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.

It’s been a month since my last column on Reuters.com as I have been on the road for a while.

When I travel in New York and London, my identity is more like that of a consumer with a dash of journalistic observation. People usually say Hong Kong is a shopping paradise but in my view, Hong Kong is no longer my favorite city for shopping. For U.S. fashion brands such as Cole Haan or Banana Republic, prices are much cheaper in New York. It’s the same for London if you’re a big fan of Burberry or Paul Smith.

The American people I know complain far less about the financial crisis than two or three years ago. Instead, some of them say they actually enjoy some of the benefits. Rents are cheaper. Food is cheaper. Transport companies are unable to raise ticket prices.

Prices for some nice homes in the historic Embassy Row, Washington D.C., look attractive to me. How much can you buy if you have $1 million? You can probably buy a nice house in downtown Washington or a tiny flat in Asia’s financial centre Hong Kong. $1 million is no longer a dream for many Chinese people thanks to the yuan’s appreciation. Let’s face it — America is cheaper and the Chinese are getting richer.

But the Chinese have their own problems; they don’t feel that rich at home.

The inflation reading for June hit a three-year high of 6.4 percent year on year, and Goldman Sachs said we may see further highs in July or even August. During his recent trip to Britain, Chinese Premier Wen Jiabao, often known as “Grandpa Wen” in China for his kind and down-to-the-earth image, claimed the inflation problem had been solved. He may need to think twice after seeing the angry public reaction in China on the rapid rise in consumer prices, especially food.

You may also want to hear what China’s central banker governor Zhou Xiaochuan said about inflation: he asked the media and public not to “overreact” to the June figure and apparently tried to prove he was doing a good job.

The central bank had many things to deal with, not only inflation, for example international payments, he said at a recent meeting. Mr. Zhou, I respect you as an intelligent and influential central banker, however, to ordinary Chinese such as my parents in Shanghai, your comments on inflation simply make them feel almost hopeless about the outlook for their purchasing power.

Perhaps the Chinese Communist Party, which is celebrating its 90th anniversary, wants to send this message — it’s not that bad to be Chinese. Go abroad and buy whatever you want and you will be proud of holding yuan and being Chinese.

Perhaps I’m too simple and naïve?

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

File photo: Shoppers walk up Fifth Avenue in front of the Cartier jewellery building in New York, December 7, 2008. REUTERS/Chip East

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

These days I’m increasingly convinced that inflation is not just a China issue but a global problem and one that is becoming worse.

Yesterday when I posted a photo of rice noodles on my Chinese Twitter-like mini blogging account, I didn’t expect it would lead to quite such an active online discussion. I paid HK$16 (about US$2) for the bowl of noodles in the canteen of the University of Hong Kong (HKU). My friends from Geneva to New York to Shanghai “complained” that the price was way too cheap.

Well, the University Canteen is intended for students and I am indeed a HKU post-graduate student, part-time.

My friends in Shanghai told me a bowl of beef noodles costs about 30 yuan (US$4.6). In New York’s Chinatown, you might be charged US$4, according to a colleague, who is trying to break her daily Starbucks coffee addiction to save money in the Big Apple. Let’s face it — In many cases, a pay rise you receive won’t keep up with inflation these days. To address the problem, central bankers around the world — except the U.S. Fed — are apparently coming to a common understanding: that increasing interest rates is becoming a more realistic option.

The European Union is joining China to become the latest member of the international community to fight inflation via rate increases. The European Central Bank raised interest rates for the first time since the 2008 financial crisis on Thursday, signaling it is ready to tighten policy further if needed to help balance rising prices.

Given the big picture for globalization nowadays, the rate rise in Europe will certainly have an impact on a variety of domestic sectors in China. I believe your inbox will soon be full of research notes from investment banks helping you analyze the impact, so I won’t elaborate here.

But I do have a question for China, and maybe for Europe, too. Can rate increases really help China and the world solve the inflation problem? What we learned from the G20 meetings is that a key problem to solve  is global imbalances and there are some “imbalance indicators” that China already rejected. From a microeconomic perspective, such imbalances refer to the income gap, which rate increases don’t really help.

According to a Reuters poll of leading economists and analysts in China this week, the country is expected to see at least one more rate increase and the central bank is likely to raise banks’ required reserve ratio three times this year, possibly as soon as this month. Nevertheless, most analysts polled said it would still be a challenge for Beijing to keep its pledge and stop inflation rising above 4 percent.

This week is certainly a very busy week for China and the global market. Just one day after China’s central bank increased its benchmark lending and deposit rate on Wednesday to help curb inflation, the government announced it will raise gasoline prices by 500 yuan per tonne and diesel by 400 yuan per tonne from Thursday.

According to some research notes, after the newest gasoline price hike, retail prices for No.93 gasoline, the most commonly used type in China, is 7.79 yuan/liter, and the price level is expected to rise over 8 yuan in the coming months and may hit 10 yuan or exceed 10 yuan by the end of this year.

That is to say Chinese drivers will soon pay more for gasoline than their counterparts in the United States. Is that the price must China pay to be the world’s No.2 economy, and the price that Chinese consumers should pay for?

The news has not gone down well with everyone. One Chinese netizen on Sina Weibo, the Twitter-like mini blogging service, which is very popular in China, joked: “My feeling is that I just happened to pick up 1 yuan on the street, like a beggar, and then I was robbed 100 yuan by a policeman.”

Some analysts are starting to wonder if China’s inflation is starting to get out of control and many banks like Goldman Sachs now estimate China’s March Consumer Price Index readings will exceed 5 percent. And considering that the government felt the need to hike the gasoline price tax, April’s data may look even uglier, possibly heading toward 6 percent in terms of growth on year.

The rate hike won’t cool off growing public angers on rising property prices in China either. Most ordinary Chinese have to face the reality — if you’re not rich, you just can’t afford to buy, even if the central bank raises interest rates 10 times a year. And those who are rich don’t care how much mortgage rates are raised, they can pay in cash.

Don’t just blame China — almost the same thing is happening in the West. A friend in Paris told me prices had risen more than 50 percent from last year for some downtown properties — even faster than in Shanghai and Hong Kong.

Let’s talk about noodles again, which are certainly far more affordable to buy than a flat. If such day-to-day products are cheaper in Hong Kong than most places in mainland China, what about traveling to Hong Kong to buy your necessities if you earn Chinese currency yuan, which is growing stronger than the Hong Kong dollar, which is pegged to the U.S. dollar? If you live in the nearby southern Chinese boomtown of Shenzhen, this is already happening.

In the global battle with inflation, everybody has their own way of dealing with the situation. So I will keep going to my university for the cheap (and delicious) noodles. What about you?

George Chen is a Reuters editor and columnist based in Hong Kong. He’s also a part-time post-graduate student, studying international relations at the University of Hong Kong.

Photo: Chinese spicy rice noodles I bought in the canteen of the University of Hong Kong on April 7, 2011. Reuters/George Chen

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.

Let’s face it — it appears there is only upside for property prices in China.

Chinese officials from Premier Wen Jiabao on down to small city mayors have been telling the public they will try their best to keep property prices under control and have indeed done much in the past 12 months via tightening monetary policy and government restrictions on property purchases. The result? Unfortunately, the more they talk, the more disappointed Chinese people feel.

The People’s Bank of China, the country’s central bank, has so far raised bank required reserve ratios (RRR) nine times since January 1 last year. The most recent on February 18 brought the RRR to a record 19.5 percent. The theory is that as banks place more money with the central bank, market liquidity should tighten and buying power for everything, not just property, should weaken.

China’s central bank has also raised its benchmark interest rate three times since October 19, most recently on February 8. Again, in theory, raising both deposit and lending rates can offer defense against fast-raising inflation, cooling some overheated sectors and also discouraging people from buying property, given the higher mortgage rates.

However, we all know that what works in theory doesn’t always carry over to the real world. So, what’s happening in the real world these days?

Property prices in Shanghai, China’s financial capital, rose more than 1 percent year on year in January. The increase came after the city announced a controversial new property tax plan that angered the growing middle class. For Hong Kong’s neighbor, Shenzhen, price levels rose 2 percent, surprising even local officials who had expected a greater impact from the city’s most recent restrictions to limit property purchases by non-residents.

In Hong Kong, a new apartment project in the popular downtown nightlife area Soho went on sale last week. A 400-plus sq ft unit was offered at about HK$18,000 per sq ft — and although you have to pay up front, you also have to wait a few months before you get the key. About three months ago, after the former British colony announced its toughest policy efforts including a high additional transaction tax targeting property speculators, a three-year-old apartment sold for about HK$12,000 per sq ft.

Now, even the city’s property agents are shocked by the pace of the increase. When Hong Kong property prices matched the peak seen in 1997 late last year, many people expected a crash. Now the 1997 peak looks more like the new bottom from 2010.

This week, China’s top five banks decided to scrap mortgage rate discounts for first-home buyers in some big cities such as Beijing and Shanghai as part of the latest round of efforts led by the government to cool the red-hot property market. Last year, they removed discounts for buyers of second and third homes. Can this zero-discount policy for first-home buyers, which is widely considered the last effort by Chinese banks to help the government rein in property prices, really have an effect this time? I doubt it.

So, what’s the core reason preventing property prices in China from falling at the government’s behest, despite the toughest policy curbs in the past one to two years? The answer is simple – there’s just too much money about. If you think even deeper, the true and sad story is that all this liquidity is in the hands of too few people in China and those people simply don’t care about mortgage discounts or other policy curbs.

The more challenging question is: why is so much money is held by so few people? This may be part of the so-called “deep-rooted and underlying problems” that government leaders from President Hu Jintao to Hong Kong’s Chief Executive Donald Tsang are studying. Can they solve it? It will take time, and we’re unlikely to see a solution before the end of the Hu administration.

The “deep-rooted and underlying problems” are about why the income gap in China is expanding instead of shrinking as China becomes the world’s No.2 economy. It’s also about the way some people can make money so quickly and easily while others cannot. In other words, does corruption contribute to the rise in property prices? Is today’s market dominated by “special interest groups” rather than genuine home buyers who just want a place to live?

From this perspective, interest rate increases and other property market restrictions simply aren’t game-changers as these factors are not the key rules for the game in the capital markets. Sad but true, expecting property prices to fall 50 percent in a year just because the Big Five banks remove mortgage rate discounts for first-, second- and third-home buyers may be, I have to say, too naive.

I suspect the only time property prices will become more acceptable is when Beijing is able to narrow the income gaps between the super-rich, the middle class and the poor.

We don’t care whether property prices fall or not, what we care about is whether we can afford to buy the property. When the general public becomes richer as individuals, and even these high property prices become more affordable, we may hear fewer complaints.

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

Photo: A couple is accompanied by a sales agent (R) in front of the model of a property development, at the 5th China (Shenzhen) Real Estate Fair in the southern Chinese city of Shenzhen May 4, 2010. REUTERS/Bobby Yip

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