George Chen

Inflation, the new civil war in China

December 28, 2010
Mao Zedong led his Communist comrades to defeat the Chinese Nationalists in a civil war, founding a “new” China in 1949. Today, the Hu Jintao administration is fighting a new civil war and the enemy is inflation. Beijing announced the latest interest rate rise — the second of 2010 – on Christmas Day, effective on Dec. 26, also the birthday of Chairman Mao. I suspect, central bankers in Beijing didn’t really want to celebrate the holiday, they just wanted to give the market a surprise Christmas gift. I asked some friends in the financial industry if the rate increase was a surprise. The responses were very mixed. The 0.25 basis point increase for the benchmark deposit and lending rates was a sort of uniform move. If the central bank had gone for a 50 basis point rise, that would have been a very big surprise. The timing of the increase was a surprise, especially after Beijing raised bank required reserve ratios about a week earlier. We thought Chinese officials also needed a break after a very busy month but they have proved themselves to be unpredictable one again, not to mention tireless. Just one day after Beijing raised the interest rate, Hu Xiaolian, deputy governor of the People’s Bank of China, published an article on the PBOC’s website, saying the central bank would make good use of a combination of monetary policy tools next year, including interest rates, bank reserve ratios and open market operations, to make interest rates more market-oriented. How often will these tools be implemented? She didn’t say in the article, but now many analysts are predicting the next rate increase could take place in two or three months – within the first quarter. Clearly, China has entered a new cycle of rate increases. Many economists believe the newest rate rise shows Beijing’s determination to curb inflation, giving that task greater priority than maintaining economic growth. Some analysts also said the cabinet and some ministries were finally on the same page for tackling inflation after earlier disputes over how to balance the interplay between GDP and CPI. To be honest with you, I am not a big fan of interest rates. If you really rely on interest rates to improve living standards, it’s almost like living in a daydream. Hong Kong broadcaster TVB interviewed some residents of nearby Guangzhou city after the announcement of rate rise. Most of them the move and even the prospect of more increases in 2011 would not do much to help them feel better about inflation, which is rising much faster than the pace of rate rises. Can Beijing raise interest rates once a month? I don’t think so. Will inflation continue to rise above 5 percent in coming months? That’s my guess. The core cause of China’s high inflation is food but people are also very interested to see how much property prices can fall. Premier Wen Jiabao does realise that curbing property prices is much harder than controlling food prices. In a rare state radio interview yesterday, Wen acknowledged that the measures Beijing took this year to cool the property market were “not very well implemented” and changed his tone on getting housing prices to return to “a reasonable level”. Previously, he was usually more straightforward in his statements about wanting to see prices under control during his final term, which ends in 2012. Besides inflation, it will also be interesting to see how Beijing deals with yuan appreciation. With higher deposit rates for yuan, a hopefully more bullish stock market in 2011 and prices of houses and villas rising across the vast nation regardless of policy curbs in 2010, do the factors sound perfect for seeing the yuan increase in value too? In fact, as many economists have already pointed out, a stronger yuan can also allow China to import commodities and other items more cheaply, helping  the government get to grips with inflation. My grandmother, more than 80 years of age, once told me there were still many old people in China who miss the days when Chairman Mao was the leader and the distribution and balance of wealth were considered by some to be better shape than they are nowadays. Deng Xiaoping wanted to “let some people get rich first”, and today we see more and more people complain of feeling increasingly poor. It was not easy for Chairman Mao to win the civil war for control of mainland China, and the new civil war on the economic front is going to be a real test of the intelligence and strength of the younger generation of Chinese Communists.


Moutai, the stronger spirit of China?

December 17, 2010

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

Have you ever tried Kweichow Moutai, the Chinese liquor also known as baijiu? If not, I am afraid some people may say you don’t really know China that much.

Shenzhen, new home for Hong Kongners?

December 10, 2010
When people from the southern Chinese boomtown of Shenzhen began rushing to neighboring Hong Kong to buy cheaper daily necessities just few months ago as mainland inflation rose high and fast, some Hong Kong residents were apparently unhappy. This time, it may be the turn of Shenzhen residents to complain about the buying power of Hong Kong people. For what? Real estate. Hong Kong media including the Chinese-language, pro-Beijing newspaper Wen Wei Po reported that average prices for new properties launched for sale in Shenzhen last month rose more than 16 percent on year, partly driven by buyers from Hong Kong after the former British colony, now led by Chief Executive Donald Tsang, issued special tax in early November aimed at curbing property price rises by targeting short-term speculators. Some Hong Kong housewives have already complained of a surge in local dairy product prices after more Shenzhen parents went to Hong Kong to buy baby formula and  related products. A large package of baby formula may be about 100 yuan (about US$15), but a new apartment in Shenzhen is now worth several million yuan. If you talk about luxury villas, prices are closer to 10 million yuan or even above, yet still much cheaper than the equivalent space and location in Hong Kong. Some people may argue the trend of Hong Kong people going to Shenzhen and other second-tier cities in nearby Guangdong province to buy property is nothing particularly new, but the recent tigtening property policy move in Hong Kong has certainly given the phenomenon greater impetus. Since the new tax policy was implemented, local media have reported a drop in new property transactions in Hong Kong, while the number of Hongkongers going to Shenzhen for property has surged. According to one agent interviewed by local broadcaster Phoenix TV, if you have visited Shenzhen in recent weekends, you are likely to have bumped into many visitors from Hong Kong scouting locations with their property agents. Technically, it could become more difficult for non-mainland Chinese to buy property in Shenzhen as the local government is also planning its own price-curbing policies to ensure affordable flats for local residents. But many sales agents apparently have a different view. Property agents are encouraging rich Hong Kong people to purchase real estates in Shenzhen for one simple reason — as the Hong Kong government is asking for an additional 5-15 percent tax if you sell your property within 6-24 months of purchase, why not just go to Shenzhen to buy something and bet on the fast appreciation of the yuan. In 24 months, how much further will the Chinese currency have risen? And the Hong Kong dollar? Could be a sound strategy? Many Shenzhen developers even organize virtually free weekend trips for Hong Kong people “to enjoy a day in Shenzhen”. You pay just HK$100 (about US$13), basically to cover the bus ticket, and join a group with a professional property guide to tour some of the newest developments in Shenzhen. Post-tour dinner or massage, which the city is really famous for? It’s your call!

China property

China, still a command economy?

December 6, 2010
By George Chen The opinions expressed are the author’s own. What happens in China will soon affect the whole world – inflation being a case in point. Just last month we saw news that U.S. fast-food chain operator  McDonald’s had decided to raise menu prices in mainland China by 0.5-1 yuan. McDonald’s was fast to react to China’s growing inflation. Others may feel it’s already too late to raise prices because of the government‘s increasing price control policies. According to an official announcement posted on a Kunming government website, one of the largest cities in southwestern China, five retailers including Wal-Mart and Carrefour have been ordered to report any price adjustments with clear reasons for the changes in advance, with the final decision in the hands of the local government. The order is part of newly imposed temporary price controls to help Kunming fight fast-growing inflation. The notice said the controls would take effect immediately and remain in place until Feb. 28. I’m not sure how shareholders and investors of Wal-Mart and Carrefour will feel if news of the move spreads to Europe and the United States. French people are known for their deep love of freedom and now the two companies will have to think of ways to maintain profit growth in China as the cost of sales rises. More importantly, how will you balance your economic interests in the short term and your relationship with the Chinese government in the long run? Even the CEO of Wal-Mart gets the point: it’s still a tough job to get investors on the same page, otherwise the share price might have to take a hit. Kunming is not alone. Soon after the State Council, China’s cabinet, asked mayors to take serious steps to address inflation, many local governments started work on policies to control prices. In Guangdong province, one of the country’s richest, where local media have reported that three dairy makers raised retail prices for milk products by about 10 percent last week, the local government is also mulling similar policies. The powerful economic planner NDRC talked with major food product makers, asking them not to raise prices for daily necessities such as cooking oil for the next four months at least, local media reported. China has applied price controls during previous bouts of inflation with mixed results. As my Beijing colleague Zhou Xin noted, in 2007, Lanzhou, capital of rural Gansu province, capped the price of beef noodles. Although the move was initially popular, some residents soon complained that restaurants had in turn cut portion sizes. Oops! This round of price controls, from the central government to local government, level may last until the spring, when Beijing will hold the country’s most important annual political meetings, some analysts said. The controls should help Beijing cap the CPI level but it’s far from a sustainable situation. Before foreign companies such Wal-Mart become frustrated, state companies such as COFCO, the country’s No.1 food importer and exporter, have already shown signs of impatience — some COFCO officials have privately complained that price controls will eat into profitability, and their employees will not be happy to see a smaller year-end bonus, local media reported. The situation will be the same at other enterprises. Employees are also consumers. At the end of the day, who’s going to boost domestic consumption to maintain economic growth? George Chen is a Reuters editor and columnist based in Hong Kong. Photo: People carrying groceries walk along a street in Hefei, Anhui province November 18, 2010. REUTERS/Stringer

China inflation

The “hot money” war in China

November 19, 2010


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

“Hot money” is the hot discussion among Chinese officials, investors and the media these days. The “hotter” the fund flows are, the more risk there is to China’s financial system, many officials believe. Naturally, “hot money” has become a top enemy of the central bank, just like inflation.

In Shanghai, prices fly high

November 18, 2010


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

The other day one of my colleagues in Shanghai was happy to see her favorite fashion brand, Gap, finally arrived in China. That same day, November 11, China announced that inflation rose to a more than two-year high of 4.4 percent. It is no wonder then that, these days, Chinese people are complaining that almost everything is becoming more and more expensive including, of course, fashion.