A cousin said he had recently paid over S$600,000 -- about US$465,000 -- for a yet-to-be-built 99-year-lease flat. Such numbers are hardly out of place in any major metropolis but this was for a state-subsidised three-bedroom apartment.

Soaring housing prices have fueled popular discontent -- little wonder as median monthly household incomes have stagnated at around S$5,000.

For its part, the government -- which houses 80 percent of people on the densely populated island -- insists that public housing prices are shaped by 'market forces', pointing to a raft of financing schemes to help first-time buyers.

What's less contentious is that Singapore is only part of a regional real estate boom that has driven property values by as much as 70 percent since the start of 2009 in cities such as Sydney, Hong Kong and Beijing.

Like Singapore, the government in China is acting to cool house prices that have skyrocketed in recent years out of the reach of a large swathe of its middle classes.

Chief among Beijing's policy arsenal is social housing. The government is stepping up construction of public housing, targeting a rollout 36 million affordable homes from now until 2015. At the same time, clampdown on property speculation has also helped ease Chinese housing prices.

No doubt, the hope is that larger state involvement would help stabilise Chinese property prices over the longer term and prevent the build up of a speculative bubble.

But research from the International Monetary Fund imply quite the opposite.

In its Global Financial Stability report last year, the Fund said its study of the recent credit crisis suggests that greater government participation in housing markets is linked to steeper house price declines.

Government involvement, whether in the form of subsidies to first-time home buyers or tax deductibility on capital gains for housing, amplified housing price swings "by exacerbating both the boom and the subsequent bust".

Some tax breaks to homeowners distorted demand and led to volatility in home prices.

As the U.S. experience illustrates, state schemes to provide low-cost mortgages to encourage home ownership could also have the unintended consequence of lax lending standards as the private sector tries to compete with the government in housing finance.

As it steps up efforts to expand home ownership, Beijing could do well to keep these findings in mind.

Slightly dazed by cornucopia of women's shoes on slick display, I was roused only when the haze of muzak wafting over the PA system was suddenly dispersed by the jaunty strains of the Chinese New Year ditty 'Gongxi Gongxi'.

A 1946 composition from Shanghai, the song has gone from classic to kitsch, evolving to become the most popular festive song in the Chinese-speaking world. Its ubiquity rests on the many -- for me at least -- teeth-grindingly cloying versions played all over shops and markets in Asia. (Click here for example and don't say I didn't warn you)

I was somewhat surprised by the song's appearance in the British retail icon -- not least because it's still some ways off the Year of the Dragon. But then looking at the shoppers around me it all made sense.

Mainland Chinese travellers spent some £200 million on Bond Street last year. That's a 155 percent surge from 2009, according to an association of luxury retailers in the London thoroughfare.

Never mind that these products are largely assembled back in their home country, Chinese tourists buy their designer bags on Bond Street and elsewhere in Europe to avoid China's luxury sales tax. More importantly, these status-conscious buyers have the assurance that they are not being sold knock-offs -- a risk rampant in a country notorious for its lack of regard for intellectual property.

Those reasons are similar to those that drive the wealthy elite in many emerging economies to London, a city that Goldman Sach's Jim O'Neil has dubbed the "BRIC capital of the world".

Whether it's handbags or homes, the well-heeled from Brazil, Russia, India, China and other rapidly growing economies are drawn to the city because it promises rule of law and regulatory predictability. For all the hype about GDP growth rates, many emerging economies remain hobbled by corruption, weak regulatory frameworks as well as social and political instability.

This is why many investors prefer to gain exposure to emerging economies via U.S. and European companies rather than buying directly into Chinese or Russian firms where doubts remain over corporate governance. It may be why emerging shares this year have underperformed their developed counterparts even with all the anxiety about recession and sovereign debt in the West.

Chinese tourists buying made-in-China swag on Oxford Street may sound incongruous but many investors are essentially in the same proxy trade.

Amid the gloom one sees in the press about Western economic decline, it's worth thinking about those Chinese shoppers in Selfridges. They may hold a much less pessimistic view.

By George Chen
The opinions expressed are the author’s own.

When you walk around Hong Kong's Central commercial and business district these days, you may notice a number of stores are holding "removal sales", which means they can no longer remain in the same location. The reason? In most cases, just blame soaring rents.

Many analysts have forecast declines in residential and commercial property prices in Hong Kong for next year, although at a stable pace rather than a sharp drop. This may be true for some suburban areas where purchase options are more plentiful than those in downtown areas, but until that happens, prices are likely to keep rising, at least for the rest of the year.

A couple of years ago, mobile phone industry leader Nokia took a moderately sized space on Russell Road in Causeway Bay just opposite Times Square, one of the busiest shopping districts in Asia, for its flagship store in Hong Kong. Local media said the store used to be one of Nokia's busiest in Asia, thanks to mainland Chinese travelers. But the good old days are going to end soon.

The Hong Kong Economic Times reported on October 27 that British luxury brand Burberry had signed a new lease with the owner of a site currently occupied by Nokia. Burberry is said to have agreed to pay HK $6.5 million (about US $836,600) per month for the two-floor 5,200 square foot space,versus the HK $1.8 million that Nokia is paying.

When the news came out, the reaction from the market was quite naturally, "Wow". One reader on Sina Weibo, China's most popular micro-blogging service, wondered: "How many coats and bags will Burberry need to sell to cover the monthly rent?" In Hong Kong, a coat or bag at Burberry usually sells for about HK $10,000-15,000. You can do your own calculations.

Burberry is not alone.

Bidding wars for prime retail locations in Hong Kong have been heating up in recent months. Some analysts call this a typical "changing hands season" for Hong Kong's high-end property market. The only key to victory is price.

Asia's leading fashion brand Shanghai Tang opened its first shop in the mid-1990s on the ground floor of the historic Pedder Building on Central's Pedder Street. The same location will soon be home to a new name.

U.S. fashion brand Abercrombie & Fitch, known for welcoming customers to its flagship store on Fifth Avenue in New York City with muscular male models, will reportedly pay about $1 million per month for the location, 2.5 times more than the rent Shanghai Tang paid.

Despite the surprisingly fast rising rents in Central, Shanghai Tang, now owned by Richemont, one of the world's leading luxury goods groups, is keen to stay in the Pedder Building, but has decided to move upstairs where rents are cheaper, local media reported.

Luxury brands are rushing into Hong Kong to tap the fast-growing demand from middle-class consumers from mainland China who swarm to Hong Kong to buy luxury products at prices far cheaper than in mainland China. U.S. upscale bag maker Coach is said to be planning to float shares in Hong Kong in the wake of Prada's successful listing in the financial centre.

Local Hong Kong people and even some government officials and legislators in the former British colony have already complained about the quantity of money flowing into Hong Kong from the mainland, pushing property prices higher than the city's towering skyscrapers.

Perhaps, the fast-growing retail rents willingly paid by global luxury brands can also be blamed on the luxury-loving mainland consumers who are becoming their best customers.

George Chen is a Reuters editor and columnist based in Hong Kong.

Photo: The closing Shanghai Tang store in Central, Hong Kong, seen on Oct. 26, 2011. REUTERS/George Chen

When I tweeted this @reutersJeremyG, one wag suggested  this meant "MSCI small-ladder-bigger-ladder-books-on-a-picnic-table", which is what it indeed looks like to an untrained eye (like mine).  But it is actually Ming Sheng, which  apparently is supposed to symbolise "brightness and transparency, prosperity and splendour".

That might sound a little flowery for an index provider, but is arguably apt given the role such indices have in opening up markets to investment.

The key point, however, is that MSCI decided it needed a Chinese business name. Henry Fernandez, MSCI's chairman and chief executive officer, said that as his business had grown in China, so it had become increasingly important to have local branding.

So we have MSCI Bright Splendour, or something like that.  Parlour game time: What would other companies be?

By Isaac Esipisu

Given that China is South Africa’s biggest trading partner and given the close relationship between Beijing and the ruling African National Congress, it didn’t come as a huge surprise that South Africa was in no hurry to issue a visa to the Dalai Lama.

Tibet’s spiritual leader will end up missing the 80th birthday party of Archbishop Desmond Tutu, a fellow Nobel peace prize winner. He said his application for a visa had not come through on time despite having been made to Pretoria several weeks earlier. (Although South Africa’s government said a visa hadn’t actually been denied, the Dalai Lama’s office said it appeared to find the prospect inconvenient).
Desmond Tutu said the government’s action was a national disgrace and warned the President and ruling party that one day he will start praying for the defeat of the ANC government.

It’s the second time the Dalai Lama has been unable to honour an invitation to South Africa by Tutu after failing to make it to a meeting in 2010.

South Africa will certainly win more plaudits in Beijing, which last week agreed to $2.5 billion in investment projects with during a visit by South African Deputy President Kgalema Motlanthe.

But pro-Tibet activists say South Africa is undermining its credentials as a country of freedom and democracy, established after the end of white minority rule a generation ago.

Is Pretoria right in not giving the Tibetan spiritual leader a visa? Is it following the best economic interests of the country of 50 million? Is it bowing to undue interference from Beijing?

As news broke this month suggesting it was more likely than ever that Greece was headed for default, China extended an offer of assistance that beleaguered European governments may find difficult to refuse. Premier Wen Jiabao announced that China was willing to increase its holdings of European sovereign debt at a time when several Eurozone countries are struggling to raise capital.

In return, China seeks little–simply an assurance that profligate governments promise to get their financial affairs in order, and perhaps some other small favor that, in the words of Premier Wen Jiabao, “would reflect our friendship.” The Premier even suggested that a good way to demonstrate this new-found goodwill would be to support China’s bid to be reclassified as a “market economy” by the World Trade Organization.

Currently, anti-dumping tariffs are applied against products shipped from China that are deemed to be sold at below the true market cost. This is an attempt to counter the subsidies and other incentives the Chinese government provides to many manufacturers to ensure their competitiveness; a change in designation would remove most of these tariffs.

While lower costs may be good news for consumers, for European manufacturers, it could prove disastrous. Disadvantaging European manufacturers already facing weak domestic demand could lead to wider job losses and a further slowing of the economy. Eurozone officials would be well advised to consider carefully the potential impact on domestic manufacturers before agreeing to easing China’s access to the European markets.

Either way, change will come within a few years, as China is slated to be re-designated as a market economy in 2016. Nevertheless, there is a very good reason why Beijing is trying to move the date forward – each year China comes under increased competition from other emerging economies.

China’s ability to undercut other production centers has proven remarkably profitable, but outside events are forcing China to update its approach. By deliberately undervaluing its currency, China has created a massive trade surplus with its export markets which has resulted in the loss of manufacturing jobs in both the U.S. and Europe. These job losses have contributed to slower economic growth in Western economies, leading inevitably to an overall decline in consumer spending and, by extension, lower demand for China’s exports.

At the same time as wealth has increased in China, so too has inflation and workers are demanding better wages to maintain current living standards. Workers now have more opportunities then they did in the past and employers are being forced to increase wages to attract and retain workers. Combine this with competition from smaller nations like Viet Nam where wages are lower, and it is understandable why China is concerned that its low-cost monopoly could be at risk.

In mid-September, an official with China’s central bank said the bank intended to “liquidate more” of its U.S. assets currently estimated at about $2.2 trillion in total. The timing of this announcement, coinciding with China’s offer to buy more European debt, is noteworthy; selling its U.S. holdings is the only way China could finance a large purchase of euros.

However, this would not be without risk to China’s finances. Should China dump all, or even a large portion, of its U.S. securities on the markets, the value of the dollar would surely decline. For U.S. manufacturers, a weaker U.S. dollar would likely be beneficial as this would make American-made products more competitive both at home and abroad. It could be just what is needed to kick-start the economy. China, on the other hand, would suffer deep losses as the dollar declines.

There is also the risk that despite China’s support, there could still be a Eurozone default. How far the euro may plunge following a default is anybody’s guess but the losses would be substantial. Ironically, the resulting uncertainty would lead to a heightened demand for the dollar as investors move to the safety of U.S.-denominated securities.

Compared to the economies of Spain or even more likely Italy, Greece is so small, it barely registers. Yet over 200 billion euros have been committed to Greece in emergency funding so far with little to show in the way of progress. Using the experience with Greece as a guide, and understanding that Italy’s economy alone is more than six times that of Greece, the funding required to prevent an Italian default could easily reach into the trillions. The question for China is whether the potential increase in export sales is worth the risk.

While Western economies wither, China is in an entirely different predicament. Beset by high inflation and a frothy real estate market, Chinese policymakers have been trying to cool their economy for going on two years. The central bank, the People’s Bank of China, has led the charge, restricting loans to real estate and hiking the required reserve ratio 12 times in 21 months.

Thanks to this, along with slower growth in the United States and Europe, Chinese inflation is now waning. Add an incipient export slowdown, and China may soon be able to loosen credit to everything but real estate. Neither too hot nor too cold, this Goldilocks economy superficially looks just right for China.

Unfortunately, the reality is that China’s economy more closely resembles a boiling bowl of porridge with a clump of ice in the middle. Poorer provinces are on a debt-fueled construction binge in open defiance of Beijing, so policymakers have to over-tighten where they do have control.

Private real estate developers are unsurprisingly feeling the squeeze, some borrowing at interest rates of more than 30 percent in the black market. Meanwhile, the rest of the private sector is suffering collateral damage. Credit has always been scarce for private companies in China, but now it is practically non-existent. Among the consequences, factory machinery orders are evaporating, and accounts receivable are ballooning as customers take longer to pay their bills.

Since stability remains China’s primary policy objective, some expect policy to ease, particularly with exports poised to slow. Recent riots in Guangdong, the heart of China’s manufacturing industry, are a reminder that a sharp economic downturn could be every bit as destabilizing as high inflation. But much of the Chinese economy is running too hot for wholesale easing.

Construction starts, for example, hit a new all-time high in July. This is particularly alarming since property sales are slowing. Credit-fueled construction may partly explain why China’s debt is growing so much faster than GDP. Fitch calculates that China’s total credit to GDP will end 2011 at 185 percent, up from 124 percent at the end of 2007.

An optimist might say the continuing boom in poorer provinces is consistent with official policy to spread prosperity inland. But it may be too much of a good thing. Nearly half of all construction spending in the last year went to provinces that collectively generate less than a quarter of China’s non-construction GDP and, in many instances, construction accounts for the vast majority of local economic activity.

China’s provincial construction mania has gone beyond anecdotal excess and the odd ghost city. And once addicted to construction growth, even scrupulous provincial officials must approve questionable projects to keep growing. The unscrupulous, meanwhile, profit from ignoring the absurdity around them.

The so-called shadow banking system accounts for a great deal of the excess. First, there are the trusts that live off bank balance sheets and lend primarily to real estate. The PBOC is trying to regulate these. Then there are manufacturers, metals traders, and other non-financial companies that tap lines of credit and lend the funds to desperate developers at fat margins. But the most dubious lending comes from nominally independent provincial banks flouting the PBOC’s directives.

The question is whether Chinese policymakers can deflate the bubble before it gets much larger — and in a way that makes China less bubble-prone in the future. As the United States discovered when the gilt came off its own Goldilocks economy in 2001, throwing more debt at the problem buys temporary relief at greater ultimate cost.  The Chinese do not intend to repeat this mistake, but if they are not careful, they may have no choice: a soft landing could turn hard and demand a hasty return to stimulus.

Western market economies have hardly covered themselves in glory recently, but there are also limits to China’s central controls. The main problem is the fixed exchange rate, which creates far too many renminbi per dollar (and euro, and yen) and makes it hard for China to set its own interest rates, since high rates would attract more inflows. This leaves reserve ratios as the PBOC’s main policy tool, but rationing the amount rather than changing the price of credit means money gets funneled to those with connections.

Deflating real estate is eminently sensible, but doing so in the context of an undervalued renminbi only treats the symptom and would leave China vulnerable to the next asset bubble before it can grow out of the debt from this one. Floating the renminbi would treat the underlying problem, stemming the flow of liquidity that makes China so bubble-prone while subduing inflation, allowing the PBOC to liberalize interest rates, and enriching domestic savers. Of course, this does not mean policymakers will do it.

Just as the United States treated a debt overhang with more debt, China will probably treat a breakdown in its control economy with more controls. Perhaps the firing squad will combat moral hazard better than bankrupting Lehman, but history suggests that as long as there is too much money sloshing around, there will be someone willing to lap it up. In the end, freeing the renminbi is the only cure.

By George Chen
The opinions expressed are the author’s own.

How time flies. It's already the end of August and speculations naturally arise about what China's inflation reading will be for this month.

The most optimistic view these days is that the August Consumer Price Index (CPI) could decline to below 6 percent. The most pessimistic view I've heard is that growth has slowed down in August, but probably only to 6.2 percent or 6.3 percent.

But, why should we care about the August CPI so much? One month cannot tell the whole story.

The reason we care so much is because if the August CPI growth slows down (we will see the official release of August economic data in the coming weeks), it's good news for the central bank as well as for the ordinary people in China who have been fighting with fast inflation for more than three years already. But, it's not good enough.

Yesterday, amid market talks about August CPI, I heard something interesting from Mengniu, China's top dairy product maker: "We are confident we can at least maintain (first-half) margin levels in the second half," Mengniu Chief Financial Officer Wu Jingshui told reporters after the company's first-half earnings release. He added the company might raise product prices and adjust its product mix to offset an estimated 3 to 5 percent rise in raw milk costs in 2011.

I shared the news on my Twitter-like Sina Weibo micro-blogging service. What was the response from my audience? Frustrated would be the accurate adjective to describe it. Mengniu is the industry leader and if Mengniu leads the next and latest round of product price hikes, you can imagine how rivals will react. Or might they have already coordinated a move on the prices?

Mengniu is not alone as price increases are not just happening in the dairy product business.

Chinese liquor maker Wuliangye also announced this week it will raise prices for its alcohol by 20-30 percent starting September 10 and industry analysts expect Wuliangye's local rivals will follow the path to maintain their profit margins, too.

So will CPI rebound (if it does decline in August, thanks to the recent fall of pork prices as some economists said) by the end of 2011?

More investors are becoming increasingly convinced these days that in a choice between GDP or CPI, Beijing should fight to maintain GDP not CPI. That is to say Beijing may tolerate further inflation, although at a slower pace month on month, but it can't afford to see economic growth fall sharply to 7 or 8 percent, as estimated by some economists.

As you can see from the decisions made by Mengniu and Wuliangye, Chinese enterprises certainly don't want to bear increasing costs that will hurt their profit margins. So, at the end of the day, the victims of China's rising CPI are the Chinese consumers.

George Chen is a Reuters editor and columnist based in Hong Kong.

Photo: Reuters file picture

When the global economy broke down in 2008, China was the savior. At that time Beijing rolled out a massive stimulus that was one of the biggest—per size of the economy—that the world has ever seen. The resulting benefits bolstered China’s economic strength at a time when the rest of the global economy was staggering under the weight of failing banks and surging public debt.

But the success of Beijing’s stimulus has masked underlying weaknesses in the country’s growth model. And the market is now waking up to the realization that global economic growth might remain suppressed for years to come.

In this environment, investors should be aware that the Chinese economy won’t be able to serve as the beacon of global growth indefinitely. Exports and investment overshadow household consumption. Public pressure is growing on the government to make growth more sustainable. The yawn between rich and poor is widening. And the Chinese leadership struggles to negotiate such difficulties with a homogeneous 1.3 billion person population dispersed throughout a country that is in different stages of development at the same time.

Reigning over this conundrum is the Chinese Communist Party—the 80-million member strong political apparatus in the unenviable position of being responsible for ironing out the country’s massive economic imbalances.

In a new report entitled “China’s Great Rebalancing Act” my colleagues and I on Eurasia Group’s China Team offer our assessment of the Party’s capabilities.

Our conclusion? China’s weaknesses are not just economic but also political. We argue that the Chinese political system is an obstacle to economic change in China, because the top leadership currently lacks the willingness to push through bold reforms that would require picking clear winners and losers in the government and the state-supported corporate sector. These reforms would lead the Chinese economy away from public investments and toward a more robust and diversified growth model, with consumption playing a bigger role. But the results of Beijing’s efforts to “rebalance” in this way—which is the ostensible goal of the Party’s much-heralded 12^th Five Year Plan—will be disappointing for foreign investors and for policymakers in Beijing alike.

Most worrying is that the Party will move only slowly in reforming the financial system—which sits at the very heart of China’s economic imbalances. In particular, fixed interest rates and often-unhindered financial support for state banks and companies artificially diverts China’s wealth away from Chinese families. Meaningful financial reform would include the liberalization of those interest rates. But the internal inertia against doing so appears too great at this time. Thus efforts to achieve more meaningful income redistribution in China will go unfinished. And even though gradual currency appreciation will help, so too will a real shift away from exports and investment and toward household consumption.

There will be some successes, though. Energy pricing reform and more variety in the country’s energy mix are achievable in the near-term, especially because the Party’s interests are broadly aligned with those of the increasingly powerful state corporate sector. Rapid urbanization is another inevitable trend that will yield consumption dividends for the economy. Beijing will have little difficulty investing more government cash into preferred industries to promote higher-tech production and Chinese innovation.

But the failures will weigh heavily. What’s the problem? In short, the Chinese Communist Party simply lacks the political gumption to force through changes that would require near-term pain–even if those changes assure longer-term gain for the country on the whole. The narrative that China’s policymakers are always able to make these kinds of difficult yet visionary choices is simply false.  The best proof is that, despite all the talk of “rebalancing” so far, the share of consumption in China’s economic growth actually fell last year, to 34%.

What does this mean for China? The economy has sufficient momentum that Beijing can muddle through with piecemeal reforms for now. But a failure to comprehensively rebalance will mean that the Chinese political economy becomes more fragile over the next five years, as today’s imbalances are perpetuated. This suggests that the Communist Party will face much starker choices—and graver consequences—in planning for its 13^th Five Year Plan in 2015.

After the rating agency Standard & Poor’s downgraded America’s long-term debt, China said that Washington needed to “cure its addiction to debts” and “live within its means.” It must have been a delicious moment in Beijing, accustomed over the years to lectures from Washington about its management of the yuan.

But actions speak louder than words. The real test will be whether China moves away from the dollar in any significant manner. While it makes modest adjustments to its reserve holdings, there are few good alternatives to the dollar. And while it calls for an international basket of currencies to replace the dollar, there are few takers. Of course, China might move toward opening its currency and credit markets in an effort to make the yuan a reserve currency, but the authoritarian political system is unwilling and unprepared to move to that degree of economic freedom.

Many commentators see the downgrading of American debt as a great shift in the global balance of power between the U.S. and China. Some wags have warned the American navy not to sail too close to China, because if the Chinese captured our ships, we would no longer have enough money to ransom them. But such jokes misunderstand the nature of power. Analysts point to China’s seemingly unstoppable growth and its holdings of United States dollars. But as I show in my latest book, The Future of Power, they fail to take into account the role of symmetry in interdependence in creating and limiting economic power. If I depend on you more than you depend on me, you have power. But if we both depend equally upon each other, there is little power in the relationship.

Some observers claim that China could bring the United States to its knees by threatening to sell its dollars. But in doing so, China would not only reduce the value of its reserves as the price of the dollar fell, but it would also jeopardize U.S. willingness to continue to import cheap Chinese goods, which would mean job loss and instability in China. If it dumped its dollars, China would bring the United States to its knees, but might also bring itself to its ankles. The situation, analogous to the Cold War’s balance of terror, where the price of aggression was the inevitable destruction of both sides, has both sides eager to maintain the balance of interdependence even as they continue to jockey to shape the structure and institutional framework of their market relationship. In 2010, when the United States angered China by selling arms to Taiwan, some People’s Liberation Army generals suggested that China punish the U.S. by dumping its dollars. The Chinese leadership wisely rejected their advice.

On American power relative to China, much will depend on the often underestimated uncertainties of future political change in China. China's size and high rate of economic growth will almost certainly increase its relative strength vis-a-vis the U.S. This growth will bring it closer to the U.S. in power resources, but doesn't necessarily mean that it will surpass the U.S. as the most powerful country. Even if China suffers no major domestic political setback, many current projections are based simply on GDP growth. They ignore U.S. military and soft-power advantages, as well as China's geopolitical disadvantages. As Japan, India and others try to balance Chinese power, they welcome an American presence.

The United States faces serious problems regarding debt, secondary education, and political gridlock, but one should remember that they are only part of the picture. In principle, and over a longer term, there are solutions to current American problems. Given the challenges they face, both China and the United States have much to gain by working together. As the largest and second largest economies in the world, the two countries have a responsibility to provide such international public goods as financial stability and less carbon intensive growth. But hubris and nationalism among some Chinese, as well as unnecessary fear of decline among some Americans, make it difficult to assure this future. Extrapolating the wrong long-term projections from short-term cyclical events like the recent financial crisis or the S & P downgrade can lead to costly policy miscalculations.