George Chen

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

What does PX mean? That’s the keyword for China from the past 24 hours.

State media reported that residents of Dalian were recently forced to flee when a storm battering the northeast Chinese coast, whipping up waves that burst through a dyke protecting a local chemical plant. The plant produces paraxylene (PX), a toxic petrochemical used in polyester.

On Sunday, some angry residents finally decided that instead of being forced to flee, the chemical plant should be relocated.

Tens of thousands of people took to the streets to demonstrate and Dalian, known as one of the most beautiful coastal cities in China, made headlines all over the world.

Dalian is not alone.

Blame bad luck or natural disasters, perhaps. Four days ago, an accident at a factory in Shandong province resulted in a deadly chemical gas leak and 125 people, mostly workers and nearby residents, were sent to the hospital, local media reported. About three months ago, poisonous chemical waste was dumped illegally, polluting water sources in Yunnan province. The case was only recently revealed to the public. You can imagine how angry local people must feel.

I had a chat with a young and well-educated fund manager, a typical middle-class Chinese, about those recent accidents and his views surprised me. The fund manager is usually very calm and polite before colleagues and clients. He told me he would take to the streets and even fight to the death to get the PX plant relocated if he were a resident in the area.

“It’s for the next generation, our children … The government must be aware that children are the last hope for many Chinese parents. They will do anything against the government if they think their children cannot have a happy, healthy life,” he said.

Environmental pollution has been one of the major causes of social unrest in China, which had almost 90,000 such “mass incidents” of riots, protests, mass petitions and other acts of unrest in 2009, according to a 2011 study by two scholars from Nankai University in north China. Some estimates go even higher.

About a decade ago, I still remember clearly, one of my professors told me that in China even if you don’t want anything to do with politics, at some point politics will find you and drag you into it. Global investors when rushing into China for buying opportunities must also bear in mind the political risks and fast-changing social environment.

The PX case in Dalian, the gas leak in Shandong and the contaminated water in Yunnan all prove the same thing — you can barely live without being touched by politics in China.

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

Photo: Residents hold a banner with Chinese characters forming a shape of a skull which reads ”Get out PX (paraxylene), give us back our home, never give up” as they demonstrate against a petrochemical plant at the People’s Square in Dalian, Liaoning province August 14, 2011 Reuters/Stringer

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.

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.

From working lunch to “private dinner”, Texas ranch to the White House, and George Bush to Barack Obama, you can clearly see the differences in the approaches of the two U.S. presidents to welcoming Chinese President Hu Jintao.

The aim is almost the same, to win the heart and mind of Hu before the United States tries to convince him and his country to increase cooperation with the U.S. on a range of tough issues – for example, North Korea.

Influential Chinese newspaper The 21st Century Business Herald reported that First Lady Michelle Obama would “supervise White House chefs” over the food to be served during the state visit. Earlier, Obama said he would treat Hu to a “private dinner”, a very rare arrangement for visiting heads of state to the U.S., affording the two gentlemen private space for a more frank conversation at the White House.

The Chinese-language report highlighting Michelle Obama’s supervisory role at the private dinner was an attention-grabber and one of the most-read articles on many leading Chinese news portals so far this week. Many Chinese netizens praised Mrs. Obama’s kind offer to treat China’s “top boss”. It would seem that before Obama has even had a chance to win the heart and mind of Hu, his wife has already scored brownie points among the Chinese public.

Things were very different just five years ago. In 2006, when George Bush was president and invited Hu to visit, he initially suggested that Hu visit his private ranch in Texas. When the news went public, the reaction in China must have surprised Bush.

Many traditional, middle-aged Chinese people didn’t really like the idea of Hu being received at Bush’s personal ranch instead of the White House. Some Chinese scholars also publicly criticized the idea, which they believed failed to reflect the seriousness and importance of Sino-U.S. ties. In the end, Hu didn’t go to the ranch, but had to settle for lunch at the White House.

No dinner? Chinese people generally prefer dinner to lunch. Lunch is a more specific, purpose-focused meal, for example the business lunches that bankers in Hong Kong so often attend. Lunch is about the talk more than food. It’s not really about winning the heart and mind of the guest, but a more pragmatic approach to make him help you solve certain problems.

The Chinese way of dealing with friendships is that you’d better bring your Chinese friend to a formal dinner – the more formal, the better it demonstrates how serious you are about the relationship. This time, Obama scored the point. A private dinner at the White House, the counterpart of Zhongnanhai, where Chinese leaders live in Beijing, sounds like a sufficiently friendly and serious approach to please Hu and improve the Sino-U.S. ties.

For various reasons, Hu’s last visit to the United States was not considered a happy or successful trip by many political analysts and scholars.

Remember the story about the Chinese national anthem played at the White House on Bush’s official reception for Hu? Thank God. The anthem was correct – the one for the People’s Republic of China. But it was announced by the U.S. solider responsible for hospitality at the ceremony as the anthem of the Republic of China, in other words Taiwan! Just imagine how Hu must have felt when he heard the words: “Now, the national anthem for the Republic of China”.

Many things have taken place in the five years since, and the rise of China is something no one can ignore, although whether the rise is peaceful or an emerging threat to the region or even the world is a new subject of debate for many.

It seems Obama understands China better than his predecessor, or he has to understand China better given its bigger impact on world affairs. The more prudent rather than self-important, and a more personal rather than state-arrogant approach by Obama towards Hu and China may reflect new attitude toward Sino-U.S. relations for both sides.

However, that doesn’t mean the international community should hold up their hopes too high for the outcome of the meeting. A private dinner may help win Hu’s heart, but you can’t expect him to immediately get tough on North Korea after he returns home. The same goes for Sino-U.S. trade, yuan appreciation and so on. Chinese leaders prefer to “proceed step by step” or  循序渐进 (xun xu jian jin) as they say in Chinese.

So, how should we measure the success of Hu’s trip to the United States? My personal view is that the top priority for Obama and the U.S. government is to win Hu’s heart and mind first. Once you make him happy, improve mutual trust and create some sort of chemistry, then you just need a spark to start addressing the other issues.

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

Photo: China’s President Hu Jintao waves upon his arrival at Andrews Air Force Base near Washington for a state visit, January 18, 2011. REUTERS/Jason Reed