Business news shorts from China

A Building in Hong Kong with RMB, USD, HKD symbols

China’s deflation down by 1.4 per cent, more than expected

China's Consumer Price Index (CPI) was down by 1.4 per cent from the same period last year; showing a greater drop than previously estimated.
The data released by China National Bureau of Statistics on June 10 showed that the changes of CPI during January to April 2009 are 1%, -1.6%, -1.2% and -1.5% compared with the same period last year. A decline by 1.4% in May marked the fourth month of deflation. CPI for the first five months dropped by 0.9% from the same period last year with 3.5% decline in property prices, 2.4% decline in apparel prices and 0.1% decline in food prices.
Some economists believe that the recently released CPI reflects weak domestic and overseas demand for Chinese products and the domestic overcapacity problem, causing a persistent decrease in prices. Additionally the Producer Price Index (PPI) released by China National Bureau of Statistics in May showed a 7.2% drop from the same period last year.
Declines in foreign investments persist for eight months in china
Foreign direct investment (FDI) data published by China’s Commerce Ministry on June 15 showed a persistent decline for eight months, with $6.379 billion USD in May; a decrease by 17.8% from the same period last year.
The data revealed the disbursement of foreign capital in China from January to May 2009 was $34.05 billion USD; a decline of 20.4% from the same period last year. Whereas from January to May, China approved 7,890 foreign-funded enterprises in total, down by 33.8% from the same period last year.
Officials of China’s Commerce Ministry said that this was the first time all three foreign capital utilization indicators (number of new established foreign companies, contractual foreign investment and direct foreign investment ) dropped at the same time since Asia’s financial storm in 1998.
Capital inflows fewer, China reduces its holdings of U.S. debt
Recent data published on the U.S. Treasury website shows that China’s overall holdings of U.S. treasury securities in April were reduced by $4.4 billion USD compared with March. This is the first time China cut its holdings in the past year. Foreign media also reported that fewer capital inflows was the principal reason, and was not China's intention.
Following the global financial crisis, China's trade surplus was down due to weaker external demand, and sharp reductions in the direct foreign investment. Therefore, China’s overall capital inflows began to drop in the past year. The data released by China's Customs shows that China exports in May decreased by 26.4% from the same period last year, while imports were down by 25.2% compared with the same sluggish period last year. China’s overall trade surplus kept shrinking to $13.39 billion USD.
China’s credit amount may hit over 8 million yuan this year
On June 12, a report from the People’s Bank of China said that new loans in May reached 664 billion CNY; reflecting an increase by 346 billion yuan from the same period last year. Total balance of loans is 36.21 million yuan for the first five months this year in China; up by 30.6 per cent from the same period last year. Market predictions indicated that if the loan balance kept increasing, total credit amount might reach 8 million yuan this year, which may cause a credit crunch.
China relaxed the bank loans resulting in 5.17 million yuan new loans from January to April this year, which exceed the planned 5 million yuan of new loans this year. Cumulative loan volume from January to May increased by 5.84 million yuan, growing by 3.72 million yuan from the same period last year.
China imports and exports declined in May for the seventh consecutive month
Data published by China’s Customs Administration on June 11 showed that both imports and exports declined again in May; for the seventh consecutive month. While exports did not improve in May, the decrease occurred at a 26.4 per cent annual pace, down by 22.6 per cent from April. Similarly, imports declined at a 25.2 per cent annual pace and dropped by 23 per cent compared with April.
Declines in China imports and exports lowered the forecast for its economic recovery. Although China offered an economic stimulus package, it could only play a limited role in improving declines in trade. As for bilateral trade with its main trading partners, the E.U., U.S. and Japan were still the top three trading partners with China, but trade volume with them declined by, respectively, 22.1 per cent, 17.1 per cent and 24.6 per cent from last year.
RMB exchange rate keeps sliding in may
Shanghai, China—The latest effective exchange rate (EER) released by the Bank for International Settlements (BIS) showed that China’s EER in May was 119.46; reflecting a drop of 2.43 per cent on a monthly basis, and a declining trend since March this year.
According to Reuters, China’s currency renminbi (RMB) yuan kept pegging into the U.S. dollar in spot-market. The U.S. dollar also slid in May, resulting in the devaluation of non-U.S. dollar currency. The 1.43 per cent decline of RMB in May was greater than its increase in the first four months and its nominal effective exchange rate (NEER) devaluated by 0.4 per cent in the same period.
The central rate of the RMB against the U.S. dollar published by The China Foreign Exchange Trade System (CFETS) this year moved most times within a narrow range of 6.82 to 6.84. It is expected that the RMB actual exchange rate in the future will maintain its weak position.

Beyond the Gucci knockoff:China's industrial espionage

Goodyear headquarters in Akron, Ohio.

Washington, DC. In March this year two engineers working at a tire plant in Tennessee were charged with stealing trade secrets from Goodyear Tires and passing the information along to a Chinese company.

The Chinese tire manufacturer paid the two to enter a Goodyear facility under false pretences andto use cell phones to photograph processes and technology that it could then use to make similar tires without going through product development - a scheme that could lead to Goodyear having to unfairly compete with a knock-off of its own proprietary design.

"Stuff is really cheap when you steal it," says Kerri Houston Toloczko, AAM Senior Analyst and former member of the U.S.-China Economic and Security Review Commission (USCC).  "Why waste years and millions - or even billions - of dollars on research and development when you can pay far less by obtaining critical product information from spying and theft?"

American consumers are familiar with China's designer knock-offs and pirated DVDs, but its industrial espionage goes beyond breaking intellectual property laws for consumer goods.  According to Toloczko, China's plan to steal propriety information is organized, strategic, and a danger to U.S. interests.

"Make no mistake, China's wide-reaching and aggressive industrial espionage is not just about tires, handbags or movies; it is an enormous threat to our national and economic security," Toloczko notes.

She adds, "In the mid-1980s, China adopted a specific plan to steal emerging technology from other countries, and to financially reward any Chinese entrepreneur or manufacturer who could take the stolen information and turn it into a viable product or system."

Although many of the stolen products and technology come from the consumer or business sector, many of these items are "dual-use" technologies that the Chinese use in military applications as well.  In 2007, a former Motorola employee - a naturalized American born in China -- was caught at Chicago's O'Hare airport with $600 million worth of proprietary computer files and paperwork stolen from her employer, $30,000 in cash, and a one way ticket to Beijing.

She had been paid for the theft by a Chinese technology company, and according to the indictment, the stolen material was classified military communications and combat use tactical technology.

"The Motorola case is just one example of the on-going theft of sensitive information occurring in the U.S. at the hands of Chinese agents," according to Toloczko.  "These include government defense and technology contractors, private industry and even within our military itself.  Stolen information has military, biotech, software, energy and agricultural applications.   American products brought to China or made in China by American manufacturers are regularly "reverse-engineered" and marketed there with no consideration of patents or intellectual property laws."

"American law enforcement and security agencies need to pay closer attention to this activity and more aggressively and publicly pursue prosecution of these high level bandits," Toloczko concludes, "before we have our economic and national security interests stolen from right under our collective noses."

The Alliance for American Manufacturing (AAM) is a non-partisan, non-profit partnership forged to strengthen manufacturing in the U.S. AAM brings together a select group of America's leading manufacturers and the United Steelworkers. Its mission is to promote creative policy solutions on priorities such as international trade, energy security, health care, retirement security, currency manipulation, and other issues of mutual concern.

China's uncertain recovery

Profits from China’s nationally-owned enterprises declined 7.5% in May 2009, as a direct result of consecutive, sharp decreases in China's exports and foreign direct investment (FDI). The latest data also showed the stimulation loan released by Chinese banks were too concentrated in the first quarter; while lacking strength to back them up later.

Exports, FDI continue to decline

Data recently published by China's General Administration of Customs indicate that China's exports in May fell by $88.76 billion U.S. dollars, representing a 26.4% decline from last May. The drop was higher than the 22.6% decline rate of April 2009.
Moreover, China's FDI was $63.79 billion U.S. dollars in May; showing a drop of 17.8% from last May It is the eighth consecutive monthly FDI decrease, according to The Wall Street Journal. About 10% of Chinese jobs and more than 50% of trades are related to foreign-invested enterprises in China. FDI’s continuous decline is also adding pressure to China’s overburdened job market and economic recovery.
Increased investment in fixed assets lacks backup strength
The Chinese government is turning to large-scale public projects and industrial support policies for its economic stimulation because of the huge decline in FDI. However, new projects and support policies require a large amount of loans through banks or funds from government spending. As a result, new loans released by Chinese banks in the first quarter of 2009 surged to 4.58 trillion RMB, which is about 244.36% of the amount of last year’s loans. The majority of the new loans went to nationally-ownedenterprises.
Since the beginning of 2009, the profit growth rate of China’s nationally-owned enterprises fell substantially. China’s Treasury Department announced that for the first time, the profit growth of nationally-owned enterprises was reduced to a negative rate, from 0.5% in April to -7.5% in May. According to Chinese financial analysts, there are too many new projects driven by the government’s stimulation policy, and overpayments in advance of those new projects due to loans that are easily-obtained; all of which have led to a false fast profit growth. Additionally, bank loans are too concentrated in the first quarter to back up in the following year, which will reduce the subsequent growth of corporate profits.
Disputes raised by China’s policy to buy domestic products while expanding domestic demands
China's National Development and Reform Commission recently required various levels of China’s government departments to give priority to buying domestic products to stimulate domestic demand. Experts from the World Bank warned that the costs of this action to China would outweigh its gains.

The Frankfurter Allgemeine newspaper also reported that China is highly dependent on exports. If other countries follow China’s example, it will initiate a wave of protectionism globally; thereby giving the West even more reasons not to buy China-made products—further damaging China’s precarious recovery.

China's export tax rebates up 7th time in year

A customer in Shanghai looks at televisions in a shop.
As early as April 2009, the export tax rebate of CRT televisions
was already at the maximum rate of 17 percent.

 (Liu Jin/AFP/Getty Images)

June 8^th, China’s Ministry of Finance and State Administration announced that the export tax rebate rate would be raised yet again to “ensure the stability of export”. This is the seventh rise of the tax rebate on exported goods from China since August 2008. Trade experts said that this move was a perversion of China’s promise to avoid acts that may provoke protectionism and does not honor trade compliances as agreed upon at the G20 Summit. This current export tax rebate may indeed spark protectionism among trade partner countries. 

More Intensive Impact 

Compared with the previous six raises, this adjustment now involves a far wider range of

products – including over 2,600 items of the manufacturing industry – and will produce a more intensive influence. It is estimated that the latest tax rebate will reach 25.2 billion Yuan. The export tax rebate on down-stream products in agriculture, medication and steel were also increased. The rebate on exported canned foods and juices rose to 15 percent, up from 13 percent. Rebates on luggage and bags, shoes and hats, toys, furniture were increased to 15 percent from 13 percent. Rebates on some plastic, ceramic and glass products were raised to 13 percent from 11 percent. The tax rebate of CRT televisions, various television components, optical-fiber cables, uninterrupted power supplies and refined copper foils, etc., were already at the maximum tax rebate of 17 percent as of April 1^st 2009. Rebates on garments and textile products rose to 16 percent, only 1 percent shy from the full tax rebate rate. 

Transferring the Risk Can Only Play a Limited Role

“Economic risk and financial risk have to be weighed. Export tax rebate policy is designed to reduce public risk by increasing financial risk. This is risk transfer, namely, public risks in economic society were put into a risk pool, but the volume of the risk pool is limited”, said Liu Shangxi, Vice President at Research Institute for Fiscal Science, Ministry of Finance.

Thus, the upward readjustment of the export tax rebate can only play a limited role. In the long term, China’s government will need to speed up the transition and upgrade foreign trade mode and propel domestic demand. Also, more support should be given to pubic consumption expansion, and adjust the income distribution structure.

Trade Distortion May Spark Trade War

This unprecedented expansion of the export tax rebate may spark not only, “ordinary trade protectionism, but trade distortion as it is an implicit trade subsidy; China wants the prices of its commodities low”, said Barfield, trade scholar of American Enterprise Institute in an interview with Voice of America. He mentioned that it was still hard to judge whether or not these tax rebates violate WTO regulations and are an illegal subsidy, before considering the tax rebate structure. Regardless, it is still unforgivable.

Hufbauer, a senior fellow and trade policy specialist at the Peterson Institute of International Economics said to Voice of America, “China contradicted the April 2009 G20 summit commitment by boosting [its] export tax rebate, which is cause for concern.” He stated that the current crisis sparked acts of trade protectionism from many countries.

As there is no value-added tax in the U.S., the U.S. won’t take a similar tax rebate measure to stimulate export, rather it may increase the import tax to protect its own industries. Currently there are many proposals in Congress trying to address the countervailing duties and anti-dumping duties on products imported from China.

Business news shorts

Rio Tinto Dumped Chinalco Deal

On June 5, the world’s third largest mining firm, Rio Tinto, scrapped a $19.5 billion deal with Aluminum Corp. of China (Chinalco). Instead, it decided to raise $21 billion capital from a share sale and set up an iron ore joint venture with Australian mining giant BHP Billiton. This move not only made Rio Tinto shy away from considerable repercussions from shareholders and politicians, but also saved Australian Prime Minister Kevin Rudd from a political storm. It also frustrated China’s overseas investors who intended to ensure raw material supplies to boost the economy.

According to Rio Tinto’s fund-raising plan, theU.K. investors will be offered 21 new shares for every 40 existing shares at a price of 1,400 pence each, which is 49 percent below June 4’s close rate. Additionally, BHP offered Rio Tinto $5.8 billion to launch an Australian iron ore joint venture. The capital Rio Tinto raised from the share sale and joint venture setup will help slash the company’s $38.9 billion debt without selling the stock rights of its biggest mining field to Chinalco.

Chinese Premier Wen Jiabao (C) inspects Rio Tinto's HIsmelt plant facilities at Kwinana on April 2, 2006 in Perth, Australia. (Photo by Getty image)
China May Buy IMF Bonds
Beijing News—China is considering buying up to $50 billion in IMF bonds, said the State Foreign Exchange Administration of China.
According to Finance Times, John Lipsky, IMF’s first deputy managing director, confirmed the Chinese proposal after Russia proposed to buy $10 billion in IMF bonds. The pledges by Russia and China seem to have some political motivations. They both desire to have a greater say in how the IMF commits its money.
China's Commerce Ministry Not Optimistic About Foreign Trade for the Second Half of 2009
Foreign trade for the second half of this year is not optimistic, said Zhong Shan, Vice Minister of China’s Commerce Ministry, at a national meeting of export credit insurance. He urged authorities to improve the export credit insurance coverage mechanism.
He remarked, “China's foreign trade sector now faces unprecedented difficulties and is set to decline in the first half of the year. It's increasingly difficult to make a quick turnaround and the situation will remain gloomy in the second half of the year.”
China Admits Employment Situation is Dire
China said the country’s employment situation was still severe and economic recovery was still not well grounded. According to the BBC, on June 3, after a regular meeting chaired by Chinese Premier Wen Jiabao, China’s State Council stated “there are still many uncertain and unstable factors in China’s economic development; and the economic recovery still does not have a solid foundation.”
The statement said that these problems are inextricably linked to the available labor force far exceeding the number of available jobs and the prominent structural contradiction. Employment situation is still dire. New jobs are still down from the same period last year, and the registered unemployment rate still keeps rising. College graduates and rural work forces are still facing more employment difficulties.
China Eastern Airline Confirms Shanghai Airline Merger
A rumor that circulated for months was finally confirmed when the merger of China’s Eastern Airlines and Shanghai Airlines was announced in early June.  The two companies will begin restructuring procedures.
“We received approval from the government on June 6 about the consolidation,” Feng Xin, Vice President of Shanghai Airlines said on June 8. Shanghai Airlines said that the merger would relieve competition pressure in the Shanghai market.
Eastern Airlines said on June 9 that both companies are planning to significantly restructure and further reduce liability rates. Since the prospects for Chinese tourism remain gloomy, both Shanghai and Eastern Airlines are running at a loss and have received bail-out money from the government.
Xie Guozhong: China’s Stock Market is Back to Bubble
“China’s stock market went back to a bubble period again, so it is unrealistic for investors to bet on China to rescue the global economic decline”, said Andy Xie, former chief Asian economist at Morgan Stanley. Aberdeen Asset Management said that investors should be careful in the Hong Kong stock market, since earnings prospects couldn't justify a three-month rally in Hong Kong stocks. Xie told Liberty Times, “Everybody thinks China is Kung Fu Panda and China can rescue the world, but this expectation is not realistic.”
India: Chinese Power Equipment Low Energy Efficient
Higher heat rate and low power generation efficiency are among some of the problems occurring in Indian power plants using Chinese equipments. A team formed by Indian authorities was sent to China to investigate recently, and they found that the heat rate of Chinese equipment was higher than specified norms, so that more energy was consumed to produce electricity. Therefore, it was confirmed that energy generation in China didn’t comply with the latest norms.
This spelled good news for Bharat Power, India’s largest power equipment manufacturer and a fierce competitor of Chinese power equipment manufacturers.
As many as 19 Indian plants were equipped with Chinese equipment. Some of them often reported oil gun failures, high oil consumption, ceramic bonds and coal pipes failures and erosion. Indian authorities have already required Chinese manufacturers to comply with the latest norms to improve the higher heat rate problem.
Concerns over another China Export Tax Refund Boost
China Ministry of Finance and State Administration for Taxation announced that as of June 1, 2009 China raised the export tax rebates by as much as 17 per cent. U.S. trade experts said that this move contradicted China’s promise in G20 Summit and would spark protectionism among trade partner countries.
According to Voice of America (VOA), it was the seventh rise of export tax rebates in China since last August; this time for more than 2,600 items. Currently China's comprehensive export tax rebates increased to 13.5 per cent. Claude Barfield, trade scholar with American Enterprise Institute, said that this was a trade distortion and an implicit subsidy.

Behind Tengzhong's plan to aquire Hummer

Hummer vehicles are offered for sale at Woodfield Hummer,
 a Hummer and Chevrolet dealership, in Schaumburg, Illinois.

Sichuan Tengzhong Heavy Industry Machinery, a Chinese company, is to acquire Hummer from General Motor (GM), which has caused concerns among analysts. Some analysts said that this “Tengzhong-Hummer Deal” was probably a trick to move enormous funds overseas considering Tengzhong’s current funds, technology, operation and management.

On June 2 GM confirmed it had come to a preliminary agreement with Sichuan Tengzhong Heavy Industry Machinery over its Hummer sale. Jim Taylor, Hummer’s CEO, said in an interview with the Wall Street Journal, “Tengzhong plans to leave the bulk of the Hummer operation in the U.S. but has committed significant investment to fund the brand's future and expand its international presence.”

GM had expected Hummer to be sold in the sub-$500 million range in 2008. Frederick Henderson, GM’s CEO told Columbia Broadcasting System (CBS) that the buyer was capable of closing the deal and this deal would preserve 3,000 U.S. jobs for factories and distributors.

Big financing gap

Tengzhong’s sales revenue for 2008 is about CNY 1.57 billion with paid tax of only CNY 20 million. It is estimated that Tengzhong has to pay $500 million to GM for this deal; secondly, it has to keep 3,000 U.S. jobs and calculated at the lowest wage - $70 to 80 per hour per autoworker – the overall wages for a year will reach over $400 million. Tengzhong has also to carry at least $200 million for its technical research and development and integrated operation. Besides, Tengzhong will also bear most of Hummer’s liability in general acquisition cases. GM has $172.81 billion in debt currently and the allocated Hummer debt wouldn’t be low either, even if the specific amount is unknown.

How to make up such a big financing gap? The most common ways are raising funds from bank loans and investors. Bank loans usually depend on the pledge of fixed assets and the strict assessment of the output value of an enterprise. A CNY 1.57 billion enterprise can hardly get higher loans than its value.

As for recruiting investors, Hummer sales fell rapidly in the recent two years in both U.S. and global markets. Moreover, this year Hummer has had a sharper slide: it only sold 5,113 vehicles from January to May this year, down 63.7 per cent from the same period in 2008 and is the biggest sales decline among nine brands in GM, therefore, its loss is also the biggest. Investors cannot help asking: is the high fuel-consumption and high emission Hummer still a worthy vehicle in today’s world where environment protection energy saving prevails? Secondly, can Tengzhong successfully complete industry chain integration after buying Hummer in an enterprise that has never before been involved in automobile manufacture? Thirdly, can this enterprise cope with the upcoming complicated labor-capital issues and enormous operation costs after acquisition? Facing such an acquisition in an economic downturn, most real investors will hesitate. Hence, common fund-raising methods will never work.

Measure to transfer enormous amounts of funds overseas?

Some analysts boldly pointed out that this “Tengzhong-Hummer Deal” is a deceptive trick to move enormous funds overseas. In general, this poor value deal is unlikely to succeed without a secret backup considering $500 million acquisition costs and almost $600 million  operation cost, plus unknown debts.

Overseas investment is a classical way to transfer enormous amounts of funds. According to their agreement, the Hummer production line is still kept in the U.S., which can facilitate the funds transfer by e.g. taking kickbacks and sharing and sending the spoils overseas after over-invoicing equipment and raw materials to foreign suppliers by high proportional commission and discount; or under-invoicing product prices so as to get price differences deposited into overseas bank accounts. If more daring, they can open a personal bank account overseas. Thus, the overseas branch of a Chinese private enterprise will become a professional money laundering center.

21st Century Business Herald was quoted as saying, “A gatekeeper of a company next to Tengzhong’s factory revealed that local people tended to think top managers of Tengzhong are very mysterious, ‘There are always cars bearing special car license plates coming to the factory about once a month.’ It seems there are many unknown secrets behind this mysterious enterprise.

Troubling contradictions in China's economic data

Large number of export businesses closed along China's coast;
 resulting in 23 million jobless migrant workers. (Getty Images)

Economic data recently released by China showed signs of an economy that may be recovering. However, the latest macroeconomic data released by China's National Bureau of Statistics and third parties reflect three great contradictions which are confusing, according to market analysts.

1.    Industrial added value up; electricity consumption down.

Electricity consumption has always been a leading economic indicator. In recent years, industrial added value grew basically in step with electricity consumption. From 1999 to 2007, their deviation margin was only 1 per cent. Since the beginning of 2009, however, industrial added value growth and electricity consumption seem to be quite contrary. Electricity consumption fell off sharply for months from the same period last year, while the industrial added value kept going up. For the month of February 2009, the industrial added value grew by as much as 11 per cent; in March this indicator increased more slowly, but still remained up by 8.3 per cent compared to March last year.

China's explanation for this apparent contradiction is that economic growth depended more on lower energy consumption industries such as light industry and various service industries. Accordingly, economic growth performance remained relatively strong compared with the low growth rate of electricity consumption.

But, market analysts refuse to accept this reasoning. In an interview with National Business Daily, a Chinese media (NBD), Lu Zhengwei, Chief Economist for Industrial Bank, said that economic growth still depends on heavy industry. According to his estimation, industrial contribution to China's GDP growth was approximately 50 per cent, while heavy industry contributed as much as 70 per cent to industrial growth. The opinion that economic growth rate was improved only by light industry does not make sense.

2.    Import and export remain sluggish; industry and consumption keep growing

Both the import and price of raw materials went down during the first quarter of this year. The import and price of crude oil and steel with a high external dependence both slipped to a certain degree. The import of crude oil was down 10.2 per cent; while its price was down 58.6 per cent from the same period last year. In the meantime, industry added value increased by 5.1 per cent; while in March it was up 8.3 per cent. It is believed, not considering the price factor, a data departure phenomenon between the raw material import and industrial added value occurred.

Additionally, China's Customs data showed that China's cumulative exports during the first quarter were down by 19.7 per cent from the same period last year; while data from the National Bureau of Statistics showed total volume of retail sales was up 15 per cent from the same period last year. Since the second half of last year, many foreign trade businesses along the coast closed down, which increased the jobless rate. The decline in income affects, to a large extent, people's consumption ability. So, where did the 15 per cent growth rate of total volume of retail sales come from?

3.    Different Purchasing Managers' Index (PMI) predictions

PMIs released by Credit Lyonnais Securities (CLS) and China Federation of Logistics & Purchasing (CFLP) always cause general concerns in the market. A PMI reading of 50 or higher indicates that the manufacturing industry is expanding, while below 50 indicates that it is generally declining.

Before March this year, both indexes were below 50 and had a similar tendency. In March, however, both predictions showed an "essential difference." China's official PMI increased considerably to 52.4, while CLS's prediction maintained at 44.8. Since April, both indexes showed a similar tendency again; though the difference was considerably narrowed. CLS's PMI rose to 50.1, entering expansion rate; while China's official PMI kept increasing to 53.5.

But, Lu Zhengwei cast doubt over CLS's prediction that showed a change from decline to expansion within one month. He said, "the change of the survey object group deserves our attention. Maybe some enterprises they surveyed in March went bankrupt in April. After natural selection in the market, the enterprises left as the survey objects certainly will make the average value better." However, he also stated, "the puzzle can be clarified only if relative agencies could publish their detailed survey rules."

Liu Yuanchun, Vice President of the School of Economics at Renmin University of China (SERUC) said, "Similar to the industrial added value, China's official PMI reflects more operation status of large and medium-sized enterprises; especially those capable of contracting governmental large-scale projects. Mid-sized and small enterprises, especially small ones that have been hardest hit by the impact of economic downturn, may not be included in their statistics."

Shortcomings in China's stimulus loan policy

As the Chinese government's 4 trillion CNY (USD $580 billion) stimulus program began, new loans extended by banks in China surged to 4.58 trillion CNY (USD $670 billion) during the first quarter of this year, or to 244.36 per cent, from the same period last year. However, a recent audit report from China National Audit Office (CNAO) for the stimulus program revealed that bill irregularities were found in some enterprises, which exaggerated the scale of banking deposits and lending.

Falsified contract discounted; while bank funding not put into real economy.

According to the Wall Street Journal, CNAO reported on May 18th that some enterprises falsified contracts and invoices for note discount due to a lack of oversight by local banks. This enabled some of the funds to be reinvested into bank deposits to profit from interest-rate differentials instead of going through real economy. The report didn’t reveal the amount of irregular funds, but stated that it caused a false increase in the deposit and lending scale, and an increase in bank systematic risk.

Feng Wei, an analyst with Beijing Guohai Securities, said to Asian Times, "Medium- and long-term loans accounted for 41 per cent of new lending in the first quarter, while bill financing accounted for about 33 per cent." He further noted, "The high proportion of bill financing was a cause for concern, as part of the new loans involved were turned into bank deposits, stock market funds or property funds, instead of supporting the real economy." According to many investors, the sharp rise in the Shanghai Composite Index could be, to some extent, ascribed to lending funds flowing into the stock market.

The increase in China's economy in the first quarter also confirmed that lending funds was not completely put into real economy. A researcher of the Chinese Academy of Social Sciences said that if all the 4.58 trillion CNY of first-quarter new loans had been spent, China’s economy should have been close to overheating already, but in fact, China's economy had only risen by 6.1 per cent, lower than 6.4 per cent for last quarter.

New loan policy made China's domestic demand even lower

"Policy makers adopted a response to this that in retrospect undermined the growth of consumption", wrote Michael Pettis, senior associate at the Carnegie Endowment for International Peace, in an article for the Wall Street Journal.

 

Since the 1990s, Chinese banks have accumulated many nonperforming loans. Pettis wrote, "Beginning in the late 1990s and continuing for much of the past decade, bank regulators repaired bank balance sheets in part by using government resources to recapitalize the banks and in part by setting deposit rates much lower than lending rates. The spread between the two was kept wider than the market would otherwise have dictated to ensure high profits for the banks."

 

Accordingly, Pettis pointed out that consumption was affected in two ways, "By raising and transferring huge amounts of taxpayer resources to pay for expected losses, of course, the regulators captured a significant portion of Chinese income that could have gone to consumption. More significant may have been policies aimed at keeping corporate borrowing rates low to slow the growth rate of nonperforming loans, and deposit rates even lower to ensure bank profitability. In effect Chinese savers were forced into accepting brutally low returns on their savings to help recapitalize the banks via profits reaped on these wide spreads."

 

Under the current stimulus policy, he said, "like those aimed at engineering massive loans to capital-intensive manufacturing at very low interest rates", some policies "forced rapid growth in domestic production. This aggravated the overcapacity problem that only domestic consumption can fix." However, the current loan policy constrains consumption growth.

Finally Pettis concluded, "...anything that limits future growth in Chinese consumption will necessarily limit Chinese economic growth. The explosion in new lending may do just that. In exchange for a temporary bounce, by encouraging a potential new round of massive capital misallocation China may have locked itself into many years of sub-par economic growth."

China loses position as 'world's factory'

China was once dubbed the "world's factory"; however, the latest research shows that Mexico is the cheapest manufacturing destination, while China fell to third place following India.
Lower manufacturing cost in Mexico and India
Alix Partners, a global firm of senior business and consulting professionals, investigated the cost of manufacturing in China, India, Brazil and Mexico by comparing exchange rates, labor, shipping and raw material costs. Their report showed that in the past 6 months, Mexico beat China as the lowest-cost manufacturer due to a wide range of cost increases in China. A high level manager at Alix Partners was quoted as saying that gone are the days when companies could see cost savings of 30 per cent or more by making 'no-brainer' manufacturing-footprint and outsourcing decisions, to China in particular. 
India Economic Times said, "China has lost its position as the world's lowest-cost components manufacturer to India and Mexico," which was a "blow for the Asian giant as it fights the financial crisis." It predicted that "China's costs would improve in the second half of 2009, but it probably will not improve enough for China to overtake Mexico and India this year.”
India more popular
India was long considered good only for services, but since it has beaten China to become the second cheapest manufacturing destination after Mexico; it is now more popular with developers.
According to Deutsche Welle, a German company established two same scale subsidiary companies in Pune, India and Guangdong, China at the same time producing welding torches. Seven years later the responsible person of this program got a surprising result after comparing their performances: In India, not only the manufacturing cost is lower, but the quality is also better. He said, "The production has been increased to twice in India as compared with in China and products have reached very high quality standard. 90 per cent of the products made in India can enter international markets, while 90 per cent of the Chinese made products can only be sold in China."
A Hamburg entrepreneur also has experience of production in both India and China. He concluded, "80 per cent of the companies invested in India is satisfied, while in China at most only 20 per cent."
Poor quality of Chinese-made products is troubling
The low quality of Chinese products has always been a hot topic. Earlier this year US construction companies and consumers initiated a formal proceeding to investigate wallboards imported from China, which turned out to be toxic, posing potential serious health threats to homeowners. Recently, a congressional hearing into Chinese drywall took place. The EPA tested Chinese-made wallboard and discovered sulfur, strontium and two organic compounds associated with acrylic paint. Sulfur and the above mentioned two organic compounds were not found in American-made drywalls and the strontium is only 1/10 the concentration of that in their Chinese-made counterparts.
The U.S. Consumer Product Safety Commission ("CPSC") said that they have already received complaints of similar problems from residents in Washington, D.C. and 10 other states including Alabama, Mississippi, Louisiana, Virginia, Arizona and Ohio; while Florida far exceeded other states in number of complaints.
Similarly, the European Union said in April that almost half of all dangerous products it identified came from China in 2008. The EU Rapid Alert System for Non-Food Dangerous Products ("RAPEX") showed that of 1,866 dangerous products which were recorded in 2008, 59% of them were made in China.
With manufacturing becoming increasingly competitive, the importance of quality control of consumer products is becoming more apparent and timely. If Chinese made products are to compete in today’s marketplace, they will not only have to lower their prices, but they will have to ensure that their quality is excellent. This means that Chinese-made products still have a long way to go.

Chinese economy is facing an extremely dangerous situation

2nd Nov. 2008
Caoan Jushi, the son of a high-ranking cadre -- and currently the vice chairman of a US-based investment banking group, often gives analysis and posts articles on the web. His articles are reportedly held in high regard by party heavyweights.
5 or 6 years ago, Caoan made a prediction that the Chinese economy will face collapse after the 2008 Olympics.
Recently, Caoan, in a speech at an economic Forum in Flushing, New York, indicated that despite the boasting by the Chinese communist regime, the economy of China is in an extremely dangerous situation.
Looking at the statistics of two major area, the share market and the housing price, China has the highest percentage decline. That means the impact of this financial crisis on China is huge. The sharemarket in American dropped less than 40%, but it dropped  nearly 80% in China.
Even in Hong Kong, it declined by up to 75%. The housing market in China declined over 40%, compared to 17% in America.
Caoan says that America and China face different types of economic crisis. Americans face the financial and banking crisis, that spreads to the surface of financial transactions, a fictitious financial bubble, a bubble crisis. Its impact on the real economy is not so big. But certainly, this impact may slowly expand.
But in China, it does not have a big impact on finance, but impacts heavly on the solid economic growth. Why do China, and many Asian countries that depend on exports to earn foreign currency, store most their money in American dollars which relies on derived exchange to keep it’s value with due terms.
The damage to China’s economy is that almost 10 years of exporting profits have disappeared. The Chinese government admits that there has been about one thousand billion Yuan lost, but let’s just check on the rise in the value of US dollars to Chinese Yuan, a 20% increase in just one year, that has cost China already 2 thousand billion Yuan. That is to say, China has lost 3 thousand billion Yuan, and 10 years of profit through exports!
The hight tide of factory closures in China has started and will last through the first half of 2009.More than half of the toy factories in Dongguan have closed. and also the shoe making industry has been hard hit, etc.
You have already seen the enormous increase in unemployment, and it will spread into every corner of China, and to the whole world gradually.
The Chinese government has announced reduced tax, this is only just the start of the crisis.