China Economic Report

If you have any interest in the growth of China's economy you might want to check out a recent trip report by Nouriel Roubini of the Stern School of Business, NYU and Brad Setser of Oxford. The original website is http://rgemonitor.com and a direct link to the PDF is http://pages.stern.nyu.edu/~nroubini/ChinaTripReport-Roubini-Setser.pdf.

Here are some of the highlights:

• "China's economic expansion is increasingly unbalanced, with too much investment in already prosperous coastal regions and too little in the interior."

• Foreign direct investment firms pay a 15% enterprise income tax compared to the 33% rate for domestic firms in order to encourage foreign investment.

• Exports grew 35% year over year in January, February, and March.

• "A vast rise in steel capacity coincided with a modest slowdown in the real estate construction... creating, at least for now, more steel capacity than is needed to satisfy even a rapidly growing Chinese market." Bad news for steel stockholders.

• A 15% revaluation against the dollar would "do little more than bring China's real exchange rate back to its 2002 level."

• "The government has kept the retail price of gasoline down, helping to control inflation. The state owned oil companies are (effectively) required to use the large profits on their domestic production (which still covers roughly 2/3s of total demand) to offset the rising cost of imports. For now, this works: the state-owned oil companies profits are still up, though they are not up by as much as they would be if prices increased to world market levels. Moreover, with the enormous expansion of China's automobile industry--both domestic and foreign--there is pressure to keep gasoline prices low to encourage automobile purchases. And, as in the US, there is also pressure to build more roads to ease traffic congestion."

• "Land is also too cheap, if you pay off the right people. The peasants who work agricultural land still cannot formally own land--land remains the property of the 'people.' ...the Communist party retained de facto control over all land, and, over time, it has transformed itself into a capitalist real-estate venture. As cities expand, developers who can convince the local party committee to turn agricultural land over for development (or to allow old urban neighborhoods to be razed fro new redevelopment) can make a fortune. Rather than buying the peasants (or old urban tenants) out, they often buy the local party committee out, so the windfalls profits from land that is used for real estate development often accrue (privately) to the members of the local party committee, no to the peasants who have been working the land or urban dwellers that have lived in these urban areas for decades. This is clearly a key source of social tension; compensation for such eviction from rural or urban lands is systematically lower than the values of such real estate."

• "China already restricts foreign ownership of domestic Chinese companies: it has no desire to let foreigners take advantage of the cheap renminbi to buy a range of Chinese manufacturing and industrial assets (remember, $150 billion would buy all of China's listed equities).

• "China's excessive reserve growth increasingly is prompting some Chinese intellectuals and policy makers to envision a different growth model--one where China's stock of excess savings is used to build up the overseas presence of Chinese firms, not just to support the US Treasury market."