George Chen

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.

Let’s talk about Italy.

Italy is about art — Leonardo da Vinci, Michelangelo Buonarroti and more names. Italy is about luxury — Prada, Salvatore Ferragamo and more brands. Italy is also about food.

But, right now, Italy is about debt — huge national debt that is putting the entire eurozone or even the rest of the world into market panic. So, who’s going to rescue Italy?

Perhaps Chinese investors. They are focused on Italy these days because the deepening debt crisis there has become a negative external factor dragging down the benchmark Hang Seng Index for two straight trading sessions. At the beginning, people were not fully aware of the situation, as some thought Italy could not be Greece.

After all, Italy is the No.3 economy in the euro zone. How can Italy be in crisis? If Italy is in trouble, what about the rest of Europe? Yesterday, I moderated an online forum where a former Trade Commissioner for the Italian government spoke. Mr. Romeo Orlandi, an old China hand, who’s now teaching globalisation at the University of Bologna in Italy, said Italy was “too big to fail”.

The European Union may find it difficult to work with the current Italian government given political dramas related to Prime Minister Silvio Berlusconi and the highly complex domestic politics in Italy, but one likely scenario is that Italy should survive from the growing debt crisis in Europe if Beijing decides to step in to help.

The Chinese government is already suffering from the “cheap dollar”, given its more than $3 trillion in foreign exchange reserves, in which U.S. dollar assets play a major part. As such, a “cheap euro” may be the last thing Beijing wants to see.

Beijing has already pledged to help at least two European nations — Greece and Portugal — solve their debt problems by buying government bonds. Mr. Orlandi expects that Beijing could take a similar approach with Italy.

The link between Beijing and Rome strengthened further after Prada floated shares in Hong Kong. The luxury handbag maker has already established a strong customer base among China’s fast-growing middle-class. Today, Italian media broke the news that Berlusconi’s AC Milan soccer club may consider Hong Kong for its planned IPO.

Chinese Premier Wen Jiabao traveled to Italy early this year to show his support for Sino-Italy business cooperation. Recent media reports also indicated that China Development Bank, a policy bank turned commercial lender strongly backed by the Chinese government, may pour more money into business opportunities in Italy.

The truth is the deeper you get in, the more difficult it is to get out. But let’s try to think positive. When a crisis occurs, it certainly also means opportunity. To Beijing, it’s time to consider what role it should play in Italy’s growing debt crisis. To the rest of the world, if Beijing steps in, then what else shall we worry about?

Of course, analysts at Moody’s may disagree with me as they have a fight in words and reports with Beijing on how financially healthy the Communist nation is, but that’s another story. Economists have been forecasting that the Chinese economy could collapse for the last decade, but nothing has happened yet.

So let’s focus on Italy — for now.

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

Photo: A man walks in front of a Prada store in Hong Kong June 12, 2011 REUTERS/Tyrone Siu

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

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

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 Western 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 once 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 said the move and even the prospect of more interest rate 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. To feel the real inflation, not just read the official numbers, you may want to go to a local supermarket in China to do your own research.

The core cause of China’s high inflation is food but people are also very interested to see how much property prices can fall and how property prices can be better reflected in China’s CPI statistics. 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 bank 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. China’s late paramount leader Deng Xiaoping wanted to “let some people get rich first”. Deng’s wish did came true, however, today we also see more and more ordinary Chinese people complain of feeling increasingly poor. What’s the answer for them?

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.

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

Photo: A 100 yuan banknote is placed next to a U.S. 100 dollar banknote in this picture illustration taken in Beijing September 24, 2010. REUTERS/Petar Kujundzic

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

If the heavy snows engulfing London’s Heathrow Airport are the last thing Europe wants to see, then a big cheque from Beijing could be the best Christmas gift the continent — once the centre of the world, but apparently no longer — could receive this year.

The Chinese government is ready to buy 4-5 billion euros (US$5.3-6.6 billion) of Portuguese sovereign debt to help the country ward off debt market pressure, the Jornal de Negocios business daily reported on Dec. 22. Without citing any sources, the paper said a deal reached between the two governments would lead to China buying debt via auction or in the secondary market during the first quarter of 2011.

The news of Beijing seeking to invest in Portuguese bonds soon helped the euro gain ground against the U.S. dollar and bounce up from an all-time low against the Swiss franc on Wednesday. It also boosted U.S. investor confidence in bank stocks at home. The potential new credit crisis in many European nations such as Greece, Spain, Portugal, Ireland and even Italy has been a growing global concern for capital markets.

Beijing’s help could certainly ease such worries to a certain extent if the news can be officially confirmed. China’s central bank has chosen to remain silent on the report, so far.

Premier Wen Jiabao, often dubbed “Grandpa Wen” at home for his easy-going personality with ordinary people, visited a number of European countries including Portugal and Greece earlier this year. At the time, Wen’s trip was already considered a new sign of China’s growing influence in Europe, with Beijing expected to lend a hand to its national debt problems as nobody would think of turning to the United States any more for such a role in the wake of the financial crisis.

Will Portugal be the last European nation to get Beijing’s help? Unlikely. Greece is also understood to be on the waiting list to get Chinese money for its new sovereignty bond issue. However, if such aid continues, Beijing may face twin pressures from the United States and its own people.

Beijing has complained about the U.S. government’s so-called “carrot and stick diplomacy” since the days of Mao Zedong, the country’s first Communist state head, Now it’s becoming less arguable whether China will take the same approach with those so-called “friendly countries”. The United States may monitor Beijing’s financial aid for Europe closely to check for links between the money and human rights issues.

Domestically, Beijing is concerned about social stability, in particular after inflation hit repeated highs this year. Some local media reports suggested that university students in some third- and fourth-tier cities had started to protest about increasingly expensive food bills on campus. Does this remind you of anything from more recent Chinese history?

On the other side, the Chinese economy itself is far more open than when ”New China” was founded by Chairman Mao in 1949, as the country still relies heavily on external trade. When we look forward to 2011, the global market environment to a very large extent is clearly linked to developments in the European debt issue. Beijing is helping Europe extricate itself from this potential new credit crisis as it also wants to avoid any negative external impact on its own economy next year.

Something pretty interesting I found out this week about China, which I also take as a good sign of Beijing’s more open-minded attitude towards the world: When China’s top banking regulator Liu Mingkang met a group of Hong Kong reporters briefly in Beijing just few days ago, Liu said ”Merry Christmas” and asked the Hong Kong media types to pass on his wishes to the people of Hong Kong, the former British colony.

Liu studied in London for some years in the late 1980s, so he must know what Christmas means in the West, even though Chinese Communists should not believe in any religion. Just five or six years ago, Chinese media were still very careful about reports concerning Christmas. Even if they mentioned it in articles, it should not carry any religious overtones. Not so many years ago, a Communist official could even be sacked or demoted for speaking about Christmas or related matters in public if he was not careful enough.

Today, Liu wishes you all a merry Christmas and Beijing is actually offering the whole of Europe a Christmas surprise via its commitment to support Portugal’s debt issue. Clearly, the world has truly changed within just few decades. So, are the rules of the game now being changed by global politics and markets?

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

Photo: China’s President Hu Jintao (L) shakes hands with his Portuguese counterpart Anibal Cavaco Silva at Belem presidential palace in Lisbon November 6, 2010. REUTERS/Luis Felipe Catarino/Handout