George Chen

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.

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.

There’s a new problem with the “one country, two systems” policy for Hong Kong and mainland China — the appreciation of the yuan can ease inflation in mainland China but not in Hong Kong.

In Hong Kong, the former British colony that returned to Beijing’s hands in 1997, things unfortunately work the other way round.

Peter Wong, HSBC’s Asia-Pacific top boss (and widely considered the most handsome banker in Hong Kong) said at a forum in Shanghai last week that because the Hong Kong dollar is pegged to the U.S. dollar, whose value is falling almost every day, food prices in Hong Kong are set to increase as Hong Kong needs to pay more to import food products from the mainland.

Former Hong Kong central banker Joseph Yam, now a senior representative of a Beijing-backed financial academy, added that he believed the Chinese government would let the yuan rise further and relax some policy restrictions.

So, a stronger yuan is in no doubt, and food prices in Hong Kong are certain to rise.

You may not care much about Hong Kong. When big investors are keen to trade stocks and make deals in mainland China, they of course pay more attention to Beijing’s monetary policy. Hong Kong? It’s more like the naughty child of Uncle Beijing these days.

But the naughty child can be a challenging problem and it’s becoming more rebellious. One of the world’s leading financial centers, these days it is also known as a city of protests, especially at weekends. In 2012, we will see a transfer of power in Beijing as well as in Hong Kong. And we will see elections in Taiwan and the United States. What a year!

Some investors think the potential for H-shares is much greater than A-shares, but political risks for H-shares could be greater if Hong Kong loses its political stability and thereby financial stability, thanks to a stronger yuan.

And if Hong Kong becomes unstable, Beijing will become naturally nervous.

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

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

Few people outside of China really know what B shares are.

“B shares? Does that mean they are not as good as A shares?” That’s a typical question I hear from foreign friends when they first come to the mainland market and by chance learn some buzz about the B-share index.

B shares probably only attract public attention when trading gets excitable, as is the case now. The U.S. dollar-denominated B shares index sank more than 7 percent at one point on Thursday after ending down more than  5 percent on Wednesday.

So, what happened?

First, the B shares index tumbled on Wednesday without any clue or warning, surprising most people in the market. On Thursday, it retreated further, even after Beijing attempted to clarify a rumour about capital gains tax that was believed to have triggered the market panic. China was  not likely to start taxing investors on capital gains any time soon, a tax official told Reuters on Thursday.

China first launched the B-share market in the early 1990s, as part of the government’s “opening up” policy, with shares traded in U.S. dollars on the Shanghai stock exchange, and in Hong Kong dollars on the smaller Shenzhen bourse. They were mainly intended for foreign investors, especially those from Hong Kong, neigbouring  Shenzhen.

At the time, investors from outside mainland China were not allowed to buy yuan-denominated A shares, until Beijing launched the Qualified Foreign Institutional Investor scheme (QFII) in 2002 allowing licensed foreign investors to invest in A shares.

Also in the early 2000s, B shares, China’s only equity market fully open to foreigners became marginalised when Beijing stopped new B-share offerings by Chinese companies. In comparison with Shanghai, only few B-share companies are listed in Shenzhen for legacy reasons, with the Shanghai exchange playing the dominant  role.

Since the B-share market became marginalised, market speculation has been prevalent.  A merger with the much larger  A-share market is widely anticipated and, in the view of many investors, should benefit B shares, partly because of the appreciation of the yuan, in which A shares are traded.

Recent media reports suggest a number of large multinational corporations, for example, HSBC (born in Hong Kong and Shanghai, not London), have been selected for a yuan-denominated share issuances on the Shanghai stock exchange, where a brand new “international board” will be set up for such foreign IPOs.

This is exciting news and exactly what Shanghai officials want to fulfill the city’s ambition of becoming a leading financial centre, as it was in the golden era of the 1930s.

The prospect of an international board makes the B-share market seem even more boring, lowering expectations for the merger of B-share and A-share markets. Investors say B shares are not a priority for the Chinese securities regulator on and all  Beijing wants is probably to offer a plan to close the B-share market as painlessly as possible.

In other words, as Chinese leaders often like to say, the historical mission (for B shares in this case) has been achieved.

One institutional investor told me, “Now we feel it (B shares) are just like the Titanic – a sinking ship. It may not sink if the government wants to save it, but nobody wants to risk waiting to see what happens next.”

An even sadder truth is that today’s B-share market has more domestic investors than foreign. As domestic institutional investors are not allowed to trade B shares, the main direction of trade comes from domestic individual investors. Many foreign investors, in particular some early birds to the unique B shares market have already shifted their focus elsewhere, for example, preparing to buy HSBC’s new shares in Shanghai soon.

Those who quit B shares early may be the real winners. The unexpected B-share tumble this week came after big gains over the past one or two years, especially among real estate companies, which were believed to be a good bet on the appreciation of the yuan.

As the old Chinese saying goes: “Even the finest feast must end at last.” When the feast is over, who will be the last to sing?

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

Photo: A man reads information on an electronic screen at a brokerage house in Shanghai August 17, 2009. REUTERS/Aly Song

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.

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.

There’s apparently growing debate in Beijing over the possibility of interest rate reform next year. The latest opinion was voiced by a senior central bank official, who said the government should lift the ceiling on bank deposit rates to help rein in accelerating inflation in the world’s second-biggest economy. Will this happen in 2011? It seems much more likely than the possibility of a fully convertible yuan anytime soon.

“China should allow deposit rates to float upwards. It would gradually enable the market to price in expectations of interest rate rises,” Sheng Songcheng, head of statistics at the People’s Bank of China, said in an article published on the central bank website late on Dec. 29. “That would help change negative real deposit rates and curb inflation,” he added.

If Sheng had published the article as a commentary in a local newspaper, it would more likely have been considered his personal opinion, but posted on the central bank’s website, the top headline on the front page no less, it’s certainly something to be taken very seriously. In my view, Sheng’s article was published not only for the market to analyze but also as a pitch to the top leaders in Beijing for more serious consideration.

Beijing controls China’s interest rate market by setting a ceiling on deposit rates and a floor on lending rates. This protects banks from competition and ensures they have a decent interest rate margin, which is around 3 percentage points now — that’s partly why banking jobs in China are very popular and considered one of the most stable jobs, in particular with big state-owned lenders.

Many people say working for a bank in China means you have an “iron rice bowl”. The interest rate margin provides a safe and stable channel of profit for banks. Whatever they do, they have the “3 percentage points” to make money. However, given that the rate is fixed by the central bank, it may also explain why local people often complain about the service they receive at big banks in China. How bad? You should consider it normal if you are stuck in a long queue for about 30 minutes or even an hour before you reach the teller.

The central bank usually raises both loan and deposit rates, like the newest rate increase on Christmas Day, which leaves the profit margin of banks unchanged. If interest rate reform really takes place next year, we should see a lot of interesting stories about the banking industry. At least, I do hope more competition can bring Chinese financial consumers better service.

In fact, any move towards a more market-oriented interest rate reform is not just about the banking industry. Such moves will also affect the foreign exchange rate of the yuan, which may well explain why some officials at the State Administration of Foreign Exchange don’t really like the idea of a free interest rate market. They say it may encourage more speculative money inflows to bet on faster yuan appreciation, making the foreign exchange regulator’s job more difficult or less important to some extent.

Why less important? You might think they would be busier fighting a faster rising yuan. Yes and no — if you have some decent central bank sources in Beijing, you may come to know that there’s always a strange tension between the PBOC and the SAFE, similar to the tension between interest rates and the foreign exchange rate. I remember a SAFE official once privately told me that the day the yuan becomes fully convertible may be the same day the offices of the SAFE are closed.

This may sound extreme but think — the SAFE’s job is to control the yuan, the more convertible the yuan becomes, the less controls you need. Then that will also affect many people’s jobs, promotions and even their political careers. Does this explain the unique relationship between the SAFE and the PBOC?

Currently, the SAFE is one rank lower than the PBOC as foreign exchange regulation is considered a function of the central bank in China. The current head of the SAFE is Yi Gang. He is also a deputy governor of the PBOC and reports to central bank chief Zhou Xiaochuan.

However, some SAFE officials believe SAFE should play a more important and independent role in making foreign exchange policy and related matters, given the significance of the yuan, which often has a major impact on China’s diplomatic relations such as the ties with the United States. To some extent, some market observers say the unique tension and internal bureaucracy between the SAFE and the PBOC actually serve to slow currency reforms and the internationalisation of yuan.

So, who’s going to have the final say? The State Council, China’s cabinet led by Premier Wen Jiabao and President Hu Jintao of course. Hu is going to meet U.S. President Barack Obama next month and the two gentlemen will for sure touch upon the yuan issue.

From all the signs I can see here, China is ready to let the yuan rise faster next year, so our American friends should be happier. In return, at least Hu deserves a better reception during his visit next month. Remember Hu’s last visit to the United States? It was not considered a very successful or happy trip by some political observers.

Meanwhile, the yuan debate will continue at home, but this time the central bank seems determined to push forward interest rate reforms first to make Chinese people feel happy. Then Hu and Wen should be happy too.

Some people say central bankers are the real politicians in China, and I sense their counterparts at the Federal Reserve are learning to perform a similar role. What’s your say?

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

Photo: China’s central bank governor Zhou Xiaochuan answers a question at a news conference during China’s annual session of parliament, in Beijing March 6, 2010. 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.

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 Hong Kongners 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!

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

Photo: A construction worker carries a bucket of paint as he walks among high-rise apartment blocks in Xiangfan, Hubei province December 8, 2010. REUTERS/Stringer

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.

Almost the same story took place about five years ago, just ahead of China’s landmark yuan revaluation in July 2005. At the time, we saw media reports about “hot money” every day, but they often disagreed about the amount of “hot money” that China had and could afford.

Some official media preferred to give a vague yuan figure in the tens of billions. I remember a central banker in Guangzhou once disclosed a more specific number and then received an immediate warning from his boss in Beijing. Hot money — how hot? That’s pretty much considered another state secret.

After China’s deputy central bank governor, Ma Delun, helped explain the “pool concept” offered by his boss, Zhou Xiaochuan, to fight an inflow of hot money, other officials joined the chorus. In an article published early this week, Deng Xianhong, deputy chief of the State Administration of Foreign Exchange, urged the government to watch the situation more closely.

China risks becoming a prime target for speculators as developed countries pump cash into the global economy, Deng told China Forex Magazine, an official industry monthly authorized and supervised by the State Administration of Foreign Exchange, Deng’s employer. “If we do not control the property bubble, let a stock bubble inflate and allow the yuan to rise freely, China will face the risk of large-scale cross-border capital flows,” he said.

Beijing may deploy a mixture of policies to deal with hot money flows, Ma explained to the official Shanghai Securities News in a report published on Nov. 15, expanding on an earlier remark by his boss Zhou. “The pool mentioned by Governor Zhou Xiaochuan does not refer to a specific market, but an array of policies,” Ma said.

If you can recall the situation facing China’s financial markets between 2004 and 2005, many officials gave very similar warnings when the whole world had high expectations for Beijing to allow the yuan to appreciate. The so-called hot money rushed into the country, into stocks, property or anything of value, day and night. Inflation was high. Property prices were high. People complained. And what happened? Beijing revalued the yuan.

Property prices rose to a new high. Inflation? Isn’t it the tough living problem that most Chinese still complain about now?

So, what is “hot money” really? According to a definition given by the Financial Times, hot money refers to “money that moves from one currency to another or one asset class to another as investors (including speculators) seek the best possible yields.”

One thing Beijing learned from the yuan revaluation in 2005 is that when fighting hot money, you can’t simply block it but also need to find a way to dredge it, just like dredging your plumbing at home. When sentiment about hot money becomes a crisis, it may not necessarily be a bad thing — after all, nobody wants to see the bubble burst.

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

Photo: A watermelon vendor looks at yuan banknotes at a market in Changzhi, Shanxi province June 21, 2010. REUTERS/Stringer