ChinaWatch: Land Of Opportunity

Welcome to ChinaWatch, WMB’s digest of news from the country with the world’s second largest economy and our chief rival to global dominance.


Fat Growth Forecast

China is on course for another five years of robust growth, but inflation threatens social stability and must be tamed, Premier Wen Jiabao says.

Wen, in China's version of a “State of the Union ’’ address to the annual parliamentary session, says the top priority this year is to curb price rises hurting ordinary people in the world's second-largest economy, Reuters reports.

Laying out a plan for the next five years, Wen says the drivers of China's meteoric economic rise remain firm.

“There is huge potential demand in the market, the supply of funds is ample, the overall scientific and educational level of the people is rising,” Wen says in his report to the National People's Congress .

He vows to boost spending on education, health care and public housing, initiatives intended to narrow the chasm between the rich and poor in China that has stirred resentment.

A huge police presence in the capital and a rare public warning against protests underscored the government's sensitivity to even the faintest whiff that the unrest roiling the Middle East could spread to China.

Building a fairer society has been a core goal of Wen's premiership, but the income gap has widened during his eight years in power and he is trying to lay the groundwork for improvement before a leadership reshuffle in late 2012.

“As Deng Xiaoping said, the first step is to make a part of the people rich and the next step is to make everyone rich,” says Shen Jianguang, economist with Mizuho Securities, referring to the Chinese leader who launched market reforms in the late 1970s.

They’re Too Busy

With single young men at the heart of Arab world revolt, China might seem a country ripe for uprising. But while it’s got millions of single young men, they don’t appear interested in amassing a movement for change.

China now has at least 20 million young men with no chance of ever finding a female partner, according to population experts. In short, there are too many men.

Demographers predict the gender gap will grow to 35 million by 2020.

The reason: China’s one-child policy and a culturally ingrained preference for male children, along with a rise in accessible ultrasound technology and sex-selective abortion, led to a staggering surplus of young men born in the 1980s and 1990s.

The overall trend is beginning to change for new families, but there remains a bubble of young men that can’t be reversed or repaired. So why aren’t they rising up and causing trouble for the authoritarian regime of China? In short, they’re too busy.

Andrea den Boer, co-author of the 2005 book “Bare Branches,” an in-depth investigation of surplus males and related potential security issues in Asia, says China’s situation is different than that of Egypt, which suffers from what is know as a “youth bulge.”

China has the millions of single young men, but what it’s missing is massive unemployment and economic decline. With the world’s fastest-growing large economy, opportunity is abundant.

Development has reached every corner of the country and work opportunities have begun taking tens of thousands of young Chinese men to Africa and other parts of the world.

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ChinaWatch: Win-Win Envisioned

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Building Partnership

China seeks a win-win partnership featuring equality and mutual trust with the United States, as the two countries' interests are deeply correlated in the era of globalization, Chinese Foreign Minister Yang Jiechi says.

"Relations between China and the United States should be cooperative and win-win and not a zero-sum game," Yang says.

Applauding the two countries' consensus to build a positive, cooperative and comprehensive bilateral relationship in the 21st century, Yang says China and America should boost mutual understanding and learn to trust and respect one another.

Mutual understanding is the basis for cooperation and a precondition for avoiding misjudgments, Yang says, adding that China's peaceful development is not only in the interests of the Chinese people but also for the whole world.

Wild Over Wine

With its explosive economic growth, China is tapping many of the world's major commodities such as metals and minerals and — perhaps most surprising — red wine.

Traditionally, the Chinese are not wine drinkers. But as the middle classes earn more money, it seems they are developing a taste for Bordeaux, reports NPR.

At a recent Christie's wine auction in Hong Kong, a case of 12 bottles of Chateau Lafite 1982 sold for roughly $90,000. Auctioneer David Elswood says the same case would have sold for about $10,000 just five years ago.

Surging Inflation

China’s consumer price index rose to its highest level in 28 months, the government says, reinforcing the need for more monetary tightening.

The consumer price index (CPI), a key measure of inflation, rose 5.1 percent last month from a year earlier, up from 4.4 percent growth in October, according to the National Bureau of Statistics. The on-year rise was higher than market estimates, which averaged 4.8 percent.

The inflation was driven by an 11.7 percent surge in food prices, which accounts for one third of the basket of goods used to calculate China’s CPI. The year-on-year increase in food prices grew from rises of 10.1 percent in October, 8 percent in September and 7.5 percent in August.

According to the bureau, the producer price index, a barometer of future consumer inflation, rose 6.1 percent in November from a year earlier, accelerating from a 5.0 percent advance in October.

The numbers were released as the Chinese government has started to move toward tightening its monetary policy in order to fight the country’s overheated asset markets and inflation risks, and are expected to put more pressure on the world’s second-largest economy.

Taxman Cometh

China aims to introduce a U.S.-style property tax in the future through reform of the existing real estate tax system, says Jia Kang, director of the fiscal science institute under the Ministry of Finance.

Jia, speaking to Dow Jones Newswires on the sidelines of an economic forum, also suggests local governments in China's central and eastern regions should make property taxes a major source of income in the future, and local governments in western China should try to make resource taxes a major source of income.

Analysts have raised concerns that local governments in China are too dependent on land sales for revenue. Jia didn't give any more details on China's planned tax reforms.

Unlike a U.S.-style property tax, which is based on a property's updated market value, China's tax on commercial real estate is based on the original purchase price.

Inflation May Follow Recovery

Many people believe higher inflation is just around the corner, especially with the U.S. government flooding the market with new money. It’s worth keeping a keen eye on several factors that could ignite inflation.

More good news is finding space on the financial pages as the global economy continues a slow recovery.

World trade flows have been rebounding, and business inventories continue to decline. Even unemployment, a lagging indicator of economic upturn, appears to have peaked and is showing signs of improvement.


But the 12 regional banks of the U.S. Federal Reserve have supported the recovery by printing more and more money. Many economists believe this may lead to another round of inflation similar to what happened in the 1970s.

Inflation is a sustained increase in the general level of prices for goods and services. With the huge debt our government has created (in excess of $10 trillion!), many investors believe the value of the dollar is declining.

Forces Feed Beast

Nobel Prize Economist Milton Friedman (1912-2006) defined inflation as “too much money chasing too few goods.” For the last decade or so, however, inflation has been unusually low. And, until very recently, there has been too little money chasing too many goods.

Historically, inflation doesn’t suddenly appear as a beast out of thin air. There are three different forces that drive inflation.

The first requirement is a surge in demand in an overheating economy.

In an overheating economy, the government, corporations and households try to buy more goods and services than can be produced, trending prices higher. That’s not a problem right now since there’s plenty of slack in the global economy. The world’s factories are running well below capacity.

Inflation also requires a significant increase in consumer income. High employment has kept wage increases well below their long-term average. A big increase in wages will not likely occur until there is full employment.

The third requirement is an increase in the money supply and credit growth. The Federal Reserve’s historic money supply increase has certainly stoked inflationary fears.

But WMB believes it will take more than the Fed pumping money into the system to ignite inflation.

Banks must also open the floodgates of credit. To date, we still are not seeing an easing of bank credit. Banks haven’t increased lending levels to their pre-crash highs and many are still recovering from their last credit binge.

Looking Ahead Now

All three factors – demand, wage growth, and money and credit growth – must rise simultaneously for inflation to take hold, according to most financial experts.

That’s only likely to occur only after we’ve had a full recovery and a complete healing of the financial system.

WMB believes that although there has been recent growth in our economy, a full recovery is still far down the road. And, a full recovery of the banking system is likely even further away.

But the borrowing continues, and policy makers may be tempted to take the easy way out by printing new money, which could fuel inflation worries.

WMB believes that over the near term, a small increase in inflation wouldn’t be entirely unwelcome — it would be a sign the economy has finally recovered. Higher inflation may or may not hit us hard at some point in the future.

In the meantime, we should continue to keep all eyes focused on the 800-pound gorilla known as inflation. Feed it too much and suffer the consequences across the board, from industry to consumers.

This post is by TechMan, WMB co-author who blogs about trends, issues and ideas affecting industry, business, technology and consumers. If you like this post, please share it.

Where Do We Go From Here?

Our economy remains stuck on a path of uncertainty: With unemployment hovering around 10 percent and foreclosures at all-time highs, consumers are afraid to spend and employers are wary of new hiring.

Meanwhile, some employees face wage cuts. USA Today reports union electricians in St. Louis took an 8.23 percent slice in their pay and benefits. Union officials insist that with one of every three out of work, there was little they could say or do about it.

“We are in the throes of a construction depression … We have catastrophic unemployment,” says Steve Schoemehl, business manager of International Brotherhood of Electrical Workers Local 1.

Such dramatic wage decreases are hinting at deflation – when prices and wages drop simultaneously. On the other hand, stagflation is when wages drop but prices increase. Inflation is, of course, when wages and prices increase.

The last time this country witnessed deflation was between 1931 and 1933 during the Great Depression, according to the U.S. Department of Labor. Prices prices fell at an average annual rate of more than 8 percent.

The Consumer Price Index (an inflationary indicator that measures the change in the cost of a fixed basket of products and services, including housing, electricity, food, and transportation) fell three consecutive months by the end of June 2010, according to the U.S. Bureau of Labor Statistics.

“I think deflation is a very real threat (to our economy),” says Richard DeKaser, president of Woodley Park Research in Washington, D.C., where he oversees macroeconomic forecasting, real time economic analysis, and housing valuation research.

On the flip side, some believe we’re in the clutches of inflation. Our national debt jumped in the last 18 months with more money being printed to help sustain our ever-increasing debt-load with China, Japan and the United Kingdom, the major players.

David J. Lynch of USA Today reports falling prices, of course, can benefit consumers as long as the economy is growing and the declines are seen as temporary.

But if the declines are expected to continue indefinitely, consumers will postpone spending and businesses typically delay investments. As incomes shrink, mortgages and other debts become harder to repay. This is one of the reasons mortgage foreclosures are rising.

Many economists, including DeKaser, who anticipate continued modest price declines, say the risk of a truly crippling and prolonged deflationary period, remain low.

“I just don’t think it’s a problem,’’ says Michael Bordo, professor of economics and Director of the Center for Monetary and Financial History at Rutgers University in New Brunswick, N.J. “The economy is recovering.”

We at WMB agree, but the pace is nearly flat and probably will remain that way for the immediate future unless some an industrial breakthrough leads to a new pattern of growth.

Generally speaking, as the economy continues to recover, demand for goods and services will increase and prices will likely continue to rise. Many financial experts agree that even if our economy reverts to another recession, and prices drop, the Federal Reserve would most likely intervene.

Even though the Fed’s current lending rate is already near zero, the Central Bank could use other tools to help stimulate the economy.

For example, the Fed could announce it would keep interest rates around zero for a specified period. It also could set specified ceilings for the yields on T-bills and other government bonds. This could be enforced by the Fed buying unlimited government debt, even if it means printing more money.

Whatever the case, we at WMB believe the ultimate solution to our sagging economy is to cultivate wealth by creating jobs through incentive programs.

Stimulating academia and industry to create new technology is one way this can be accomplished. Breakthroughs in such areas as energy creation or computing could lead us out of our current financial crisis.

This post is from TechMan, WMB co-author who blogs about trends, issues and ideas affecting business, industry, technology and consumers.