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Recent Events in China
August 26, 2007 - It's hot in China – even though we are now in the beginning of the fall on the Chinese calendar – with temperatures reaching 37 to 40 degrees throughout the north and mid- regions of the country, and humidity close to 100 percent. This is also an important time of year in the Chinese economic and political calendar. For western business, the expats have now just returned from their summer vacations, the international schools are open again, and, for the Chinese, students are streaming back from summer vacations and the busy fall season.
- On the political side, the Chinese leadership took its annual summer break on the beaches of the Beidaihe resort on the coast of Shandong Province opposite Korea, meeting to put together the new leadership and policy agendas for the next five years – all of which will be debated further and announced at the 17th party congress in the fall. The party congress in October and the National People's Congress next March will see a major reorganization of the central party and government leadership – and the emergence of new faces and new leaders.
- For the economy, China's economy continues to boom. In a just released poll by the Chinese State Statistical Bureau, 100 of China's top economists expect strong growth, rising urban and rural incomes, increased consumer spending, high growth of exports and imports, and very slight inflationary pressures through the end of the year. More recent reports of rapidly rising food prices, especially pork, are beginning to worry consumers and economists alike.
- China's anti-corruption campaign moves up a notch; the Chinese media announced on July 27 that the Politburo expelled former party secretary of Shanghai, Chen Liangyu from the communist party and sent his case to the Chinese Procuratorate for criminal prosecution. The corrupt former head of China's FDA was executed on May 29.
- The "Made in China" brand has come under siege and the Chinese Government is responding in mixed-fashion, pledging to clean up enterprises that produce unsafe products, but proclaiming that 99% of China's exports are safe and meet international standards. The Chinese are also halting US exports of soybeans and other agricultural products, claiming that they are substandard – and increasing the chances of a sharp conflict over trade issues.
- While the United States continues to press China to raise exchange rates to make US products cheaper in China – in the face of a huge potential $300 billion global trade surplus on China's part – Chinese economists are beginning to argue that revaluing the RMB is good for China's economy. The RMB has risen from 8.27 to the dollar a year ago to 7.60 today, and rapid growth, inklings of inflationary pressures remerging, and China's gaping trade surpluses argue for a faster revaluation that senior leaders are stating in public.
- The beginning of the one year countdown for the Olympic Games began on August 8 – with public ceremonies proclaiming "we are ready!" Construction of Olympic facilities is ahead of schedule, and $30 plus billion of investment in Beijing's infrastructure is transforming the city. Meanwhile, in Shanghai, August 5 marked the 1000 day countdown to the launching of the Shanghai Expo.
- After 13 years, China's National People's Congress is on the verge of passing an anti-monopoly law. Just added to the law is a provision that requires "national security" checks for foreign acquisitions of Chinese companies. The provision was added in response to a rapid increase in mergers and acquisitions involving foreign companies, particularly huge foreign equity players.
Continued Strong Growth
According to one hundred of China's brightest economists as reported in China's Caijing Magazine, there is reason to be optimistic about the Chinese economy. Fixed capital investment is up almost 30 percent this year, fueling the enormous building boom that is sweeping the cities of coastal China, and consumer spending is up 15 percent this year, two points above 2006. Urban incomes are up 16 percent since the beginning of the year, and, in cities like Shanghai, where many thousands of urban residents are now investing in the stock market, pockets are full and shops are full of customers. Consumer confidence in China's economy over the next six months, in the urban areas, is now at record high levels – reaching 99.3. The strong bull markets in Shanghai and Shenzhen are fueling optimism that good times are here to stay. In Beijing, massive infrastructure spending in preparation for the 2008 Beijing Olympic Games – Beijing is investing more than $30 billion in its infrastructure and the more than 9,000 construction sites in the city – is creating record pollution and record optimism. In the critically important rural areas, peasant incomes are up 12 percent, an important factor for continuing stability.
Foreign investment continues to pour into China. FDI is up 12.2 percent over the first half of the year, and economists believe that this trend will continue. Foreign trade is also up, with China – by its own reckoning – now running an $85 billion surplus, up 83 percent over the same period in 2006, much of it with the United States. China's trade surplus with the United States last year was $280 billion. Despite elimination of VAT tax breaks for exports and the appreciating Renminbi, exports were up 28 percent and imports 23 percent.
There are some warning signs, however. Food and housing prices are beginning to rise, by 8.3% and 4%, and the M1 and M2 money supply measures are up 21% and 17%. Economists polled are not concerned about inflation returning in 2007 but are advocating imposition of mild macroeconomic controls to keep growth on an even keel. Some economists are concerned that the Shanghai stock exchange, which is at about 5,000 now, is experiencing a bubble. While the recently imposed additional 4% tax on stock exchange transactions caused a brief market crash, the Shanghai exchange has surged over the past weeks – and a drop off in value similar to that experienced in New York and London could cause some worries. That said, State Statistical Bureau economists expect ten percent growth this year.
The leadership of Hu Jintao and Wen Jiabao has made reduction of corruption one of the hallmarks of their drive toward a more "harmonious" society. Dozens of cases of corruption have been pressed by the central authorities, none more prominent than the detention last spring of Shanghai Party Secretary Chen Liangyu. Chen, who was seized in front of his home in Shanghai, has been dismissed from the party by the Politburo. In an unusual announcement, all of China's top newspapers headlined the Politburo's decision – and Chen's imminent prosecution by the judicial authorities. Following Chen's detention last spring, Beijing transferred Xi Jinping from neighboring Zhejiang, and substantially reorganized the Shanghai Municipal Government, arresting and prosecuting as many as 30 officials, and setting strict rules for officials.
Chen's prosecution and the execution on May 29 of the corrupt former head of China's FDA for approving pharmaceuticals in exchange for bribes are aimed at quelling public anger over the squandering of social security funds, on the one hand, and the deaths of innocents from poor quality or fake pharmaceuticals. In an interview with one of China's top journals, Deputy Procurator Wang Zhenquan – who would be the equivalent of the deputy director of the FBI – explained a series of more sophisticated approaches that China's top law enforcement agencies are taking to bring corrupt, senior officials to justice. While these measures are intended for a domestic Chinese audience, for the foreign business community, they will create a more predictable and certain investment climate, and are all for the good.