Monday, China’s $586 billion dollar stimulus plan appears to have positively reverberated around the world’s stock markets. China’s own indicies were up more than 7 percent, while major indexes in Asia were up 2 to 5 percent on Monday. Even Europe got in on the fun, with its major indexes up 1 to 2 percent. Is the world going Keynesian again, returning to 70s era deficit spending? Will a huge financial spending package in China be enough to mollify stock markets, ending their bear runs?

I am not normally one to attribute rhyme or reason to the movements of stock market indexes. In most cases, only a fool would say how a market is going to move on any given day. Yet today, with the news from China’s central government that it would encourage its domestic market to invest and consume more, it appears to have moved markets in a straight-forward correlation. Certainly, Chinese investors have come to expect the government to step in to prop up stock markets. Last week, it was a rumored $50 billion ‘buffer fund’ that prompted China investors to rally.

US investors are not so easy to impress. The Chinese spending package was not enough to dent the malaise over the US markets, which today were hit by the new of the bankruptcy filing of a major electronics retailer, Circuit City, and layoffs at the US subsidiary of DHL. Finally, the spectre of a slew of possibly negative economic data to be released later this week, including the trade balance, may be prompting caution.

But, back to China, the relatively huge gains in China and other Asian markets indicates, to me at least, that China’s economic news does have the power to help stimulate regional stock markets. But will the package, as China’s leaders claimed, actually help stabilize the world economy? Put another way, can China’s economy save the world’s?

To elaborate on that point, one must not imagine that China will quickly start spending its half trillion dollars to ramp up imports, thereby helping its trading partners. The main effects of this package will be to further push China’s economy toward domestically-fueled expansion via consumption and investment.  It is China’s biggest package ever, the equivalent a $2 trillion package for the US economy, but it will do little to help the world economy, other than encouraging a stable China.

China can afford the package without running a huge deficit, but is there any other cost? Inflation, possibly. One thing is clear, China is most definately now a Keynesian. I hope it can avoid the fate of Japan of the 90s, which tried, and is still trying, to spend its way out of the economic doldrums. Nobody wants to see another lost decade.

The first trading day after the Asia-wide three-day holiday, and following the weekend announcements of Lehman Brothers Chapter 11 filing and the buyout of Merrill Lynch, China’s stock markets dropped in tandem with Asian and world markets.

China Supertrends has been following the financial implications of the sub-prime crisis for a while now and will comment on this latest development and the state of China’s stock markets in a separate post. Today, Tuesday, September 16, was yet another blood-bath in the markets, but at a time like this it is worth remembering that China’s underlying economic fundamentals remain very strong.

In fact, China just came off yet another strong month of growth. If this is true, what causes the apparent contradiction of one of the world’s best performing economies having one of the worst-performing stock markets?

In brief answer to this complex question, let’s just say that the theory of decoupling - the idea that China and other developing countries are mature enough to continue to develop on their own during an economic decline in the US and elsewhere - is increasingly discredited.  We wrote as much in Supertrends: We are living in an inter-connected world, and nothing, not even neo-Mercantilist policies, a protected currency, nor the world’s largest foreign reserves, can resist the forces that are sweeping our world.  As John Donne famously said, no man is an island. This financial crisis calls to all governments to act.

China, with its strong economic performance in August and year-to-date, may appear to be in the eye of the storm, an island of calm and prosperity. Last week was the Mid-Autumn Festival, and the economists at China’s National Bureau of Statistics were producing new data faster than mooncakes at Wang Jia Sha. Virtually everything seems according to plan.

Starting with the drivers of the economy, consumption continued to show signs of strength, with retail sales maintaining a 23.2 percent pace of growth in August, only slightly lower than July’s 23.3 percent, the fastest rate since 1996, according to the Shanghai Daily.

The level of retail sales growth is far above the most recent inflation levels, meaning retail sales growth is not just about price increases, there is real growth there.  In fact, CPI - the consumer price index, or basic inflation - decreased to 4.9 percent in August, continuing the downward trend, but worrisome PPI - the prices producers are paying for raw materials and commodities - continued to climb, to 10.1 percent in August. PPI increases will, at some point, either result in decreased margins and profits as companies absorb the increases, or get passed on to consumers as price increases, so China is not out of inflationary woods yet.

Many were regarding the fight on inflation to be one of China’s core economic policies of 2008, but in a surprise move today the People’s Bank of China decided to cut interest rates by about a quarter percent, down from 7.47 percent to 7.2 percent and, in perhaps the most surprising move of all, cut the reserve ratio by a full one percent after having just increased it by one percent in June.  Now that the Olympics are over, micromanagement of the economy seems back in style.

But the message, that the economy is ready for a rate cut and wants to increase money supply, could be evidence that the PBOC overshot the mark and caused money supply to shrink too quickly, contributing to some of the summer’s abysmal stock and real estate performance.  Growth in M2, the money supply, decreased to 16 percent in August, down from 17.4 percent in June.  It is important to point out here that we are still talking about an increase of 16 percent, just that the rate of speed it was growing simply slowed down a little.

Is the PBOC acting wisely or foolishly? Time will tell if they are cutting too soon, a knee-jerk reaction to the latest sub-prime casualties, trying to prop up the falling stock and property markets, or if they are presciently avoiding a much harder crash in the wake of Fannie/Freddie/Lehman fallout and other factors yet to come.

While some of this data could be construed as negative, China had a lot of other positive economic results in August. For example, the trade surplus is up by 25.7 percent year-to-date, compared with Jan - Aug 2007 figures.

In August, with industrial output growth the lowest in 18 months, a mere 12.8 percent increase, exports decreased to 21.1 percent from 26.9 percent in July. Imports were down more dramatically, from 33.7 to 23.1 percent, mostly because of commodity import price decreases  (i.e. oil), so the trade surplus actually still got bigger. 

Though slowing its rate of increase slightly, clearly China’s export prowess is not affected significantly by the world-wide financial crises, and despite the 2008 increase in  the strength of the RMB exporters seem to have adapted. The sky, it woud seem, is not falling, though its perhaps a paler shade of grey. Ecnomists, analysts, and the Chinese media make a lot of dire proclamations about how the Chinese economy is in decline but this is better thought of as healthier, sustainable growth.

I could go on. FDI and other investments - still strong. Foreign reserve size- still troubling, but thanks to the Fannie Mae / Freddie Mac bailout, the 20 percent of reserves held in US mortgage debt appears safe.

So the question originally posed, why is there a contradiction? China’s strong economy (with all the usual provisos and assumptions about the data, of course) on the one hand, and its weak stock and property markets on the other. What gives?

Is this a sign that global markets cannot decouple and are doomed to falter together, or is it a sign that somebody needs to act more decisively?  Just as China became a stabilizing force in the Asian Financial Crisis of 1997, is there are way it could use its economic and financial strength to do so again?

No country is an island in our globalized world.  Everybody has a stake.  With the alarm bells sounding, can China passively wait for the U.S. to get through its bailouts, and hope that the world financial system remains intact?  Or does this bell ring for another?  Whom does the bell toll for?  China, it tolls for thee.

In Supertrends, we wrote about how increasingly-younger working professionals are coming to China, sometimes right after graduation from an MBA program or even undergraduate school. This is a certain trend. Shanghai can even be called the new New York for its growing fashion, club, restaurant, and shopping scenes. And, in the city’s business sector, to paraphrase the immortal Frank Sinatra, if you can make it there, you can make it anywhere.  But are halfpats the new expats?

Halfpats are not an official job classification, just a collective term for people that go to another country to work on their own initiative, rather than being sent by their firms. They come as tourists or students, then stay as workers, sometimes for years. On the other hand, the classic expatriate, in China and elsewhere, is typically an older executive at the managerial level dispatched on a limited-term assignment from the headquarters to an office abroad.

Expats play an important role in bringing experience, trust, and corporate culture to a foreign office. For this, they are often handsomely rewarded with luxurious (compared to local standards) rent and food allowances, tax-differential subsidies, even hardship pay and medical evacuation insurance. A new article by Alan Paul in the Wall Street Journal ponders whether the traditional expat is the Neanderthal to the halfpat’s Homo sapien:

…these old school mainline expats may be endangered. There is another, growing group of expats in Beijing who are younger, more willing to move around and less expensive to employ.

All true.  But I disagree with the idea of halfpats significantly endangering the Neander.. sorry, expats.  Unlike their halfpat descendants, older expats have experience that callow youth simply cannot make up. Furthermore, the very thing that makes halfpats attractive - local presence, Mandarin-speaking, upwardly mobile skills - makes them into flight risks.  They have choices about where to work in China, and may not have a long-term commitment to the foreign firm.

A multinational company in China would be no more likely to hire a halfpat instead of an expat than it would to hire an inexperienced Chinese manager. Every survey I have seen still says there is a shortage of management talent in China, whether foreign or local. The key of course, is management talent.  A halfpat may be extremely competent but, for company politics if for no other reason, nobody is handing them the keys to a multimillion dollar China operation.  So the premise that Paul puts forward is - and I think he must get this, too - partly flawed.  Expats and halfpats are apples and oranges.

Full disclosure, I am a halfpat based in Shanghai.  And, like all halfpats, I sometimes lament the fact I am not an expat.  It is true, I have no luxury villa, no car with driver, nor tuition subsidy to send my kids to school.  I don’t even have kids!  But, like many other people coming to China without a work sponsorship, I gave up comfortable and higher-compensated jobs in other countries for the chance to be here. It was a chance worth taking. And, like that other Sinatra song, “…regrets, I’ve had a few, but then again too few to mention.”

Contrary to the implied conclusion of Paul’s article, that halfpats are going to be replacing expats, I believe that the demand for expats is as strong as ever, and halfpats are a mutually exclusive quantity which may also be increasing, for that matter.

Many foreign firms are still expanding in (or even just entering) the China market, requiring foreign management staff. A recent announcement showed that companies choosing Shanghai as their regional headquarters are still on the increase, now numbering 206, up from just 41 in 2003. While the current HR practice in China is to try to follow a local or local-plus (i.e. the aforementioned halfpats, such as haigui returnee Chinese, or foreigners already living in China) hiring policy, there are not yet enough qualified halfpat candidates available for top organizational positions.

We may also study the preferred habitats of expats to guesstimate their numbers. For example, expensive serviced apartments can be an indicator of expat populations. To make a generalization, halfpats get much lower salaries and little or no housing allowance, so few can afford the US$1500 - $15,000 monthly rents on a serviced apartment or villa in Shanghai. We can therefore take growing supply of luxury residences (as long as they are filled) to mean that the expat market size is increasing. Singapore’s Frasers Property, previously featured in our article on the redevelopment of Shanghai’s Wujiang Road, plans to open 20 new serviced apartment buildings in China by 2010, half of its global increase during that period.

Paul’s WSJ article also points to a barrier for new or returning halfpats:

Longer-term visas have become harder to obtain in China. Many of the visa brokers often employed by halfpats have been shut down and there are rampant stories about expats without full-time employment having to leave China, at least for a while.

But then he continues with the common expectation that visa restrictions will be lifted at the end of September or October after the Paralympics are over, once again swelling the ranks of halfpats. I’m personally not so sure. On the ground in Shanghai, my impression is that during this period of visa tummult, China-based businesses quickly adapted: For example, English schools put their best staff on permanent work visas, and other companies that depended on unlicensed foreign workers made the switch to locals.  There is only unofficial rumor to go on in regard to the government policy after September: While longer business visas are likely to return, the requirements may still be strict.  Young halfpats, however, are nothing if not flexible and creative.

So, while China still remains an extremely attractive place to work in the minds of many young foreign graduates, the job market for those workers is tight, and I don’t expect a big influx of halfpats to displace more-experienced expats anytime soon.

Attention big company managers: Rest easy on your imported beds and high thread count sheets this night, your jobs are not in danger from Mandarin-speaking Young Turks just yet.

Related Information:

Rich Brubaker at All Roads Lead to China has been following the halfpat story for some time, I recommend you check out a few of his posts on the topic here and here.

Last week in a major environmentally-themed speech in Washington, Al Gore called for complete elimination of carbon-based energy generation in the US within ten years. It was a bold statement, equivalent to Kennedy’s Man on the Moon address, and then some: Achieving his goal will not only require the full participation of the US government, but also that of every consumer in the United States, a far more ambitious effort than the manned moon landing. It’s an inspiring speech that I highly recommend:

Predictably some feel this is a long-shot, if not an impossibility. Yet perhaps that is the point: By aiming for the stars, at least we may reach the moon.

And I’ll go one step further to say that, if the US is to have any chance of success, China’s participation will be needed as well, to provide many of the products needed - the solar water heaters, the wind turbines, the batteries to store power in electric cars, among other things.

A growing number of Chinese firms listed domestically and abroad are positioned to profit from China’s own environmental woes by taking them as the newest business opportunities. We make this point in Supertrends of Future China (scheduled for release in about three weeks, just before the Olympics), where we devoted a full chapter to what we call the Greening Supertrend.

In brief, Greening is the intersection of China’s national environmental policy with the domestic and global trends towards clean energy and pollution reduction. A new generation of entrepreneurs in China is embracing this modern Green Revolution. By taking advantage of the domestic market size and manufacturing power, they will put China at the forefront of environmental technologies, first domestically and then, if present trends continue and Gore’s vision becomes a reality, globally.

Red Star Greening Over China

The central government has put green development as a prime objective of the 11^th Five Year Plan for China’s economy. The target is further outlined in the Five Year Plan for Environmental Protection. Many critics rightly point out that national policy is often ignored at the local levels, but last year’s promotion of the State Environmental Protection Agency (SEPA) to full ministry status is a sign of how seriously the central government is taking the issue.

Recently, the government has made some regulatory steps which are actually putting China in the lead of global environmental policy: For example, the plastic bag ban I discussed last week was announced, implemented, and accepted by the national population in just six months.

Replacing those bags with environmentally-sound reusable bags is just one of the new opportunities that China’s entrepreneurs have already jumped into. On a much larger scale, China’s wind and solar energy industries are taking center-stage.

The World Wind Energy Association currently ranks China as number five in a list of global wind users. China has approximately six thousand megawatts of generating capacity, about a quarter of world-leader Germany’s capacity, and not even one percent of China’s massive energy needs. Shi Pengfei, the vice-president of the Chinese Wind Energy Association, said that the National Development and Reform Commission had increased China’s target of wind-energy generation to 100,000 megawatts by 2020, five times as much as Germany’s present capacity.

Xinjiang Goldwind Science and Technology Company (SZ 02202), China’s leading wind turbine producer, went public on the Shenzhen stock exchange in 2007. Although large scale wind farms face many obstacles in China, such as an electric grid that is oriented towards cheaper coal-powered energy generation, on the strength of its domestic market growth, some analysts (additional link) believe Goldwind and other Chinese companies can rise in the next three years to challenge the world’s biggest turbine manufacturers including GE.

By 2020 the central government has pledged meeting 15 percent of China’s energy needs through renewable energy sources, including wind, biofuels, water, and solar. By 2050, the ratio is to be 30 percent including nuclear power. This means huge investments are required, but China is already a world leader in the use of at least one clean energy technology: Solar.

Star light, star bright

In many of China’s second, third or fourth tier cities, rooftops are covered by solar water heaters. The cheap, ubiquitous devices use the sun’s rays to heat water so that even rural workers can afford to take a hot shower after a long day’s work. In China, 200 million people have their water heated in this way, according to the NDRC. China has more than 50 percent of both the world’s production and use of solar water heaters, and other forms of solar energy are starting to grow as well.

Suntech Power (NYSE:STP) is the world’s third largest solar cell producer after Q-Cells of Germany and Sharp of Japan. It had US$1.4 billion in revenues in 2007. Revenues are expected to increase quickly as solar cell-generated electricity starts to approach price parity with carbon-based energy sources such as coal and currently high-priced oil.

The government is also active in solar energy policy, mandating that China should increase its current 100 million square meters of solar water heaters to 150 million by 2010, and 300 million by 2020.

With China set to take its place as the world’s largest economy by mid-century, its power needs will also dominate and, if it is not careful, the pollution problem will reach unprecedented levels. Green technologies promise to be among the best industries to be in during this challenging period of growth.  While China’s domestic market alone is a considerable prize for any green company, globally the potential is astronomical.  Gore’s call to action may help considerable to raise a green star over China.

Related Information:

A number of other commentators have written on China’s Green potential as a business opportunity. Here are a couple of articles that I recommend:

China: A Clean-tech gold rush

China’s Coming Environmental Renaissance

China’s Green Leap Forward

China’s Silver Lining

A possible Olympic legacy: A greener China

Sphere: Click here to see related content on other China blogs and news sites

]]> http://www.chinasupertrends.com/al-gore-ten-year-target-china-environmental-opportunity/feed/ http://www.chinasupertrends.com/g8-leaders-in-japan-pledge-to-halve-greenhouse-gases-china-cuts-more-free-plastic-bags/ http://www.chinasupertrends.com/g8-leaders-in-japan-pledge-to-halve-greenhouse-gases-china-cuts-more-free-plastic-bags/#comments Sat, 12 Jul 2008 11:10:51 +0000 Jason Inch http://www.chinasupertrends.com/?p=54

This week in Japan, the G8 leaders pledged to cut greenhouse gas emissions by 50 percent before 2050. In the same week, China announced it would immediately cut more free plastic bags. What is the main point of difference between these countries’ environmental policies? It could be summarized thus: More talk versus real action.

The G8’s move to cut greenhouse gases (primarily CO2) by 50% was immediately decried by some environmentalists and tagged as insufficient by the group of developing countries, including China, on the sidelines of the summit.

For example, the pledge didn’t even make clear whether the cut was to be from 1990 levels (as is the general practice of the UN and the Kyoto Protocol when measuring emissions reductions) or present levels, which would significantly decrease the impact of the pledge. The US in particular has increased carbon emissions in the subsequent 18 years by 20%. From a BBC report:

…the US has refused to set any interim targets for cutting emissions - and environmentalists have criticised the progress at talks as “pathetic”.

Five of the world’s biggest emerging economies said the G8 should increase its targets to more than 80% by 2050.

China, India, Mexico, Brazil and South Africa - who will join talks on Wednesday - also urged developed countries to commit to an interim target of a 25-40% cut below 1990 levels by 2020.

Meanwhile, in China, the Ministry of Commerce on July 11 announced changes to the plastic bag ban policy. Effective immediately, restaurants, bookstores, and clothing stores will also be required to eliminate free plastic bags, charging customers for each one issued. In fact, this was a clarification of the already-implemented plastic bag ban law, which came into effect on June 1 this year.

Is Red China Becoming Green?

One law eliminating free plastic bags does not a green country make, but I believe that China’s environmental policy is frequently unfairly derided by critics as unenforced. In fact, such a broad generalization is inaccurate: Here in Shanghai, it’s true that not every store has implemented the policy at present, and it seems many of the aforementioned clothing, restaurant and bookstores presumed the law was meant to apply to groceries only, but this loophole has now been closed. In hypermarts, supermarkets, and convenience stores, it is already impossible to get free plastic bags, so I expect the new revision will take effect quickly in restaurants and other venues.

In our new book Supertrends of Future China, we cover the plastic bag ban law as an example of China’s new environmental movement and the central government’s willingness to put its words into action. The G8 really should pay more attention instead of just making more hollow promises.

Related information:

For more details on the plastic-bag ban update, the resourceful China Environmetal Law blog has a post on the matter, describing the hitherto unknown-to-me existence of ‘produce department hooligans.’

One of my frequent reads in the econoblogosphere is Brad Setser’s Follow the Money. In a recent post, Setser covered the topic of a June 13 Wall Street Journal article that posits transportation costs from China would affect trade with the US. This in turn was based on a May 27 analyst report from CIBC World Markets provocatively titled “Will Soaring Transportation Costs Reverse Globalization?” Salon’s How the World Works caught this even earlier back in 2006, and updated the post on June 6. I duly covered the topic myself a week ago in in my June 9 Shanghai Star Business Journal column, reprinted below.

But first, Setser raised an interesting question: Why did the WSJ article focus on transportation costs from China when the RMB appreciation has also been significant in 2008?

I would answer this in two ways from a purely practical approach. (I’m going to focus on the US since it is the largest export market for China.)

• China-based firms usually price in US dollars, not RMB, so for much of the appreciation of the past several months, possibly even for all of 2008, suppliers may be locked into existing contracts and pricing schemes, or under frequent pressure from US customers to keep prices steady. This makes the RMB’s rapid appreciation of the past five months less important.
• Transportation costs, on the other hand, are usually set at the time of shipment by a third party (most orders from China may be quoted ex-Factory or FOB to a China port, but rarely priced ‘all-in’ to a foreign port). Therefore, transportation costs for the buyers have been increasing more quickly in the last few months.

As well, there’s probably an economic argument to be made about elasticity of transporation versus a change in price due to exchange rates, but I’ll leave that one alone for now. Instead, here is my article from the June 9 Business Journal:

______________________

China’s Coming Oil Shock

The recent sudden increases in the global price for oil threaten to choke off China’s export economy, further clouding the outlook for what should have been the country’s Olympic year in the sun. June 6 saw the biggest one day price gain ever, exceeding even the period during the two oil shocks in 1973 and 1979, an increase of more than ten dollars in one day. As prices for crude oil continue to climb, closing at an all-time high of US$138 per barrel June 6, China is now facing rising transportation costs that could derail its economic development.

The recent run-up in oil prices was not the first shock China has dealt with in 2008, but the effects of snowstorms, civil unrest and the Sichuan earthquake, already making 2008 one of the most unpredictable in China’s modern development, may be eclipsed by the consequences of a sustained high oil price on China’s economy.

China is not alone: Since the record oil price spike, foreign leaders have been calling on OPEC to increase production. While many analysts believe that the high price is a distortion, possibly due to over-speculation, even a short-term stay at these record prices will cause economic pain for both developed and developing countries. The leaders’ calls echo President Bush who, in March, criticized OPEC for not answering his call to raise output.

At that time, OPEC appeared to be rebuffing Bush for mismanagement of the US economy and US dollar. At present, other global leaders are starting to express worry. Seeking to draw attention to the issue before the upcoming July G8 meeting in Japan, Australia’s Prime Minister Kevin Rudd recently said “We need a clear statement from the world’s major economies to the OPEC producers to lift their production quota now.”

China is caught between a rock and a hard place. It is an export economy relying on its weak currency to fuel exports, while its fuel is made more expensive because of the weak currency. Some analysts say the oil price is set to rise further. Morgan Stanley predicted US$150 oil by July 4, while in May Goldman Sachs forecast US$200 oil within two years before a cutback in demand would cause a return to rational pricing. If this happens, China will be hit with a double body-blow.

First, while China’s currency exchange rate has been set against an unspecified basket of currencies since 2005, when the US dollar peg at 8.28 yuan per dollar was ended, it is still weighted heavily in dollar terms, meaning that as the US dollar depreciates against other major currencies, so does the yuan albeit at a slower pace. With prices for crude set in US dollars, the cost China is paying per barrel steadily increases. This could add further pressure to revalue the yuan at a faster pace.

Second, and this is the real kicker for an export-driven economy such as China’s, transportation costs are going off the charts. Specifically, ocean freight, all those millions of containers being sent from China to the US and Europe, are now significantly more expensive. A May 27 report by CIBC World Markets forecast some major transportation cost increases: If, as Morgan Stanley predicted, oil reaches US$150 per barrel, shipping a container from Shanghai to the eastern US will increase from about US$8,000 today to US$10,000. If the US$200 target from Goldman Sachs is realized, the shipping costs of that same container will rise to US$15,000.

How big of an impact would that have? According to PIERS Global Intelligence Solutions, China shipped the equivalent of 4.65 million 40 foot containers to the US in 2007. This means that, if all those containers were sent to the east coast with oil at US$200 a barrel, the increase from today’s prices in overall shipping costs would top US$32 billion. Suddenly, cheap clothes and knick-knacks for Wal-Mart aren’t so cheap anymore, and the US supply chain would start to shift back to nearby countries such as Mexico.

Of course, China may be expected to produce higher-value exports to negate the effect of transportation costs or to place more emphasis on domestic market consumption rather than on exporting - both of which appear to be happening already - but if the oil prices increase too much too soon, manufacturers could not retool quickly enough. The effect on exporters would be compounded if the high oil price also drives the US further into recession, reducing aggregate demand.

China, the world’s second largest user of oil after the US, can act to alleviate the oil price shock for itself and the global economy by reducing the gasoline subsidy to China’s transportation system as India and Malaysia have recently done. China has some of the cheapest gas in the world among non-petroleum exporting countries, even cheaper than the US currently. This promotes inefficient vehicles and transportation choices. Reducing the subsidy will not only make Chinese industry and transportation more efficient, it will help China meet its own environmental goals and improve quality of life for everyone.

Two months ago I discussed in this post the effects of regulation on the stock markets in China. My theory: After the precedent China’s regulators set in April by offering two investor-friendly policies timed to pump up the markets, China’s investors would now get in the habit of looking to the government for a bailout whenever the markets were in trouble.

At the time, I predicted that the existing market fundamentals affecting China (high inflation, decreasing exports, high oil price etc) would eventually re-register with investors, and we might see another dead cat bounce. Well, the cat is back:

The above chart shows China’s CSI 300 Index, the measure of both the Shanghai and Shenzhen stock exchanges.

Two periods to take note of: First, April 20 to 24, when the two regulatory actions were announced, a clear jump in the markets was evident. Overjoyed would be an apt description of investors when their stamp duty was reduced.

Second, May 12 to 19, the week following the Sichuan earthquake, there was market confusion until May 20. Thereafter indexes began their slide over uncertain earnings growth and worries about the 8.5 percent April inflation figure, announced just before the earthquake, started to sink in.

So, what now?

The China Securities Regulatory Commission faces a dilemma: Does it toss the market a bone, perhaps by offering investors margin trading as some are predicting? Or will it finally let modern investors learn a hard lesson in stock market bubbles? As of June 11, the markets are setting new 2008 lows and volumes are dramatically down as investors start waiting for the bailout.

While I am in favor of China’s use of industrial policy to grow the economy, my admiration doesn’t extend to such shallow tactics as propping up the stock markets. Margin trading, suddenly thurst upon the investing public at such an uncertain ecomomic time, would be an unmitigated disaster in my opinion. China’s development needs to be sustainable, so supporting the pusuit of easy money is not one of the solutions China’s leaders should be considering.

A number of excellent blog postings, for example over at China Herald, have covered the nuts and bolts of China’s telecom restructuring announced in late May, but few have mentioned the ramifications the announcement is having on critics of China’s industrial policy. Such critics, it is fair to say, run the gamut from free-market Friedmanites to political appointees of the Bush administration, who inevitably say China’s telecom market is closed to outsiders and anti-competitive. After this restructuring, it turns out they are still half right.

_________________

With the recent news of a reshuffling of China’s six major telecommunications providers, critics of China’s telecom industry have two less targets to shoot at, namely the de facto monopoly of China Mobile and the slow-pace of telecom industry reform in the post-WTO era. But these critics, including the offices of US and EU Trade Representatives, were firing blanks in the first place: China Mobile was never a true monopoly, and industry reform does happen, it just happens at China’s pace, not at the pace trade negotiators desire, as this implementation of pro-business government policy clearly shows.

On May 24 guidance on the telecommunications sector’s planned restructuring was finally made clear in a joint announcement by China’s Ministry of Industries and Information (MII), the National Development and Reform Commission (NDRC) and the Ministry of Finance: Where there were six operators before, now there will be three - China Mobile, China Telecom, and China Unicom - that will each have an existing fixed-line and a mobile phone business as a result of mergers and divestitures.

Furthermore, at the end of the process, new 3G licenses will be issued for each, on different technology platforms: China Mobile will get the home-grown and untested TD-SCDMA standard, China Telecom will get the stalwart CDMA 2000 system, and China Unicom will get a license for WCDMA technology, which has long been popular in Japan. The market will now decide which is best for China. Critics, however, have been fast to say that China Mobile’s long-dominant position stacks the deck and so it will likely emerge the winner anyway. This is not a foregone conclusion for two reasons.

A short history lesson can help to put this into perspective: Before restructuring, the dominance of a certain telecom provider was undisputed. It had the most subscribers and the largest cross-country network of telecommunications infrastructure, and its revenue and profits exceeded those of all of its smaller competitors combined. At its peak, it had more than one million employees. After deregulation the giant telecom provider would be forced to open its network to smaller competitors and have its competitive powers capped by the regulator, which would mandate rates for it and watch it much more closely than its younger, more nimble, adversaries. Does this sound like China Mobile? No, this was American Telephone & Telegraph, at the end of 1981.

AT&T, once the biggest telephone company in the world, was reduced to a mere shell of its former self following deregulation and the forced divestiture of seven regional operating companies in early 1982. After a few bad strategy decisions, parent AT&T ended up being bought by one of its own spin-off children twelve years later.

So, the first reason the critics are wrong: History shows that the preeminence of an incumbent is by no means assured. The second reason: Asymmetric regulation, whereby China’s regulators intend China Mobile to overcome greater obstacles than the other two, is going to be a burden for China Mobile. For example, it is being saddled with the smallest of the fixed-line operators, China Tietong, and receiving the TD-SCDMA 3G platform license, which is unproven in both its technology and market appeal. This means that China Mobile’s ability to maintain its monopoly is uncertain.

As to the slow pace of change that critics have leveled at China’s telecom deregulation process, it bears reminding that AT&T, the US’s dominant telecommunications provider for more than a century, with its dying breath, clung to its monopoly for more than eight years against a US Department of Justice antitrust suit lodged in 1974. Regional carriers in Canada have been known to drag proposed rate cuts through years of debate and court action to avoid changing their business practices, meaning Canada only started deregulation of its telecommunications industry in April 2007. In that light, the speed of China’s telecom restructuring has not been slow.

In fact, China’s telecom regulators have shown remarkable brevity when it comes to implementing a given proposed change. For example, China significantly reduced rates for all mobile phone users in the last two years, most recently by cutting roaming charges in March by up to 80 percent. China’s telecom industry has some way to go before it will be totally transparent and fully-competitive, but it is far from the unchanging, anti-competitive sector that US and EU trade representatives paint it to be.

One thing the critics get right: It is true that China continues to groom its national champions, much as the economies of Japan, Korea and, to a lesser extent, Malaysia and other Asian economies did in their high-growth periods up to 1997.

Yet while economists regularly point out the folly of governments picking winners versus a Darwinian policy of survival-of-the-fittest free-market selection, so far China has bucked the trend: It now has three formidable national competitors that will all undoubtedly become global companies fighting over the title, “The biggest telephone company in the world.”

In a recent post on China’s Human Flesh Search engine, I discussed how the behavior of Netizens in China can be harnessed for good and ill to solve social problems. Occasionally, the online forums in China become vitriolic (much as they do anywhere) for reasons related to China’s strong sense of cohesiveness (which we describe in Supertrends of Future China as a key driver of China’s major trends).

The following article, reprinted (and updated) from my newspaper column on May 23, details how some Netizens have a new target for their anger: Governments, people, and companies that do not donate enough for earthquake relief. While the outpouring of praise for donating companies is generally strong, the praise is reserved mostly for Chinese companies, while the anger is often directed at foreign-related entities.  While there are exceptions when it comes to foreign individuals, the reaction to foreign companies’ donations is often negative even in the face of a large contributions.

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In the aftermath of the Sichuan earthquake, the generosity and compassion of corporations has been put on display by using donation lists in building lobbies, office memos, online bulletin boards, and newspaper articles.

While corporate donors in many foreign countries, if they are listed at all, might be shown alphabetically, here the common practice is to rank organizations together with the amount of money they give and circulate the rankings for all to see.

As a form of peer pressure, this method seems very effective in China in encouraging contributions. But at the same time, lists of foreign corporate donations have caused controversy on China’s online forums.

In the days following the disaster, the netizen community quickly shifted to discussions about the donations of foreign countries and multinationals because the pre-earthquake controversies such as the Olympic torch relay and Carrefour were still unresolved. A new theme has been that there were insufficient earthquake relief donations by multinationals.

In a comment echoed on numerous online forums, netizen “Botage” wrote on Sina.com’s community page on May 15, “Why do foreign companies give so little? Take McDonald’s, KFC, Nokia… they give even less than Chinese companies, it is terrible.”

Another netizen on Sohu.com, “Zongq,” writes, “China has given these foreign companies and brands such a huge market and profits, but when something like the earthquake happens in China, we actually don’t see even humanitarian aid (from them).”

This has had some unfortunate implications for the multinational companies doing business in China, with some Chinese Netizens calling into question their commitment to Corporate Social Responsibility while Chinese companies are lauded for their generosity.

The wave of criticism about donations started against the US government, for donating only US$500,000 to the Chinese Red Cross when it had offered millions more in aid to Myanmar. (Editor’s note: The US also donated 10 million to the International Red Cross to be earmarked for China. In fact, aid to Myanmar was pledged but either not accepted or not delivered because of prevailing political conditions, whereas aid flowed to China much more easily: More here.)

And when it comes to foreign money, even China’s own are not exempt from online criticism: Basketball superstar Yao Ming was pilloried in the media and online forums for “only” offering half a million yuan until he quadrupled his donation. From there, debate extended to how much Chinese firms were giving and how little foreign firms seemed to be giving. Is this criticism justified based on the facts?

Chinese companies have undoubtedly shown their support for the unfortunate in Sichuan. Seventy-five Chinese-listed companies have contributed more than 563 million yuan, nearly US$81 million, as of May 19, as reported by financial news portal Hexun.net (partial English translation here). There is no precedent to compare the actions of the national firms as a group, but donations by 75 large foreign firms, based on a similar ranking list published on the Chinese Website manage.org.cn, have reached about half the national firm’s figure, 350 million yuan as of May 20. Both groups likely have much more to give as time goes on.

One firm in particular, the State Grid Corporation of China, already contributed 76 million yuan in cash, almost US$11 million, and almost twice that in non-cash aid, to be recognized as China’s largest donor.

This firm also topped the Hurun Report’s 2008 Corporate Social Responsibility Ranking (English version, 2007 only, here) and is a paragon of how Chinese would like national corporate citizens to act. Another large donor is China Mobile which, in addition to a large cash donation of 86 million yuan, has also committed to donating possibly billions of yuan to mobile phone subscribers in the afflicted regions by automatically increasing every phone’s account by 100 yuan if it falls below a 50 yuan threshold. Large Chinese banks and insurance companies have also contributed significantly, such as the Bank of China’s 64 million yuan cash donation. Larger Chinese firms are typically donating at the 10 to 20 million yuan levels. Many foreign firms, contrary to netizen opinion, are well within this range.

For example, KFC has donated 15.8 million yuan, while Nokia donated 10 million yuan plus thousands of free mobile phones. The largest foreign donations to date, 30 million yuan each, come from Samsung and Nike, but GE, Chevron, GSK, Toyota and others all have made donations at the 10 million yuan level or above. These are no small amounts by any standard.

It may therefore be said that foreign company donations in total are not as large as those of Chinese national firms, but should they be?

In the Hurricane Katrina disaster in the US in 2005, US corporations donated more than US$547 million, according to USAToday, while foreign firms contributed very little, most of the donations coming to the State Department via the donor countries directly.

Meanwhile, the small donation by the US government aside, US firms’ donations in China as of May 20 have totaled more than US$25 million, a significant amount by just one country’s corporations.

The time and distance factors should also be considered in evaluating foreign firms’ responses to the earthquake. It takes more time to communicate with head offices abroad, plan an appropriate assistance package, and select the best channels to deliver relief.

Many foreign firms likely elected to wait until the initial confusion after May 12 had settled down: Cisco Systems, initially making a donation of US$250,000, generously increased its commitment to more than US$ 1 million several days later, once the scope of the tragedy became known.

In the rush to be the first and highest on the lists, is it possible some people are losing sight of the real purpose of giving in times of need?

Foreign firms are certainly aware of the benefits of being in the Chinese market and take seriously their responsibilities as good corporate citizens, but they must be allowed the time to make a measured response and not be held to the same standards as companies in the country suffering from the disaster. And the most important point of all: no matter the source of the aid, it is for a common good and I think that nobody can disagree on that.

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Notes:

1 US$ = 7 RMB

The best resource I found for a total list of donations that is semi-regularly updated can be found here.