government increased down payments on land purchases. The China Life Insurance Co, the nation's biggest insurer, dropped 2.6 percent to a two-month low. Initial public offerings on the ChiNext board have drawn almost 900 billion yuan in subscriptions, the China Securities Journal said on December 18."It looks like the Government is using new share sales as a way to avoid an asset bubble on the stock market," said Zhang Xiuqi, a Shanghai-based strategist at the China International Fund Management Co, which oversees about $10.2 billion. "The crackdown on the property industry is tougher than was previously expected." The Shanghai Composite Index fell 65.19, or 2.1 percent, to 3,113.89 at the close, the lowest since November 27. It dropped by 4.1 percent this week, a second weekly loss. The CSI 300 Index declined by 2.5 percent to 3,391.74. The Shanghai gauge had jumped by 71 percent this year as Government spending and a credit boom helped the nation's economic growth recover from its steepest slump in more than a decade. The Poly Real Estate, China's second-largest developer by market value, fell 7.5 percent to 21.88 yuan, capping a nine-day, 16 percent slump. Gemdale Corp, the fourth largest, lost 7.8 percent to 13.20 yuan. The Shanghai Shimao Co, a property developer controlled by billionaire Xu Rongmao, declined by 4.8 percent to 15.77 yuan. The Government set the down payment requirement for land purchases to at least 50 percent of the total price. The new down payment level is an increase from earlier levels, said Zhou Hu, a real estate analyst at Bohai Securities Co in Beijing. An index tracking 33 property stocks traded on the Shanghai Composite tumbled 5.4 percent , its biggest loss since Aug 31. Property stocks have slumped after the government said it would target "excessive" growth in property prices in some cities. That follows the Cabinet's statement last week that it will re-impose a sales tax on homes sold within five years, after cutting the period to two years in January. The country's property and stock markets are a "bubble" that will burst when inflation accelerates in 2011, former Morgan Stanley chief Asian economist Andy Xie said.
---“China Daily” of December 19,2009


HIDDEN CREDIT RISKS

3.Financial stocks also declined after the Fitch Ratings said Chinese banks' capital strength is likely to be more "strained" than it appears as lenders increasingly use off- balance sheet transactions to free up room for further loan growth. The growing amount of unreported loan transactions, including re-packaging loans into wealth management products to sell to investors and the outright sale of loans to other financial institutions, represent a "growing pool of hidden credit risk" and may lead to downward revisions for some Chinese banks in 2010 and 2011, Fitch said in its latest report.
---“China Daily” of December 19,2009.

RIDING THE REAL ESTATE TIGER

4.In an article on the concerns over the state of the real estate market published on December 16,2009, the “Global Times” of the “People’s Daily” group wrote as follows: “With house prices skyrocketing in China's cities, urban residents are finding themselves stripped of purchasing power, causing concern of social unrest and prompting government measures to rein in prices, curb speculation and demand the construction of more low-cost homes. He Keng, an official with the Financial and Economic Committee of the National People's Congress, complained about the growing housing bubble in a CCTV interview over the weekend. "If even a vice minister-level official like me can't afford a decent home, it will be a huge problem for most ordinary people," he said. For the majority of the wage-earning public, the soaring prices have taken the dream of buying their own home further out of reach. It also explains why a TV series called "Snail House," which reflects people's difficulty in affording a house, has been an instant hit. It has also become controversial, as it was called to a halt after only 10 episodes broadcast by Beijing-based BTV, reportedly due to pressure from real estate developers. Noticing the smoldering public discontent, the central and local governments have been cautiously making small moves, trying to prevent the danger of an outpouring of anger that may jolt society as a whole. Shanghai Mayor Han Zheng said last week that house prices in the municipality are rising too fast and could eventually harm the interests of the Shanghai people. In southern China, the Guangzhou government has planned to release 80 square kilometers of land onto the market in order to curb soaring prices, local media reported Monday. An executive meeting of the State Council, chaired by Premier Wen Jiabao, announced on Monday that the central government would rein in the overheated momentum of housing prices by increasing the supply of low-cost homes, curbing speculation and strengthening the supervision of the real estate market. The stock market in Shanghai and Shenzhen saw real estate-related stocks falling across the board, some down 6-8 percent at closing Tuesday. Nanfang Daily reported Tuesday that major institutional investors dumped a net 2.9 billion yuan ($424.6 million) worth of real estate stocks on the yuan-denominated A-share market last week, representing over 11 percent of the net fund outflow of the entire market, the highest among all the sectors. However, analysts are not optimistic about the Government's determination to take steps to control housing prices, saying that the Government is at a dilemma in the face of growing social discontent and a recovering economy boosted largely by the real estate market and related industries. "The Government is riding on a tiger," a People's Daily senior editor, who asked to remain anonymous, told the Global Times. "It's dangerous to keep on riding, and even more risky to get off." "Restraining home prices from soaring too quickly in recent months is the government's intention," Chen Guoqiang, director of the real estate research center at Peking University, said yesterday. "But the government doesn't want the commercial real estate sector to fluctuate too much in 2010 because it needs to keep the real estate market booming to ensure the country's economy runs well," he said. Tian Yun, vice president of the China Macro Economics Institute, said, "the latest measures will be ineffective." "The current high prices are pushed by joint efforts by the central government and local governments," he explained. "State-owned enterprises have become the hands that are pushing the high prices, and local governments depend on high property prices to assure local expenditure," he said. Developers also prefer not to develop low-price housing, and how the government will execute its relevant policies remains a question, Yang said. Yi Xianrong, a researcher at the Chinese Academy of Social Sciences, confirmed Tuesday that tightening credit lines would be the most effective way to curb the housing market, because the soaring home prices at present are caused by lax credit policies. Experts said the State Council's action guidelines announced Monday show its intent to restrict the credit policies for mortgage loans so as to curb speculation. "From what the guidelines indicate, the buyers who want to buy their second or third houses need to pay a down payment of no less than 40 percent of the total value," Chen Guoqiang said yesterday. "This means that profiting from fast re-sales will be under control." The Central Government also announced on December 9 that people must now keep their houses for five years before they can resell them, a change from the previous minimum of two years. Zhong Wei, director of the Financial Research Center at Beijing Normal University, said the growth of the real estate market is expected to slow down next year, with total sales of 3.3 trillion yuan, compared with this year's 3.6 trillion.”
-----“ Global Times” of December 16,2009

NEW JOBS

5.China created 9.4 million new jobs in urban areas in the first ten months, the Ministry of Human Resource and Social Security said on December 12. The number represented 104 percent of the whole year target for 2009, the Ministry said. Around 4.4 million laid-off workers were re-employed in the January-October period, or 88 percent of the 5-million goal for the whole year.
----- Xinhua News Agency of December 12,2009.

FOREIGN TRADE LOOKS UP

6.China's foreign trade is projected to grow 15 percent next year, according to a report released by the China Institute for WTO Studies on December 18. The report forecasts imports to increase by 15 percent and exports up 13 percent. With the external demand improving and the global economic recovery gaining momentum, "the declining trend of China's exports would come to an end next year," the report says.The Government stimulus package would boost imports through enhancing domestic demand, while the growing competitiveness of Chinese enterprises in the international market would increase exports, said Zhang Hanlin, head of the institute based in the University of International Business and Economics. Net exports would contribute 0.3 percent to China's GDP growth next year, said Zhang, compared with a minus 4.4 percent this year as predicted by the World Bank in a recent report.
---- Xinhua News Agency of December 18,2009.

PROTECTIONISM AGAINST CHINA

7.In the first 11 months this year, China's imports and exports totaled US$1.96 trillion, down 17.5 percent compared with the corresponding period last year, according to the General Administration of Customs. Exports dropped 1.2 percent year on year in November, but were up 2.6 percent from October, the fifth consecutive monthly increase. And imports rose 26.7 percent from year on year. However, the China Institute for WTO Studies report also warns of rising protectionism against Chinese products in 2010. Faced with worsening unemployment situation and shrinking market share, some countries tended to make China a scapegoat, said Zhang. "China will suffer from more trade frictions in the years to come." The report says, in the first nine months this year, 19 countries have launched 88 trade remedy investigations against China, involving 10 billion dollars, a year-on-year rise of 125 percent. China suffered 14 trade remedy investigations from the United States, involving US$5.84 billion, or 639 percent more than that of the corresponding period last year. Some countries might resort to new remedy measures which are often in disguised forms but with more destructive effects, Zhang said. ------ Xinhua News Agency of December 18,2009


TRADE IMPROVES IN NOVEMBER

8.China's imports and exports rose 9.8 percent in November year on year, ending a 12-month decline, to stand at 208.2 billion U.S. dollars, the General Administration of Customs announced on December 11. The trade surplus was 177.96 billion dollars in the January-November period, down 30.6 percent from a year earlier. Exports stood at 113.65 billion dollars in November, down 1.2 percent from a year earlier, but were up 2.6 percent from October for the fifth consecutive monthly increase. Imports rose 26.7 percent in November to 94.6 billion dollars. From January to November, the country's imports and exports totaled 1.96 trillion dollars, down 17.5 percent compared with the corresponding period last year. Imports for the first 11 months were 893.02 billion dollars, down 15.8 percent year on year; exports dropped 18.8 percent to 1.07 trillion dollars. The EU remained China's biggest trading partner, though bilateral trade declined 17 percent to 326.27 billion dollars in value in the first 11 months; the United States was second with trade at 266.54 billion dollars, down 13.4 percent; Japan followed with trade down 17.4 percent to 203.33 billion dollars. ----- Xinhua News Agency of December 11,2009

INDUSTRIAL OUTPUT UP

9.China's industrial output growth accelerated to 19.2 percent in November year on year, following a 16.1-percent increase in October, data from the National Bureau of Statistics showed on December 11. The figure increased 10.3 percent year on year over first 11 months this year, 0.9 percentage points higher than that of the first 10 months, said the NBS. Production of heavy industries was up 22.2 percent in November, and that for the light industries rose 12.6 percent. China's continued economic growth had brought the acceleration in industrial growth, said Sheng Laiyun, a spokesman with NBS. He also attributed the rapid growth to the sharp industrial decline in the corresponding period last year. In November 2008, China's industrial output growth slowed to 5.4 percent year on year. ---Xinhua News Agency of December 11,2009.

RETAIL SALES UP---DRAMATIC SURGE IN DOMESTIC AUTO SALES

10.China's retail sales rose 15.8 percent year on year to 1.13 trillion yuan (166 billion U.S. dollars) in November, the National Bureau of Statistics (NBS) announced on December 11. The rise was 5 percentage points lower than that of a year earlier. It was also down 0.4 percentage points from that in October, the NBS data showed. In the first 11 months, total retail sales topped 11.27 trillion yuan, up 15.3 percent year on year. The rate was 6.6 percentage points down from that of the corresponding period last year, but unchanged from the first 10 months this year. In November, urban retail sales rose 16.5 percent year on year to 760.6 billion yuan, while those in counties and sub-county areas were up 14.4 percent to 373.3 billion yuan. Retail sales grew 14.5 percent year on year for grain and edible oils in November, 24.9 percent for household electric appliances, and 61.5 percent for autos. To stimulate domestic consumption, the government put into place a series of measures, including tax cuts for auto and property purchases and introduced subsidies for home appliances in rural areas. In November, auto sales reached 1.34 million units, bringing the total sales from January to November to 12.23 million, up 42.39 percent year on year, according to the China Association of Automobile Manufacturers. -----Xinhua News Agency of December 11,2009

FIRST PHASE OF CENTRAL ASIAN GAS PIPELINE COMMISSIONED

11.President Hu Jintao commissioned on December 14,2009,a landmark pipeline to transport Turkmen natural gas to China.Hu, together with Gurbanguly Berdymukhamedov, President of Turkmenistan, Islam Karimov, President of Uzbekistan, and Nursultan Nazarbayev, President of Kazakhstan, turned a symbolic wheel at a refinery in Samandepe in Turkmenistan's vast Karakum desert during a ceremony that opened the pipeline to start the first gas supply flowing. The 7,000-kilometer gas pipeline first runs for 1,800 kilometers in Central Asia – snaking through Turkmenistan, Uzbekistan and Kazakhstan – before linking up with a further 5,000-plus kilometers of pipeline in China's far-west Xinjiang region. The China National Petroleum Corp will eventually import up to 40 billion cubic meters of gas a year through the pipeline when it reaches full capacity in 2012-2013.
---- “Global Times” of December 15,2009.

12.The China-Central Asia natural gas pipeline starts from the border between Turkmenistan and Uzbekistan, runs through Uzbekistan and Kazakhstan, and finally ends at Horgos City in China. It is a double-line pipeline, including line A and line B. Line A passing through the Central Asian States has a length of 1,833 kilometers. It was tested and put into operation at the beginning of December 2009. According to the project's construction plans, both lines will be completed and begin transporting natural gas in 2010. After the natural gas imported from Turkmenistan reaches China, the gas will be transported to other provinces and cities including Shanghai and Guangzhou through the Line B pipeline of the west-east natural gas transportation project. This pipeline is 4,978 kilometers long, and is designed with an annual gas transportation capacity of 30 billion cubic meters. The connection between the two pipelines can guarantee China a sufficient and steady natural gas supply. When interviewed by Chinese media, Turkmenistan President Gurbanguly Berdymukhamedov said that Turkmenistan will offer China 40 billion cubic meters of natural gas annually for the next 30 years. The China-Central Asia natural gas pipeline and the No. 2 pipeline play important roles in optimizing the energy structure and improving the environment. It is predicted that after the No. 2 pipeline is completed and put into operation, the proportion of the natural gas consumption to primary energy consumption will rise by 1 to 2 percentage points. Compared to coal consumption, the annual 30 billion cubic meters of natural gas consumption can reduce carbon dioxide emissions by 130 million tons per year. "China can become a steady purchaser of Central Asia's oil and natural gas resources," Xia Yishan, an energy issue expert at the China Institute of International Studies believes, "As China's economy develops and the Chinese people's environmental protection sense rises, China's demand on clean energy will increase sharply." Pan Guang, Director of the SCO (Shanghai Cooperation Organisation ) Research Center under the Shanghai Academy of Social Sciences, believes that China's huge foreign exchange purchasing capacity and advantageous geographical position are extremely attractive to Central Asia’s natural gas exporting countries.
----“ People’s Daily Online” of December 15,2009.

CHINESE OIL COMPANY’S INTEREST IN KURDISH REGION CREATES PROBLEMS WITH BAGHDAD

13 . Sinopec Group, China's second largest oil company, said on November 23,2009, that it remained active in its efforts to bid for oilfields in Iraq despite being rebuffed in the second round of bidding. "Sinopec is still in talks with the Iraqi Government over the bid," said a source from Sinopec who declined to be named. Sinopec's offer to pay participation fees to bid for oilfields on offer in Iraq's second bidding round was rebuffed by the Iraqi Government due to Sinopec's existing deals with the Kurdish regional government, Reuters reported. In June, Sinopec agreed to buy Swiss oil explorer Addax Petroleum Corp for $7.3 billion, which had signed deals with the Kurdish authorities in northern Iraq. The source from Sinopec said the contract with Addax was not likely to affect Sinopec's other businesses in Iraq, based, as it was, on an evaluation it did before purchasing the Swiss oil company. Baghdad's refusal, however, indicated that the Addax deal clearly had a negative impact on Sinopec's effort to further tap oil reserves in Iraq. "Sinopec asked to pay the participation fee to get the data package but we refused due to the deals they have with the Kurdish regional government," Reuters quoted Sabah Abdul Kadhim, head of the legal and commercial section of the Petroleum Contracts and Licensing Directorate, as saying. "Our position is clear. We will not deal with any oil companies that sign contracts with the Kurdish authorities without the approval of the central government," Kadhim was quoted as saying. Analysts said the failure of Sinopec in its bidding effort indicates that it is still not easy for Chinese oil producers to acquire overseas oil assets when deals are intertwined with sensitive political issues. "Oil, unlike many other resources, is closely linked with national interests and political issues," said Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University. "It is still not easy for Chinese oil companies to tap overseas oil reserves when resources become intertwined with political interests," he said. Lin, however, noted that Sinopec was not likely to give up easily and was expected to continue in its efforts to bid for Iraqi oilfields to expand its upstream oil asset overseas.-----“China Daily” of November 24,2009

OVERSEAS OIL PRODUCTION OF SINOPEC UP

14.Overseas crude oil output for Sinopec would touch 17 million tonnes in its total output of 60 million tonnes for this year. The acquisition of Addax Petroleum Corp this year has boosted the company's overseas oil production to a large extent, company spokesman Huang Wensheng was quoted by the China Daily as saying. The company pumped 9.01 million tonnes crude oil last year from its 35 overseas projects in Africa, South America, the Middle East and Russia, according to Huang. The refiner wrapped up the 7.3 billion U.S. dollars purchase of the Geneva-based Addax Petroleum Corp. in August, gaining reserves in Iraq's Kurdistan and West Africa. ------ Xinhua news agency of December 12,2009

CHINA GOES AHEAD WITH MYANMAR-YUNNAN PIPELINE DESPITE LOCAL OPPOSITION

15.A delegation of the China National Petroleum Corporation arrived in Rangoon on October 29 to discuss the gas pipeline project, which is to link western Burma’s coastal area to China’s Yunnan province and the recent spate of protests against it. The delegation was to hold talks with the Myanmar authorities about technical issues regarding the controversial project, which began in mid-September amid criticism by human rights groups. The 980-kilometre pipeline is part of a 30-year natural gas purchase and sale deal CNPC sealed in December , 2008, with a consortium of the Myanma Oil and Gas Enterprise, South Korea’s Daewoo International, ONGC Videsh Limited and Gail (India) Limited. The strategically important pipeline, which will transmit oil and natural gas from Africa and the Middle East, will shorten the transportation distance, and will pass through the Arakan (Rakhine) State, the Magwe division, the Mandalay division and Yunnan in China. Currently it is transported by tankers through the Malacca strait to China. The consortium found commercially viable gas deposits in A-1 and A-3 offshore blocks in Myanmar, which is also known as the Shwe gas project. ------Myanmar political exiles
20-12-09


( The writer is Additional Secretary (retd), Cabinet Secretariat, Govt. of India, New Delhi, and, presently, Director, Institute For Topical Studies, Chennai. He is also associated with the Chennai Centre For China Studies. E-mail: seventyone2@gmail.com )