George Chen

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

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

You may think I am overly cynical today but let me first ask you a simple-yet-complicated question — what is fair?

Global ratings agency Moody’s said yesterday that the United States will retain its top AAA credit rating after President Barack Obama signed a bill to raise the federal debt ceiling. However, we heard very different opinions from China on the credit rating of the world’s No.1 economy.

A Chinese ratings agency yesterday downgraded the U.S. from A-plus to A, saying the deal to lift the debt ceiling would not solve underlying U.S. debt problems or improve its debt-paying ability over the long term.

Dagong Global Credit Rating, a relative newcomer to the sovereign debt rating realm and little known outside of China, said in a statement that the U.S. decision to raise the borrowing ceiling would  not change the fact that the growth of its debt had outpaced overall economic growth and fiscal revenue.

Global ratings agencies are “unrealistic” in their assessment of U.S. credit, overestimating the ability of the U.S to pay off debt, Dagong’s chairman Guan Jianzhong told our correspondent Lucy Hornby in Beijing. Click here to watch the full TV interview online, brought to you by Reuters Insider.

I’m not going to tell you which rating is more accurate. Readers of my column on Reuters.com are mostly professional investors, so I am sure you have your own clear thoughts on this. The opposing views from Moody’s and little-known Dagong interest me purely because I really don’t know these days who is really telling the truth in the financial market.

When almost nobody is reliable and you can only rely on yourself, it’s really quite a scary feeling, isn’t it? Let’s imagine — today the U.S. budget ceiling adjustment took place in China, or perhaps France. What would the reactions of  rating agencies be?

I am of course not a ratings expert but I don’t think it’s rocket science. It’s just a decision on a combination of numbers and facts without any subjective thoughts or emotions.

Moody’s decision to keep the United States “Triple-A” and Dagong’s decision to downgrade the U.S. (made, some people say, for the sake of Beijing’s political agenda in Sino-U.S. relations) actually mean the same thing — that such ratings are merely subjective rather than based on facts and are in fact a potential and indirect risk to global economic recovery.

In the statement issued by Dagong downgrading the United States, the firm should probably have noted in its disclaimer that the U.S. Securities and Exchange Commission had denied Dagong’s application to become an officially recognised bond rater in the U.S.

Since then, Dagong has often verbally attacked the credibility of the SEC and the U.S. government. Google the news and you will find more buzz about the bad relationship.

So, tell me, who do you believe these days?

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

Photo: A Moody’s sign on the 7 World Trade Center tower is photographed in New York August 2, 2011 REUTERS/Mike Segar

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

Is the train crash tragedy becoming a turning point for China’s political and economic development?

Frustrations among the Chinese public have been growing rapidly — at least on the internet if not yet in the streets. People are particularly unhappy with the way the Ministry of Railways has dealt with the train accident, which so far has cost 39 lives.

It has now turned into a full-blown crisis. Shen Minggao, chief Greater China economist for Citigroup, said in his latest research note to clients that the train tragedy could become “a turning point in the China growth model.”

“Authorities may choose intentionally to slow GDP growth gradually but firmly to 7-8 percent in following years and spend more time to fix the problems created by artificial fast growth,” said Shen in the note.

Shen’s comments have sparked a big debate online. Some young Chinese have said they are utterly disappointed at the way the government has handled the post-accident situation and don’t believe fundamental problems in China like corruption and bribery can be fixed or changed quickly.

I consider such hopelessness a big political risk for Beijing — even more risky than the growing tensions over the South China Sea these days. People losing not just confidence but all hope in the authorities is one of the gravest problems any government can face.

In the capital market, we see some Chinese brokerages still recommending investors buy some railway-related stocks that lost value sharply in the past few days due largely to growing concerns on the outlook for China’s high-speed train development and safety issues.

Goldman Sachs analysts said in a report the train crash accident may speed up the pace of reform of the Ministry of Railways and some listed railroad companies can benefit from this.

Before the accident, some asset managers selected some railway stocks as a big part of their portfolios, and you know the way Chinese asset managers like to invest when they want to make a big bet – they usually unite.

That is to say, if one big fund steps into the railway sector, others will naturally follow, and then a sort of investment alliance is formed in the stock market. This is the so-called win-win way that many Chinese asset managers are happy to work with and this could well explain why some foreign fund managers can easily get lost when they first come to invest in China.

The train crash last Saturday was unexpected, a so-called “black swan” factor to those fund managers, and now it’s apparently going to affect the performance of some big Chinese funds for the coming months.

Will the train crash trigger a market crash in China? This is certainly not the turning point for that Beijing wants to see in its economy.

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

Photo: China’s President Hu Jintao (L) looks at Premier Wen Jiabao as they leave after the opening ceremony of the National People’s Congress at the Great Hall of the People, in Beijing March 5, 2011 REUTERS/Jason Lee

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

We’ve talked about whether China’s economy will have a soft or hard landing. In fact, what China needs is a pause. Lots of things in China may be moving way too fast. Including our trains.

On Saturday, at least 35 people died when a high-speed train smashed into a stalled train in eastern Zhejiang province, raising new questions about the safety of the fast-growing rail network. For a Reuters story, click here.

In my view, the train crash does not only raise doubts about China’s big ambitions and effort to build its high-speed train network. It also adds to people’s frustrations over the way the country is administered. Some political commentators have said the “accident” was not really an accident but an incident, which in the end may have corruption, irresponsibility and bureaucracy to blame for.

For investors, it could be a time to short on those high-speed train related stocks. The Ministry of Railways tried the best to regain trust from the nation’s frustrating passengers that China’s latest high-speed train technology is safe and advanced. Such declarations came less than 24 hours after the tragedy that the the entire country is now mourning.

I think the market has already given its response to the rail ministry — shares of China train equipment makers fell as much as 16 percent on Monday. Meanwhile, many investors began to refocus on airlines. For a related Reuters story, click here.

Chinese companies and stocks have been under growing pressure in the past months on a variety of factors related to safety and stability.

Are Chinese food companies safe? Can accounting records and the business performance of listed Chinese companies be simply stable, rather than subject to abrupt warnings of earnings revisions, or challenges by rating agencies over credibility problems?

When we talk about the safety of China, it’s not just about the safety of the country’s transportation. The big question is if China is morally safe.

The New York Times quoted a Chinese blogger as saying: “China, please stop your flying pace, wait for your people, wait for your soul, wait for your morality, wait for your conscience! Don’t let the train run out off track, don’t let the bridges collapse, don’t let the roads become traps, don’t let houses become ruins. Walk slowly, allowing every life to have freedom and dignity. No one should be left behind by our era.”

I will stop here and leave you to consider that.

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

Photo: An injured man receives medical treatment at a hospital after two carriages from a bullet train derailed and fell off a bridge in Wenzhou, Zhejiang province July 24, 2011 REUTERS/Aly Song

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

Let’s talk about properties, again. It’s time to rethink.

I  know some people in the capital market are concerned about Premier Wen Jiabao’s latest comments on rebounding property prices in second- and third-tier cities in mainland China, and that he’s asked local governments to keep tightening.

Please allow me to be frank — these comments are more an indication of a political attitude than a signal of new hardline moves.

Shares of property developers fell last week on Wen’s remarks, which made investors more pessimistic about the broader market as most believe a substantial rebound would have to be supported by property and financial stocks. They are the real and most important factors supporting not only the stock market but also overall economic growth. You know that. I know that. And I also know Beijing should be aware of this crystal clear point.

Days before Wen made his latest verbal attempt to bring property prices under control on the mainland, Yu Zhensheng, the top Communist Party boss in Shanghai, made an interesting comment when meeting some visiting Hong Kong businessmen.

Yu told the visitors that Shanghai also wanted to get the city’s property prices “under control,” but noted that didn’t mean the government wanted to “attack and cause a crash in the property business.”

Yu’s message was widely reported and considered a desperate effort by Shanghai to retain foreign investment in its property sector to support the city’s ambitions to become a true world-class financial centre by 2020.

Days after Wen’s comments, Hong Kong’s richest man Li Ka-shing also revealed his latest development plans in Shanghai. Li has made a fortune and invested a lot in Shanghai in the past two decades and continues to invest despite all the cold calls from officials in Beijing on property development across the vast country.

Wen will remain in power for about one more year before his scheduled retirement. When we get a new administration, things could be very different, and if you are an executive, you know you can’t just wait until things get different. Investment has a cycle, just like Rome wasn’t built in a day.

Remember probably one of the most popular political slogans in the U.S. in recent times? “It’s the economy, stupid!” Bill Clinton promoted this idea successfully in his 1992 presidential campaign against George H. W. Bush and you know who won the game in the end.

To Beijing, my sincere suggestion is to refrain from making economic matters, in particular the property business, too political in the future.

The People’s Government should not see the property business as an enemy. If you want more people to be able to afford to buy apartments, do something else to help them become rich. Otherwise, even if property prices fall 50 percent, the young generation will still tell you the sad truth — sorry, I can’t afford it.

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

Photo: A cleaner wipes a window as he abseils down the front of a building in the financial district of Beijing May 5, 2011 REUTERS/David Gray

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

There are growing signs that something is brewing in relation to China’s foreign exchange rate regime.

When Hong Kong traders returned from the Easter break, many were surprised to be told by their mainland colleagues about growing market speculation that Beijing might be planning a one-off deal to lift the value of the yuan — some say by as much as 10 percent.

Others are more cautious. They say a one-off revaluation sounds unlikely although Beijing may relax foreign exchange controls by setting new “game rules” around the upcoming Labour Day holiday in the first week of May. The Financial Times yesterday ran a nice scoop about sovereign wealth fund China Investment Corp being set to win new funds, likely $100-200 billion, as Beijing seeks to diversify its massive foreign exchange reserves, now exceeding $3 trillion.

I support the idea of further empowering CIC. If Beijing wants to reduce its exposure to U.S. debt, expanding direct investment worldwide is a very workable solution. Will Beijing make a formal statement on its ambition to boost CIC’s shopping power abroad during the Labour Day holiday?

Don’t forget we will soon have one of the most important U.S.-China summits with the annual Strategic and Economic Dialogue (S&ED) meeting in Washington on May 9-10. Of course, the yuan exchange rate will naturally be a focus of the dialogue. If CIC invests more in the United States, that may help the U.S. add more jobs. But then you may naturally think of another question — will the U.S. be happy to take so much money from China yet restrict its investment to some “boring” sectors?

Before the new S&ED meeting, Senate Majority Leader Harry Reid and other U.S. lawmakers back from a trip to Beijing said on Tuesday they had been assured that China would allow its currency to continue to rise against the U.S. dollar.

The yuan rate is now indeed a double-edge sword. Chinese leaders including Premier Wen Jiabao have repeatedly indicated at recent meetings and in state media reports that the government may consider allowing the yuan to rise to help curb rising inflation. That may well explain why the market is full of speculation about possible new yuan policy changes in the coming weeks.

Beijing does have a habit of making surprise policy announcements during holidays.

But April is almost over. It’s also the last month for Jon Huntsman as the top U.S. representative in China. He will officially leave the post of U.S. Ambassador to China at the end of April. Some speculate he may run for the 2012 U.S. Presidency. I am more persuaded by other opinions that he would have better chance by teaming up with a Republican candidate to run for vice-president.

Even if he and his presidential candidate fail, the media and public attention should be enough to allow him to aim for the White House in 2016.

Wait a minute … did I just suggest that President Barack Obama is too strong to fail? If you’ve seen Inside Job, the award-winning documentary film about the financial crisis, you may have different thoughts on Obama and his core values.

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

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

Are Chinese bankers overconfident? Or perhaps global investors are too suspicious of China?

A couple of days ago, Bank of China Chairman Xiao Gang dismissed growing market concern, in particular from the West, that a debt crisis could be brewing given the rising level of bad assets in China’s banking system.

Xiao said bad loans would be kept under control and he cited Chinese people’s “good tradition” of repaying debts to back up his argument.

Yesterday, Minsheng Banking Corp Chairman Dong Wenbiao told the media he believed the stock market, especially listed banks, under pressure since late last year from monetary policy tightening, should see some good days soon.

The simple investment logic behind his optimism? “Because the government is tightening the property market, but there’s still too much money in the market. When people are unable to buy property, they will choose to buy stocks again,” he told the official Guangzhou Daily.

Both Xiao and Dong gave their comments during the ongoing annual parliamentary meeting in Beijing. Bank of China is one of the Big Four state lenders. Minsheng Bank, the country’s No.7 bank by assets, is China’s first non-state lender with strong business links to local private businesses.

It may be unfair to say they are overconfident because this political summit in Beijing is exactly the time they must give expressions of firm confidence in China’s economic outlook.

Otherwise, why bother flying into Beijing for the meetings? Isn’t this all about boosting confidence? Not only for the public but also China’s leaders themselves?

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

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

While Chinese lawmakers gathered in Beijing for the annual parliamentary meeting, I returned to my hometown Shanghai for a holiday.

The  lawmakers are keen to discuss China’s macroeconomic matters these days, but I am more interested in being a microeconomic observer. For example, how much does an apple cost in Shanghai these days?

During my holiday, I brought my girlfriend, a Hong Kongner, to Shanghai No.1 Food Store on the historic Nanjing Road. The store is a favorite place from my childhood as I felt I could buy food items from all over the world under one roof.

But, today a shock lay in store.

Apples imported from Japan sell for 198 yuan (about US$30) each. My girlfriend was also shocked: “I think it’s even more expensive than those in SOGO in Causeway Bay (Hong Kong).” I believe her.

I shared the expensive apple story at a family dinner. To my shock again, my Shanghai relatives didn’t seem particularly surprised to hear this. “It’s normal. You have supply and you have demand, so I say it’s normal,” my uncle said.

Now you might want to challenge my uncle with a simple question — are Shanghai people so rich these days that they eat 198 yuan apples? We know the sad but true answer. No. You can clearly see the rapidly enlarging income gap between the super-rich, the middle class and the poor.

Speaking of income gaps and how to solve them, I wrote a column before my holiday and I took the property market as a case study. Read it here.

My 198 yuan apple story may sound too extreme. A “normal” apple is not that expensive in Shanghai. Fifty yuan (US$7.6) will buy you a pack of apples that you can probably eat for a week. To me, it seems cheap enough but to my father, who’s been observing microeconomic changes in China for the last five years since his retirement, still found cause for complaint.

“The price of apples shot up too fast. Last year, 50 yuan would buy a large basket that you wouldn’t be able to finish in a month,” he said.

The spokesman for China’s top economic planner, the National Development and Reform Commission, told the media this week that China’s February CPI would start to decline. Investment bank Nomura also issued an updated estimate on March 9 that the February CPI reading could be 4.8 percent on year because of a fall in food prices.

To meet the official goal of keeping inflation to a 4 percent average this year, the government has raised interest rates three times and banks’ reserve requirements five times since October, while also using a series of direct controls to cap price rises.

China’s top leaders have declared that their priority this year is to control inflation. So far, complaints about rising prices have amounted to little more than grumbles, but serious inflation has sparked social unrest in China in the past.

I sent a short message to my father in Shanghai to tell him the Nomura estimate and he quickly replied: “Can you invite the analyst to visit Shanghai and I’ll treat him to some apples.”

One of my social science professors once warned me: “Remember, politicians are all liars, in the West and in China.” So, I guess as a microeconomic observer, my Shanghai holiday should make more sense than the ongoing meetings in the Great Hall of the People in Beijing, for a realistic indication of what’s going on in China.

Photo: A man buys vegetables at a local food market in Shanghai December 11, 2010. REUTERS/Carlos Barria

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

While U.S. President Barack Obama hopes to see a quick property market recovery to boost investor confidence, China’s intentions for its own property market are the diametric opposite – not because it wants to damage investor confidence, but rather to cool growing social unrest prompted by fast-rising property prices.

On Jan. 26, Chinese Premier Wen Jiabao hosted a cabinet meeting to discuss the latest property market situation. As a result of the top-level meeting, Wen announced his new “eight-point” guidelines, considered by many analysts as the toughest so far and probably his last major effort to curb property prices:

1. Local governments should set 2011 property price-control targets and make them public

2. Land supply for affordable public housing should be stepped up and the pace of construction increased

3. Properties sold within five years of purchase will be subject to a sales tax based on the selling price

4. The minimum down payment requirement on second homes will rise to 60 percent from 50 percent

5. Land supply for residential property this year should be no less than the average annual figure from the previous two years

6. Home-purchase limits will be adopted nationwide. Local governments should limit home purchases by non-local residents and those who have already purchased more than two homes

7. Local government should take responsibility for stabilising property prices (in other words, those who fail to do their job could be punished)

8. Increased education to encourage more sensible property investment to create a more stable market for the long term

Wen, whose nickname is “Grandpa Wen” for his usually warm public personality, has pledged to rein in property prices before the end of his final term in office in 2012. But time is short and progress has so far been limited, so he has decided to take action once again.

Among the eight points, the most important is of course to raise the down payment minimum for second-home buyers. Local media have already reported a sharp rebound in property transactions, one or even two times more than usual since the beginning of the year in some big cities such as Shanghai and Beijing. With the anticipation of more policy curbs, Chinese home buyers feel compelled to sign deals more quickly and more aggressively.

Early this week, official think-tank the China Academy of Sciences released its 2011 forecasts, including an estimate that property price growth may slow but will still rise about 12 percent on average. Such forecasts should serve as clear cautions to Premier Wen if he wants to keep his promise before he retires.

Ironically, property prices have risen more than ever before since Wen took power. Of course, you can’t blame him. All this, I say, is a natural process and the result of strong economic growth and increasing personal wealth.

But just like a coin, everything has two sides. Those who get rich (as late Chinese leader Deng Xiaoping said “let some people get rich first”) are happy to get their homes. Those who miss the chance … oops … perhaps Premier Wen can do more to get them on track.

For global fund managers, who are still talking about the beautiful China story: Wake up, please, because 2011 looks like a truly strange and difficult year for China, if not for the whole world. Chinese banks are under pressure, thanks to endless reserve ratio increases. Property is now under attack.

Commodities prices continue to rise in global markets and most people say it’s too complicated to understand how commodities and futures products work. So, tell me which is relatively speaking the safest area to put money?

Perhaps property if you are a firm believer in yuan appreciation, which could be even faster this year for the sake of Sino-U.S. relations? I do believe President Hu Jintao doesn’t mean to disappoint President Obama after his successful state visit.

Apparently, Zhang Xin, CEO and co-founder of leading Chinese developer SOHO China, is still a big fan of the business. There is little reason to expect new measures by the Chinese authorities to rein in property prices will be any more effective this year than in 2010, she told our reporters in Davos.

What happened in 2010? It was considered the toughest policy year for real estate in China. And the result? Property price rose more than 20 percent on average.

“So what, you say? Do what I do. The property market is already out of the government’s control. It’s too late,” a fund manager summed up the recent property policies for me when we had lunch recently. Then he ordered another glass of wine despite complaints about his lower bonus this year, given mediocre fund performance in 2010.

My fund manager friend is probably what Deng was talking about — those who get rich first. He’s now looking to buy his third home in Shanghai.

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

Photo: A man walks past portraits of China’s President Hu Jintao (R) and Premier Wen Jiabao by Chinese artist Ye Zhifu outside a gallery in Beijing, January 18, 2011. REUTERS/Jason Lee