PRC Economy and Industry: News and Discussions

[Liu]

chinese government announced sevevral days ago that all Chinese could receive pensions from chinese governmetnal administrations after they retired .

it is the first time that rural Chinese had received pension .

according to statistics, arevrage pension of chinese old people is about 1200 Yuans(about 180 USD)/per month.

[svinayak]

http://www.nakedcapitalism.com/2009_07_26_archive.html

Michael Pettis: Falling US Consumption to Lower Chinese Growth to 5-7%
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In a Financial Times comment. Michael Pettis gives a well-reasoned and glum forecast for Chinese growth, namely, that it is unlikely to exceed 5% to 7% over the next few years. The reason he sets forth is that China was able to show growth rates in excess of domestic consumption growth thanks to US exports. But US consumers will be consuming at lower levels for the next few years, As Pettis explains, the implication for China is that its overall growth rate will fall below its domestic consumption growth rate.

Now 5% to 7% growth may not sound shabby at all to American, but things look very different from China. Anything below 8% will be inadequate to absorb expected increases in the workforce. The government's authority has rested upon its ability to deliver rapid enough growth, and that has also helped to paper over tensions between coastal cities, which have seen great gains, and the hinterlands, where progress has been much slower.

Marc Faber has said that the economic reports coming out of China are greatly exaggerated and he pegs growth now at a mere 2%.

From the Financial Times:

For 20 years, and especially in the past decade, rapidly rising debt has allowed America’s consumption growth to exceed economic growth, with a concomitant rise in the country’s trade deficit. One consequence of this too-rapid growth in American consumption has been that the non-US global economy was able to grow faster than non-US global consumption. This was especially true for Asia, the main beneficiary of the US consumption boom, and for China in particular.

While Chinese consumption was growing at an impressive 9 per cent a year over the past few years, Chinese gross domestic product growth substantially outpaced it, clocking in at 10 per cent to 13 per cent annually. China was able to do this in large part because as it poured resources and cheap financing into manufacturing, and in so doing produced many more goods than Chinese households and businesses were able to consume....

But everything has changed....US debt levels will decline over the next several years......American consumption will grow substantially slower than the US economy, and so the trade deficit will decline. For the rest of the world, even ignoring the possibility of a decline in global investment, a contraction in the US trade deficit will bring with it a period in which economic growth will be less than consumption growth.....

If the Chinese economy was the biggest beneficiary of excess US consumption growth, it is likely also to be the biggest victim of a rising US savings rate. For now, China has been able to avoid the brunt of this reversal. Although Chinese exports have dropped, imports have declined even faster, so that China’s GDP continues to grow faster than its consumption, and China’s savings level, which is the inverse of consumption, continues to rise. But this has come at the expense of an unsustainable squeeze on China’s export competitors.

Eventually, and maybe this is already happening, the decline in the US trade deficit must result in a decline in China’s ability to export the difference between its growth in production and consumption. When this happens, China’s economy will grow more slowly than Chinese consumption, just as the opposite is happening in the US. Put another way, rather than act as the lower constraint for GDP growth, as it has for the past two decades, growth in Chinese consumption will become the upper constraint. At the same time, for the next several years Chinese consumption will necessarily rises as a share of GDP, just as US consumption must decline as a share of US GDP.

If Chinese consumption growth is able to continue at 9 per cent annually, the implications are that China’s GDP growth will fall from the heady 10-13 per cent levels of the past few years to something approaching 6-8 per cent, depending on the speed of the US adjustment and the share of the adjustment absorbed by China’s trade competitors. But there are reasons to doubt the ability of Chinese consumption to grow so quickly.

First, in an environment of much slower Chinese economic growth, it would not be surprising if consumption growth rates also declined. Just as rapidly rising income fed rapidly rising consumption on the way up, a sharp slowdown in income growth should cause consumption growth also to slow. Second, and more importantly, China’s fiscal stimulus consists mainly of a massive expansion in bank lending, which is almost certain to lead to a sharp rise in bad loans. Resolving these, which China will have to do in the next few years, will probably require the same policies used to resolve the banking crisis of the late 1990s, which will inevitably constrain consumption growth.

For now, an extraordinary but inefficient expansion in new bank lending has powered the Chinese economy into growth rates that many thought unlikely even six months ago. But rapidly rising bank lending, especially if misallocated to nearly the same extent as in previous loan surges, cannot be a long-term solution for slowing Chinese growth.

Over the next five years or more Chinese economic growth will necessarily be lower than growth in Chinese consumption. The massive but unsustainable investment in infrastructure and new production facilities that characterises the Chinese fiscal stimulus package will not be able to change this fact. From its dizzying heights during the past two decades, the world needs to prepare itself for a decade during which, if all goes well, China grows at a still respectable but much lower rate of 5-7 per cent. If the current fiscal stimulus package retards China’s adjustment process, as many analysts argue that it does, growth rates may be much lower.

[Singha]

China Executes Airport Chief for Bribes

Associated Press

BEIJING -- The former head of Beijing airport's management company was executed Friday following his conviction on corruption charges, state media reported.

An intermediate court found 60-year-old Li Peiying guilty in February of accepting almost $4 million in bribes and embezzling about $12 million in public funds over the past 14 years, the Xinhua News Agency said.

Mr. Li was executed Friday after the Supreme Court upheld a lower court's rejection of his appeal, Xinhua said. The report did not say when the Supreme Court ruled and it did not describe the method of execution.

China has long-struggled against corruption among high level Communist Party officials, especially in state-owned enterprises in energy, transportation and other key sectors that wield vast power and influence.

In 2007, China executed the director of its food and drug agency for approving fake medicine in exchange for cash. One antibiotic was blamed for causing the deaths of at least 10 people.

The Capital Airports Holding Company of which Li was chairman, operates more than 30 airports in nine Chinese provinces with managing assets of more than 100 billion yuan ($14 billion) and 38,000 employees, according to the company's Web site.

In handing down its sentence in February, the Jinan Intermediate People's Court said there was evidence that Li had solicited the bribes, making the crime more serious. It said the amount of public funds Li stole resulted in "extremely large economic losses" for the state and constituted an "extremely serious crime."

China puts to death more people every year than all other countries combined, with 5,000 executions expected to take place this year, according to the San Francisco-based Dui Hua Foundation, a human rights monitoring group. The Chinese government itself does not provide an annual tally.

[Rahul M]

extremely OT.

apanese covered concrete on the bottom of all rivers in japan and made all rivers "artificial rivers".

Oh OMG...............power of propaganda. And the trust of educated Chinese in such absurd stuff. It remind me of USSR (1987) where it was a "known fact" that Winston Churchill used to eat monkey's brain while poor animal was kept alive under the dining table.

that is an actual dish, at least in japan.
may be in china too according to this wiki report.
http://en.wikipedia.org/wiki/Monkey_bra ... cuisine%29

[Jayram]

Dont know if this was posted earlier but man the headliner could not be more blunt- got this off morningstar website
China’s Growth an Accounting Miracle
Now we are learning how China has achieved its “miracle growth.” The country showed positive GDP growth while its electricity consumption declined in the beginning of 2009 – creative accounting that makes Enron’s accountants appear as dilettantes.

[Chinmayanand]

Credit tightening threatens China's 'giant Ponzi scheme'

China's loan growth plunged in July while exports fell 23pc from a year ago after grinding lower for nine months as consumers in the West tighten their belts further.

The data raise fresh doubts about the strength of global trade and whether the world can rely on China's growth miracle to power recovery.

Separately, the Baltic Dry Index – measuring freight rates for bulk goods – has tipped over, dropping 25pc since late July. The shipping figures buttress reports that China has stopped building up stocks of metals and other commodities after a spate of frantic buying over the early summer.

China's central bank said loan growth fell to $52bn (£31bn) from $248bn a month earlier, although it is too early to tell whether Beijing has begun to rein in credit after the explosion of bank loans in the first half of the year.

The loan figures are being watched closely by analysts and traders in the City. Excess liquidity in China has been a key driver of global markets since the rally began in March.

Beijing is walking a tightrope by trying to offset the collapse in exports – almost 40pc of GDP – with an investment blitz in roads, railways, and industry through state-owned companies.

The real economy cannot absorb the money, so it is leaking into asset speculation. The central bank estimates that 20pc of fresh credit has ended up in equity markets. The Shanghai index is up 80pc this year, though profits have fallen by almost a third. The pattern echoes the final phase of Japan's Nikkei bubble in 1989.

"China is a big fat tail risk for world markets," said Hans Redeker, currency chief at BNP Paribas. "Shanghai equities have reached the same extreme as in late 2007. The country will have to cut credit growth, and when this happens, Shanghai equities and commodities will suffer. That is what could bring this global rally to a halt."

China Construction Bank, the number two lender, is cutting loans by 70pc over the second half of the year. "We noticed that some loans didn't go into the real economy. Housing prices are rising too fast," said the bank's president, Zhang Jianguo.

Andy Xie, a leading consultant, said China's boom was a "giant Ponzi scheme" that was likely to "bring very bad consequences" for the country.

"The stock market is in a final frenzy again. The most ignorant retail investors are being sucked in by rising momentum," he said. Equities are overvalued by 50pc to 100pc.

Mr Xie, who wrote his doctoral thesis on Japan's bubble in the 1980s, said China's ratio of property prices to incomes is seven times higher than in the US. It costs three months' salary per square meter of space – arguably the highest in the world – though tower blocks are sitting empty. Prices are being propped up by state enterprises, abetted by local Communist bosses.

Mr Xie said Chinese booms and busts follow a political rythmn. There is a deeply-rooted belief that the authorities can keep the game going – the "Panda put", China's answer to the "Greenspan Put" – and that the Communist Party will not let the rally fizzle before the 60th anniversary of the revolution on October 1. This belief is self-fulfilling, for a while.

Mr Xie expects China's rally to falter around October, followed by fresh shots of liquidity before the economy falls into a deeper slump by 2012. "Property prices could drop like Japan's in the last two decades, which would destroy the banking system," he said.

Mr Xie said China's asset boom is the flip-side of the weak US dollar. US monetary stimulus is in effect leaking across the Pacific. Bust will follow when the dollar rallies, draining liquidity again. If the Fed tightens abruptly as it did under Paul Volcker in the early 1980s, the denouement could be painful for China.

Beijing deserves praise for trying to switch reliance from exports towards the domestic economy. It has had some success. Retail sales have risen 15pc over the last year. But Professor Michael Pettis from Beijing University said it is proving very hard to induce the Chinese to alter their spending habits. The cultural barriers will take years to overcome.

Instead, the stimulus is feeding more industrial investment, leading to more excess capacity worldwide. While Chinese GDP continues to grow near 8pc, this is based on output. In the West, GDP growth is based on spending. These two definitions are chalk and cheese.

The underlying story has not changed. The East-West imbalances that lay behind the Great Recession of 2008-2009 are getting worse, not better.

[Singha]

from FEER:


July 2009
Fear Grips Shaoguan's Uighurs
by Kathleen E. McLaughlin

Posted July 17, 2009

Shaoguan, China – When the local government in Xinjiang province dispatched more than 800 Uighur workers to a toy factory here in May, they couldn’t have predicted their fate would blow up into a national crisis. Today, police say two of the Uighur workers were killed and scores more injured in the June 26 events that ignited a firestorm of protest in restive Xinjiang. More mysteriously, some 700 of the original Uighur workers of Shaoguan’s massive electronic toy factory are being held out of sight behind locked gates roughly 10 miles away in an abandoned factory. Their plight, and the lack of quick police action on the initial murders, sparked mass protests and killings on July 5 in the Urumqi, adding the latest cracks in China’s façade of ethnic harmony.

“The Uighurs are like wild men,” said Li Xiaoming, a factory worker from Sichuan province. “They carry knives and steal things, they never do what the bosses tell them.” His comment is par for the course among Han Chinese factory workers and locals across the manufacturing region. Most Han migrant workers in these parts, with little exposure to the outside world themselves, appear to have deep-rooted bias about Uighurs and what they might do. They appreciate the Uighurs’ dancing and food, but don’t trust them. “I think it’s possible they raped a girl,” said one factory worker outside an Internet café. “They made people nervous. They didn’t speak Chinese.”

In Shaoguan, rumors and innuendo are the currency of trade. Police have warned everyone repeatedly not to talk about what happened at the Xuri toy factory, but nearly everyone has something to say. Many factory workers and locals are still convinced there is merit to the allegation that six Uighur men raped two Han women shortly after arriving at the factory. Police deny the rapes happened, but Han workers said there was a cover-up and the charges were posted online.

The Uighurs, meanwhile, are nowhere in sight to defend themselves or discuss their version of events from that night. Testy armed guards man the gates of their new compound, apparently a sister factory of the Xuri workshop. All interview requests with them have been refused by the Shaoguan government, but for a few brief questions allowed of two Uighur workers at a government press conference on July 10. The pair spoke cautiously, seated together at a table with several top officials from both Shaoguan and their hometown in Kashgar. “I did feel scared right after the incident happened, but now we feel so confident and full of hope for our life and work,” said the young Uighur woman. “Now we have already gone back to work and we all live with peace of mind.” “The government has treated us very well; we very happy,” the woman continued.

The woman, who did not wear the traditional Muslim head covering worn by most other female Uighur factory workers, was whisked away by officials at the end of the press conference along with her male counterpart. Authorities could not provide her Uighur name, only a Chinese alliteration.

In Shaoguan, the atmosphere remains tense. “Of course, everyone’s been afraid, but it’s getting better now,” said a restaurant owner who didn’t want to give her name. “At first everyone was nervous to go out.”

Meanwhile, five hours south in Huizhou, Uighur workers at a Nike shoe factory say their friends and neighbors from the toy-factory want to go home but aren’t being allowed to leave. The Huizhou workers were part of the same labor contract as those in Shaoguan, and were sent just by chance to make shoes rather than toys. “I’m very afraid,” said Kubah, a 24-year-old worker who said he was coerced into moving to Guangdong in the first place. His girlfriend was sent to the toy factory earlier this year, and he says is being held along with the others, not allowed to leave and barely allowed to telephone out.

The local government in Shaoguan, meanwhile, says more than 50 Uighurs from the toy factory who wanted to return home already have; an assertion their friends deny. The official narrative from Shaoguan runs like this: A Han girl was harassed by a group of Uighur men when returning to her dorm at the factory late on June 25. Han Chinese, already inflamed by the rape rumors, stormed the dorms and attacked Uighurs. Amatuer videos posted online show brutal attacks, as Chinese chase Uighurs through the dorm floors. Uighurs maintain it was an ambush that left more than two people dead. Officials characterize it as a mass brawl.

What is certain is that it all began with a controversial plan to ship Uighur workers to Guangdong to fill vacant factory jobs amid a continuing labor shortage. The young workers, whose families have charged they were forced to send their children south, often lack even basic Chinese language skills and find it difficult to fit in with the dominant Han culture. “The government enforces repressive labor policies, including measures that have a disproportionate negative impact on ethnic minorities,” the U.S. Congressional Executive Commission on China wrote regarding Xinjiang in its annual report last year.

Even so, the Kashgar government says it will send more workers to Shaoguan’s toy factory, providing better training and language resources beforehand. What isn’t clear is what will happen to the more than 700 Uighur workers already in Shaoguan. Because they are cut off from most contact with the outside, it’s not known whether they are working inside their new camp or just waiting out each day to find out what happens next.

Kathleen E. McLaughlin has been a journalist in China for more than seven years and has covered regional issues including economics, the environment and governmental regulation.

[Katare]

China’s July Car Sales Rise 70.5%, Most Since 2006

[Liu]

Dont know if this was posted earlier but man the headliner could not be more blunt- got this off morningstar website
China’s Growth an Accounting Miracle
Now we are learning how China has achieved its “miracle growth.” The country showed positive GDP growth while its electricity consumption declined in the beginning of 2009 – creative accounting that makes Enron’s accountants appear as dilettantes.

of course ,any statistic can not be completely accurate.but nobody can prove that chinese governmental data is deliberately lying.

besides,such a paradox happened several times during the past decades.

for example.
during 2003-2008,the consumption of Chinese electricity growth 20-30% while CHina GDP growth only about 10%.

[Chinmayanand]

China and the W.T.O.

The World Trade Organization’s ruling against China’s stranglehold on the distribution of imported books, movies and songs may not unleash a torrent of new business for American entertainment industries, but it comes at exactly the right time for the world economy.

It should serve as a warning to the Chinese government to restrain its growing economic nationalism, which poses a serious threat to international trade and the chances of a global recovery.

Hollywood studios and other media companies currently must deal exclusively with government-run distributors. If the decision by the W.T.O. panel stands — China has the right to appeal — American and other foreign companies should be able to seek better, more lucrative distribution deals. Apple, which owns iTunes, and other companies should be able to sell music over the Internet. But other restrictions remain — only 20 foreign movies can be shown in Chinese theaters each year.

In the midst of the global recession, China has taken increasingly unfair steps to protect its industries. It has given tax rebates to exporters and barred government entities from buying foreign goods if there are domestic substitutes. It has again intervened heavily in currency markets to halt the rise of the renminbi.

The W.T.O. has ruled several times against China in recent years. By Sept. 1, China must comply with a W.T.O. ruling in a case brought by the United States against illicit taxes on imported auto parts. By March, it must comply with another ruling on a case brought by the United States about its lax enforcement of counterfeiting laws.

China has also increasingly turned to the W.T.O. to defend its interests. Last month, it challenged an American ban on Chinese poultry imports. It has another case against American anti-dumping policy. And there will be more. China has as big a stake as the United States in a well-functioning, lawful trading system. If it wants to protect its own rights, it will accept the W.T.O.’s rulings.

[Hari Seldon]

x-post from the perspectives thread

Old China hand Arthur Kroeber on the innate, almost spiritual and inevitable greatness of the China model, in an ft article:

China’s ability to maintain economic growth of around 8 per cent despite the global shock took many by surprise. But this ability has nothing to do with systemic advantages, a distinct “China model” of growth, or skill in macroeconomic management.

Still less has it anything to do with the reasons cited by the People’s Daily editorial [Note: this is in reference to an especially silly editorial you can find here]. China’s present economic vitality results from a Great Wall all right – a Great Wall of borrowed cash. There is nothing remarkable or spiritual about an economy growing at 8 per cent when credit is allowed to expand by 34 per cent.

The fact becomes even less remarkable when we recognise that nominal GDP (the appropriate comparator for nominal credit growth) grew just 3.8 per cent in the first half. {Huh? How can nominal gdp growth be 3.8% and end-year gdp growth be 8% in real terms unless you have negative inflation of 4.2%, eh?}

In other words, 10 dollars of new loans were required to generate just one dollar of economic growth.

In fact China’s first-half growth shows one thing and one thing only: the existence of a powerful state with the ability to commandeer its citizens’ wealth and plough it into more buildings, bridges and roads, with no regard for the return those investments will bring.
{Returns lie in the eyes of the beholder, nobel saar. In PRC's case, the shock and awe of urban landscaping itself is reward enough, I reckon. Its too much for the mere producers of said capital to have a say in its utilization, after all. No? How do you say "Arbeit macht frei" in mandarin again? }

link

Old china hand Prof. Michael Pettis too seems to have taken a dim view to prospects of the PRC khanomy going fwd.
link

[Sanjay M]

Look at this ridiculous climbdown by govt officials, in the face of strongarm tactics by workers:

http://online.wsj.com/article/SB125043783917034879.html

This is something India would do - and yet now China is following India's capitulative example.

What does this bode for China's future? Is this a glimpse of an unstoppable trend?

[ramana]

Can we have an occasional summing up say on monthly basis of the PRC Economy?

[ashi]

China: The new Big Oil
http://money.cnn.com/2009/08/17/news/in ... 2009081707

[Hari Seldon]

The chini juggernaut rolls on

Expansive China faces grass-roots resentment (Reuters)

From Africa to Europe, the Middle East and the United States, China's drive to project its economic might abroad can sometimes breed fear and resentment. The risks are likely to grow as Beijing channels more of its foreign exchange reserves, which stood at $2.13 trillion at the end of June, into foreign investments. From having a handful of tiny investments abroad less than two decades ago, China has grown to the world's sixth-biggest foreign investor and overtook the United States as Africa's top trading partner last year. That breath-taking rise has brought problems: allegations from emerging countries that China is stripping them of resources and suspicions in the developed world that obscure state interests lurk behind Chinese investments.

Where governments welcome Chinese investments for the boost they bring to their economies, a widely perceived Chinese tendency for Chinese firms to import their own workers has created tensions with job-seekers.

people in many places welcome the benefits from Chinese investment. Those can include aid with few strings attached, capital for infrastructure that Western donors will not fund and competition that drives down prices. Despite the clashes in Algeria's capital this month, its government welcomes Chinese investment. A $9 billion minerals-for-infrastructure deal is presented by Congolese President Joseph Kabila as a cornerstone of his plan to rebuild the Democratic Republic of Congo after years of war.

China will build roads, schools and hospitals in exchange for mining rights.
{Too bad Afg'n has no minig rights to offer Indian monies doing similar service in that desolate wasteland, eh?}

In Guinea's capital, Conakry, the Chinese government is building a 50,000-seat sports stadium as a gift. "We are very satisfied with our cooperation with China," said Denis Sassou-Nguesso, the president of Congo Republic on a visit to a hydro-electric dam being built by Chinese contractors. "Contrary to certain assertions, it's not just Chinese on the various construction sites, there are also numerous Congolese workers," he said.

And then there's the Demographic invasion of the Russian far east, less graphic than the BD one of Asom though.

But in some countries, it is the sheer size of the Chinese presence that causes tension. Russian officials estimated that last year there were 350,000 Chinese migrants living in the country's far eastern regions, many illegally. The native population, in an area almost 10 times the size of France, is just over 7 million. Asked if the numbers of Chinese migrants jeopardized Moscow's control there, a senior Russian migration official said: "There is a threat. It should not be overstated but there is a threat," said the official, who did not want to be identified because of the sensitivity of the subject.

Well, whuddathunkit, eh? A Tibet-xinjiang policy applied to the Russian far east? I heard first hand from a kazakh national of Russian origin that Kazakhastan too is chock full of Chini migrants.

Elsewhere, the fact that the lion's share of Chinese investments are from the state itself or state-controlled companies, is the source of friction. One of the best-known cases of thwarted Chinese expansion was when U.S. lawmakers blocked the sale of oil company Unocal to China's CNOOC Ltd. in 2005. One senator said the deal would effectively give the Chinese Communist Party control over a strategic U.S. resource. In Sudan, rebels accuse Beijing of supporting Khartoum in the six-year-old conflict in Darfur -- and they see Chinese companies as the embodiment of that policy.

"Their only interest in Sudan is their own economic benefit," said Al-Tahir al-Feki, a spokesman for Sudan's rebel Justice and Equality Movement. "As soon as that benefit is gone they will disappear, leaving so many things destroyed behind them."

Another accusation leveled at Chinese investors is that they cut corners. Five Zambians were shot and wounded in 2005 in a riot over pay and safety standards at a Chinese-owned mine, and a year later 52 Zambians were killed in an explosion at a Chinese firm manufacturing explosives for mining. In January, Chinese traders in Guinea closed their shops for several days for fear of reprisals after the authorities found Chinese-made fake medicines. "A part of the population attacked the Chinese expatriates, whom they associated with the offenders. We ... had to intervene to calm the situation," said a military source who was speaking on condition of anonymity because he was not authorized to speak to the media.

Read it all.

[AnimeshP]

Apologies if posted earlier ...

Mall of misfortune

As it happens, it’s just those things – time and space – that give so much trouble to the workers here. They have too much of both. On a recent Friday afternoon, an amusement-park employee, slouched in a forsaken ticket booth, tried to kill time by making origami. Another worker slept, with perfect impunity, on a table. In front of the haunted house attraction, one attendant was doing hand-stands while two others looked blankly on.

There was nothing else to do, because the South China Mall, which opened with great fanfare in 2005, is not just the world’s largest. With fewer than a dozen stores scattered through a space designed to house 1,500, it is also the world’s emptiest – a dusty, decrepit complex of buildings marked by peeling paint, dead light bulbs, and dismembered mannequins.

Very interesting read ...

[Hari Seldon]

Lead Poisons 1,300 Children in China

[Sanjay M]

NYT:

Asia's Recovery Highlights China's Ascendance

[Sanjay M]

Forbes:

Silicon Dragon Reawakens

[vina]

Well, got this by email at work this morning.

Well, in addition go Shanghai Status, we have Shanghai Accounting. or maybe Anhui Accounting.

Tunneling to True Profit in China
Adam Blaker Mark Dixon, near the center in a white shirt, standing amid tourists in tiananmen Square, Beijing

Mark Dixon, a founder of the mergers and acquisitions adviser the1.com, which is active in mainland China, unwittingly unearthed some Chinese accounting tricks while valuing a local company.

What with the world still reeling from the domino effect that Lehman Brothers’ balance sheet had on financial markets, the exposure of accounting frauds like the one at the Madoff fund and the final throes of the expenses scandal in the British Parliament, a trip to China promised to be a breath of fresh air in this atmosphere of fishy finances.

Hired by a client to help with an acquisition in China, I was given the job of deciding how much the buyer should pay for the business. That meant first calculating an accurate profit for the target company, its so-called normalized profit.

In the West, the process involves making a few small adjustments caused by things like no longer having to pay salaries to sellers if they aren’t going to stay at the company and other nonrecurring items. But it shouldn’t mean having to recalculate the entire income statement.

Generally Accepted Accounting Principles are not generally accepted in China. This is partly because the Chinese have their own accounting rules and partly because rules are for breaking.

And it’s not just that some company owners are trying to confuse the tax authorities. It’s that, when they do so, they end up also confusing themselves.

The gymnastics they do with revenues and costs are so impressive that the Beijing Olympics should have added an event especially for accountants. Markets with developed gray economies, like Italy, are well known for the practice of keeping one set of accounts for the government and another for the owners so they know what’s really going on. Chinese companies often dispense with the second set, hence the confusion. That’s probably true of other “developing gray economies.”

One can hardly call something normal when it doesn’t normally happen. So my quest for normalized profit was really a search for the abnormal — indeed, it might better be called abnormal profit. In fact, it was so elusive it seemed like a search for the abominable snowman.

My Chinese interpreter couldn’t handle the term normalized profit, so I dropped it in favor of true profit. But that only caused offense because it implied the figure before adjustment was a lie, which indeed it was. I then tried the expression official profit, by which I meant “what it officially should be,” but that didn’t work because it got lost in translation with the false profit they were officially reporting. I finally explained it as “the profit you would have received if you had reported everything completely correctly,” at which point I added, “Let’s for simplicity just call it Profit X!”

Now everyone understood what I wanted. But they couldn’t understand why I wanted it. “We’d only pay more taxes,” they explained.

The mathematical difficulties of calculating Profit X are compounded by the delicacy of the subject. It’s not only a confidentiality issue — after all, I might be a government spy — but it’s also simply embarrassing to admit what they’ve been up to.

Someone who behaves like a traditional, polite accountant will never find out the truth. One needs to use both carrot and stick. The stick is “Your business looks surprisingly unprofitable.” This provokes the Chinese pride, which, once awoken, quickly displaces any embarrassment. It also triggers natural commercial instinct — they instinctively realize the intentionally low profit figure is somehow going to hurt them in the upcoming negotiation.

The carrot is “Don’t worry, I’ve seen this many times before.” Said with the bedside manner of a family doctor, it allows the final key to be turned. The scene is now set for a tour of their forbidden city.

At this point, we were ready to dive into the “abnormalization” process itself. Every stone I turned over seemed to reveal not a single spider but countless additional stones, each of which needed to be investigated. While pursuing each line of questioning, I found myself having to note side questions to ask later — my memory isn’t that good. At the most frustrating point I was told, “You can’t expect to understand China — our accounting is different.”

They weren’t trying to derail me from my quest. (Indeed, companies are fairly cooperative once they have bought into the process.) It was rather a way of trying to calm me down — but it only revved me up the more.

It seemed as if the project would never end (I was already down to the last clean shirt), but eventually I had exhausted all of my questions: the Profit X figure was there in black and white.

I have invented a formula to get to the truth faster. Of course, it doesn’t help you get your hands on the figures to input, but it does show which ones you’ll need to get and what to do with them. Even if you never need to use it yourself, you may be interested in what it reveals:

Profit X, or normalized after-tax profit =

The amount of after-tax profit actually reported to the government

+ Revenues received off the books to avoid paying revenue tax and to reduce corporation tax

+ Revenues from invoices pushed into the next period in order to delay paying revenue tax in the current period

- Revenues from invoices delayed from the prior period into the current period for the same reason

- Revenue tax the business should have paid on the net effect of these three adjustments

- Employee salaries paid off the books

- A “gross-up” to bring this off-the-books employee cost to a level at which the employees themselves would have received the same amount after tax if they had been paid legally (otherwise, they’ll go and work off the books somewhere else!)

- The extra Social Security cost the business should have paid on these two amounts

- Real expenses the business couldn’t deduct because the supplier couldn’t provide official government receipts, or fapiao, showing the supplier had paid revenue tax

- A gross-up to bring this to a level at which the supplier would have received the same amount if it had declared the income and paid both revenue and company profit taxes

+ The amount of expenses the business declared for fapiao that had nothing to do with its operations but which somehow found its way into the accounts

- The amount of additional corporation tax on the incremental profit resulting from the net effect of the above 10 items

To be fair, some companies need all the adjustments, and others perhaps none.

Only in China does a government have the power and desire to control centrally every invoice that a business issues. For an invoice to be tax-deductible, it must be printed on a government-authorized, numbered receipt called fapiao. The government charges service businesses 5 percent of the face value. The payment it receives is thereby an automatically collected revenue tax, also called business tax, levied on the business issuing the receipt rather than on its recipient.

When profitable businesses pay one another, they are economically encouraged to follow this system because the paying entity can’t deduct the expense without receiving the fapiao. Consumers, of course, have little need to show expenses when they go shopping, so they wouldn’t naturally request fapiao, letting retailers off the hook for sales tax collection. (Sales tax, which retailers must charge and remit to the government, is 13 to 17 percent of sales.)

To deal with this motivational loophole, the government, with free-market thinking, has cleverly persuaded consumers to request receipts from businesses — all retail fapiao are printed with scratch-off lottery numbers on forms issued by the government.

The government is thereby marshaling 1.3 billion Chinese as volunteer tax police by harnessing the Chinese people’s well-known love for gambling. I am counting the children among this volunteer tax police figure because they especially love to check the receipts for prizes.

Such ingenious measures don’t stop some Chinese businesses from cooking the books, but they make a dent in the problem. Indeed, one can hardly imagine the state of Chinese accounting in the absence of this totalitarian control of invoicing.

Back to the M.&A. negotiation. It had been a two-day herculean task to get to the truth. On top of the mathematical work itself, I had been through a cultural minefield before we came out the other side in triumph together. The Chinese owners were as satisfied as I was to arrive at this magic number. In fact, they had never known their “true profit” until that moment.

Now, we were ready for the hard part: the price of the business. The chairman was eager to know how I would value his company. Having understood the figures, I was ready with the answer. “We can give you a 10 P/E,” I said. “In other words, 10 times Profit X.”
The mood over the past few days had been everything but calm, but now an eerie silence descended on the room. “That isn’t even close,” he replied.

Indeed, it turned out he wanted 10 times his — not my — real profit: the actual cash they got from the business tax-free, or what could politely be called the pragmatic profit.
The problem was that pragmatic profit multiplied by 10 came to almost 20 times Profit X. It wasn’t even worth negotiating.

“What was the point of the last two days if you are now going to use a totally different profit number?” I demanded.

He needed no time to find his thoughts. “You missed the point. We did that calculation at your request,” he said. “It’s a completely irrelevant number for us. Why would we give up our company for a lower value just because you want to make it legal?”

With reports of fishy finances still blowing in from the West, it wasn’t the right moment to respond with a speech about morality. At times like this, one wishes instead for an Easterly wind.

Mr. Dixon can be reached at mdixon@the1.com.

[Hari Seldon]

China Begins Overhaul of Organ Donor System

BEIJING — China inaugurated its first voluntary organ-donor program, hoping to overhaul a system that now gets most of its organs from the black-market and executed convicts.

Wow. Voluntary organ-donation policies in PRC? Incontrovertible proof that aaj ki duniya mein, anything is possible. What's next I wonder, a -10% tax rate?

[Hari Seldon]

Australia Clears Way for $41 Billion China Gas Deal

The newfound PRC-Oz tango has the potential to be a game-changer, IMHO.

[svinayak]

‘‘We found out the 3PL company
moving our product from one
manufacturing site to another site
within central China was
outsourcing the actual
transportation to the Chinese
Army. This was unusual but it did
provide excellent security.’’

Consumer Products Manufacturer

[svinayak]

Trends in China
Inflationary control, infrastructure
investment and educational
opportunities will be crucial for China
to maintain its market share of the
offshoring business. The companies
participating in this study are already
looking to countries like Vietnam,
Thailand and throughout Latin America
as a way to mitigate their risks and
shorten the supply chain cycle time.
Overall, interviewees foresee additional
investments in China’s infrastructure,
particularly in preparation for the 2008
Beijing Olympic Games. However, there
are significant concerns about what will
happen to the economy after the
Olympics, as some previous Olympic
host countries have experienced a
“post-Olympics bubble,” and as the
potential for an inflationary
environment exists, which could lead
to an overall increase in the cost of
doing business there.
As stated earlier, China does have solid
plans for investing and improving the
overall infrastructure. In order for
businesses to be able to move away
from the congestion of the large cities,
substantial upgrades need to be made
to water supply and wastewater
treatment, overall pollution, energy
output and consumption and
burdensome government regulations.
In addition, there is a real need for
increased investment in infrastructure,
particularly in China’s interior.
Respondents do note that once
investments are made to the physical
infrastructure, China is doing more to
protect its investment, limiting loads on
new roads, which should allow
companies to improve their distribution
model. As China moves towards more
sophisticated distribution models, this
will in turn support the nationalization
of trucking standards, which are just
now being formed with new regulations
and guidelines.
Concerns also exist about the
enormous disparity between the quality
of labor in the eastern provinces versus
central and western China. Study
participants frequently noted the
significant gap between the availability
(and rising cost) of highly-skilled labor
in the major cities, and lack of skills
(and lower costs) of labor in the
interior provinces. Participants see a
need for China to increase investment
in education throughout the country to
level these concerns.
From a raw materials perspective,
China is one of the largest producers of
iron, steel, aluminum and other metals
used in many everyday products. Price
increases, which are inevitable, will
have a ripple effect across Chinaproduced
products. An additional
concern voiced by study participants is
a rapid increase in the total landed cost
of outsourcing to China, which will be
impacted by both the valuation of the
dollar and the rate of cost increases in
China. Therefore, many companies
currently outsourcing significantly in
China will likely mitigate this risk by
investing in other stable, low-cost
countries.

[Sanjay M]

China Investment Investing Billions in Hedge Funds

This means the Chinese bigwigs see only economic sputtering in the upcoming future, with no strong growth or contraction. Hedge funds are best for the turbulent periods of mediocre economic performance, and I would bet that even these High Frequency Trading firms would benefit, too.

[Katare]

They have started to worry about a softlanding of overheated chinease economy but I am pretty sure Chinese don't beleive in landings at all, soft or hard.

Chinese factories face surprising labor shortage

[ManuJ]

In case this hasn't been posted before, Jim Jubak's take on China's accounting practices:

Link

China's system is designed to report production and not, as in U.S. statistics, expenditure growth

Beijing decides on a $586 billion stimulus package in November. That money gets recorded as growth in gross domestic product as soon as it's disbursed. None of this waiting around for the money to stimulate economic activity before anything gets recorded as GDP. Nope, the money is counted as spent by state-owned companies and local governments in national economic statistics as soon as the check leaves the building.

But the system doesn't stop there. As soon as something is produced it goes into the national numbers in such categories as retail sales. Make it, ship it, and it's a sale. As Makin writes, "Shipments to retailers are counted as retail sales on the apparent assumption that ultimately all goods shipped will be sold at some point in the future."

you're justified in asking whether the goal of Chinese economic policy is real, sustainable growth or the appearance of enough growth to keep the domestic peace

consider the possibility that China's huge acceleration in its growth rate is merely an artifact of the way the country keeps its books. And that the effects of China's stimulus will wear off the moment the government stops sending out the checks.

If China's growth is real, investors can expect that the People's Bank, China's central bank, will start to slow growth in the money supply, growing at a mind-boggling 28.5% annual rate in June, before the economy, stock prices and inflation get out of control. If, on the other hand, China's continued reported economic growth rests on Beijing keeping the money pump running because the real economy is still in a slump, then the People's Bank will rattle its sword but do nothing.

[Waylan]

With all due respect to Mr. Makin, who is a PhD from Chicago no less, there are a few details he forgot to mention. China's annual GDP estimation are announced in all three methods - production, income, and expenditure, @ both current and constant price. It is only the quarterly GDP estimations that are announced in value added and production method, since it is the most readily available, and it's only for 10 industries, instead of full 94 industries as would be in the case of annual estimates. He also failed to mention the treacherous political maze of administrating this data collection system in China - sub-national NBS bureaus in 5 government levels , survey teams directly under national NBS , and NBS departments under 31 ministries doing pretty much overlapping range of things reporting and accountable to different political masters. Anyways, he managed to get a good spin to the story though.

[Sanjay M]

China Increasingly Calls the Shots for World Markets

[Liu]

In case this hasn't been posted before, Jim Jubak's take on China's accounting practices:

Link

China's system is designed to report production and not, as in U.S. statistics, expenditure growth

Beijing decides on a $586 billion stimulus package in November. That money gets recorded as growth in gross domestic product as soon as it's disbursed. None of this waiting around for the money to stimulate economic activity before anything gets recorded as GDP. Nope, the money is counted as spent by state-owned companies and local governments in national economic statistics as soon as the check leaves the building.

But the system doesn't stop there. As soon as something is produced it goes into the national numbers in such categories as retail sales. Make it, ship it, and it's a sale. As Makin writes, "Shipments to retailers are counted as retail sales on the apparent assumption that ultimately all goods shipped will be sold at some point in the future."

you're justified in asking whether the goal of Chinese economic policy is real, sustainable growth or the appearance of enough growth to keep the domestic peace

consider the possibility that China's huge acceleration in its growth rate is merely an artifact of the way the country keeps its books. And that the effects of China's stimulus will wear off the moment the government stops sending out the checks.

If China's growth is real, investors can expect that the People's Bank, China's central bank, will start to slow growth in the money supply, growing at a mind-boggling 28.5% annual rate in June, before the economy, stock prices and inflation get out of control. If, on the other hand, China's continued reported economic growth rests on Beijing keeping the money pump running because the real economy is still in a slump, then the People's Bank will rattle its sword but do nothing.

well, chinese center bank indeed now starts to slow the growth of money supply.

[Waylan]

If China's growth is real, investors can expect that the People's Bank, China's central bank, will start to slow growth in the money supply, growing at a mind-boggling 28.5% annual rate in June, before the economy, stock prices and inflation get out of control. If, on the other hand, China's continued reported economic growth rests on Beijing keeping the money pump running because the real economy is still in a slump, then the People's Bank will rattle its sword but do nothing.

Mr. Makin seems to be forgetting a lot of things he is so familiar with. First off, China's monetary policy is still in a crawling stage compared to developed western economies, a fact he would be more than aware of as a professional. China's financial system does not have a solid money market as her cornerstone as all major economies do. Commercial banks still dominate the financial landscape. Due to high reserve ratio, CHIBOR and SHIBOR are still ineffective. As a result, interest rate targetting does not work as effective either . Her yield curve has maturities up to 7 years only, forget about the 30+ years yields. PBoC still has to get approval for setting rates from State Council. PBoC is still using money supply aggregates as the main tool for her monetary policy, as the major economies once did in 60's and 70's. So on and so forth. You just can't compare major economies indicators to those of China. It would be like comparing apples and oranges as they reflect different macro attributes and economies. You just can't apply standard indicators across the board right off the bat, you have to consider the underlying conditions too. Given the situation and tools available, PBoC and State Council have done a good job, however imperfect it may looks to outsiders' perfect world, cough .. cough ... even with your equally perfect financial meltdown still raging on in the land of the free and perfect.

[wig]

there are certain aspects of the chinese economy that bear repetition. my apologies if the brf folks are aware and i am repeating them. but please bear with me.
1. industrial growth needs a very strong managerial/ legal and accounting framework.
2. this is vital for modern capital and commodity markets and banking to survive - leave alone flourish. the system was abused in future and options trading in the west that caused the overconfidence and crash of the markets.
3. underlying it all was the contingent liablities ( off balance sheet vehicles) (loans taken by corporates that do not reflect on balance sheets -final statements of accounts)
4. when they matured the revenue streams were found wanting in being able to service liablities.
5.world wide to avoid such pitfalls the accounting system (its transperent working is paramount) is being standardised by converting from present Accounting Standards ( almost every country has is Generally Accepted Accounting Principles) eg. US GAAP, Indian GAAP and so on. to IFRS (international financial Reporting Standards) by financial year 2011
6. due to this there will be one (or very near one) set of final statements of account of corporates.
7. satyam type fiascos where everyone is pointing figures at everyone else - the old adage- " when in fear or in doubt blame the press for finding out" applies here should be avoidable in the future.
8. the chinese as a matter of course will convert pronto. but the skilled professional accounting manpower is lacking. And whilst slatted factories come up quickly, skilled personnel generation takes at least one to two generations (my humble opinion)
9. this is not going to happen anytime soon - and that is the rub. the shanghai exchange is not exactly an epitome of transparency. it is redolent of flawed accounting and valuation practices.
10. the most dangerous part for china is the lack of implementation of direct taxes - this field is the field worldwide that nurtures the larger population of skilled accounting professionals worldwide.
11. it is this large base that supplies the smaller number of accounting/legal/ managerial professionals who speicialse in esoteric fields of treasury management, corporate structuring, leveraging finances etcetra.
12. it is extremely unlikely that you can leap frog something which is followed worldwide.
of course my very humble opinion!

[wig]

one more matter of passing interest.
the us federal reserve bank ( fed) is doing what banks and governments do. exercising the principle of sovereignity over all it surveys. it is printing money. now i am sure brf regulars know who owns what must be the biggest reserve of us currency/ treasury etc.! so the near future is not exactly a dream. as the us currency finds its new worth a great deal more and some bright investors worldwide are goint ot find there new worth mighty soon

[Katare]

there are certain aspects of the chinese economy that bear repetition. my apologies if the brf folks are aware and i am repeating them. but please bear with me.
1. industrial growth needs a very strong managerial/ legal and accounting framework.
2. this is vital for modern capital and commodity markets and banking to survive - leave alone flourish. the system was abused in future and options trading in the west that caused the overconfidence and crash of the markets.
3. underlying it all was the contingent liablities ( off balance sheet vehicles) (loans taken by corporates that do not reflect on balance sheets -final statements of accounts)
4. when they matured the revenue streams were found wanting in being able to service liablities.
5.world wide to avoid such pitfalls the accounting system (its transperent working is paramount) is being standardised by converting from present Accounting Standards ( almost every country has is Generally Accepted Accounting Principles) eg. US GAAP, Indian GAAP and so on. to IFRS (international financial Reporting Standards) by financial year 2011
6. due to this there will be one (or very near one) set of final statements of account of corporates.
7. satyam type fiascos where everyone is pointing figures at everyone else - the old adage- " when in fear or in doubt blame the press for finding out" applies here should be avoidable in the future.
8. the chinese as a matter of course will convert pronto. but the skilled professional accounting manpower is lacking. And whilst slatted factories come up quickly, skilled personnel generation takes at least one to two generations (my humble opinion)
9. this is not going to happen anytime soon - and that is the rub. the shanghai exchange is not exactly an epitome of transparency. it is redolent of flawed accounting and valuation practices.
10. the most dangerous part for china is the lack of implementation of direct taxes - this field is the field worldwide that nurtures the larger population of skilled accounting professionals worldwide.
11. it is this large base that supplies the smaller number of accounting/legal/ managerial professionals who speicialse in esoteric fields of treasury management, corporate structuring, leveraging finances etcetra.
12. it is extremely unlikely that you can leap frog something which is followed worldwide.
of course my very humble opinion!

Wig,
You start your post stating that you are going to talk about Chinese economy but in the middle you move on to western financial collapse. It's confusing where you are talking about China, western world and where you mean to talk about both.

Point # 3 & 4, Do you mean this happened in china or in west?

I do not think this happened in the western economies. The collapse was totally a finicial messup fostered in regulatory vacuum and short term profit making focus.

If it happened in China, I have not seen many/any reports of what it did to the Chinese economy.

[Sanjay M]

Wal-Mart China. We Know Kung Fu.

http://www.weirdasianews.com/2009/09/07 ... employees/

[wig]

my apologies katare ji.
i do seem to have confused the issue.
what i am trying to drive at is that china simply lacks the skilled professionals in accounting/ legal/ managerial areas of specialisation.
such manpower is not going to be available very rapidly to the chinese.
western:
yes i dwelt on the western fiscal collapse. what i wanted to say was that whilst you are right it was greed driven, it was from the point of view of regulators a failure of oversight.
the rule appears to be for better or worse is to observe the letter but rarely the spirit of law in business enterprises.
this is what happened in satyam at least my opinion.
but then pursuit of wealth is a motivating factor for most humans. that is legitimate if you ask me. the regulators are handsomely paid and very ably qualified to catch abusers of the system. this failed- not in the least because of accounting standards which gave leeway to samrt operators. here i would like to draw attention to b madoff, of usa
china:
coming back to china i wanted to state that they simply do not have basic generally accepted accounting policies or the qaualified manpower to implement such standards. and this manpowerr or skill sets is not going to appear overnight.
most of the west and india will shilft to IFRS (international financial reporting standards ) by 2011.
on the record china might already be there. but that is a mirage in the absence of skilled manpower.
i hope i am clear this time!
i think i should write seprately and then post. nwo when i go through what i wrote earlier even i feel confused.
my apologies katare ji

[KarthikSan]

^^^ Let me see if I get this right. What you are essentially saying is that all the financial data coming out of China is unreliable. Is that right?

what i am trying to drive at is that china simply lacks the skilled professionals in accounting/ legal/ managerial areas of specialisation. such manpower is not going to be available very rapidly to the chinese.

coming back to china i wanted to state that they simply do not have basic generally accepted accounting policies or the qaualified manpower to implement such standards. and this manpowerr or skill sets is not going to appear overnight.

[kmkraoind]

China unveils jet at Asia's biggest air show
China Says First Jet to Cost Less Than Boeing, Airbus

Really I cannot resist without appreciating Chinese. Vy hook or crook they are developing at faster pace at every sphere of life. While we still struggle to build a 14-seater aircraft, Chinese are not far away challenging behemoths like Boeing and Airbus. It really saddens me that though Chinese growth and GDP are equal to India's during early 1950s, they are now surpassed us with a huge difference.

[Raghav K]

China unveils jet at Asia's biggest air show
China Says First Jet to Cost Less Than Boeing, Airbus

Really I cannot resist without appreciating Chinese. Vy hook or crook they are developing at faster pace at every sphere of life. While we still struggle to build a 14-seater aircraft, Chinese are not far away challenging behemoths like Boeing and Airbus. It really saddens me that though Chinese growth and GDP are equal to India's during early 1950s, they are now surpassed us with a huge difference.

Wait till the first passenger sits and travels and the reality sets in. Lets hope this is not a TITANIC. Atleast in India when we make it we do it right.

[Katare]

Raghav,

Paki like thinking! Must appreciate the enormity and complexity of nation building that Chinese are attempting. failure would happen but that's not the point.

Chinese solar plant expected to be the biggest -2000MW

First Solar, which makes more solar cells than any other company, said it struck a tentative 10-year deal to build in China's vast desert north of the Great Wall. The project would eventually blanket 25 square miles of Inner Mongolia -- slightly larger than the size of Manhattan -- with a sea of black, light-absorbing glass.

The solar field would dwarf anything in operation in the U.S. or Europe. At 2 gigawatts, or 2 billion watts, the solar plant could pump as much energy onto China's grid as two coal-fired plants, enough to light up three million homes. Like most solar plants, however, it wouldn't produce electricity at night.