If you follow business news at all you have probably read these words: “China is Dubai times 1,000 – or worse”. Jim Chanos and several other 'China bears' foresee doom in China’s economic future. They argue that eased credit has led to asset bubbles, particularly in real estate. Hence they call for shorting China’s economy, with the belief that the country is set to experience a disastrous crash. But there is at least one glaring omission in the bears’ analysis: they fail to account for changes in China’s demographics and its tremendous potential to impact the economy.

How important are demographics? A paper published in 2005 by the US Federal Reserve suggests that a nation’s working age population, ages 25 to 64, may ultimately determine shifts in real estate prices. Remarkably, the model employed here accurately anticipated the real estate boom and busts of Japan’s market in 1974 and 1990, the movements in prices in the US, Great Britain and Ireland, and even foreshadowed the current collapse in real estate prices recently experienced by these countries.

Just as the populations of the United States, Japan and Great Britain were influenced by the Second World War to create a generation of baby boomers, so too have events in China influenced its demographics. At the end of the Great Leap Forward in 1961, there was a surge in the birth rate, which gradually subsided due to family planning measures implemented by the government. This generation then began having children in the 1980s, creating another spike in births despite the implementation of the One Child Policy in 1979.

Those born during the spike of the 1980s are now entering working age. The result is that the working age population in China is now at a historic peak. Numerous Chinese people turning 25 are entering a period in life where most finish their university studies, find jobs, get married and buy houses – in China often with the financial assistance of their parents, likely of the previous boom generation. If the logic of the Federal Reserve’s paper holds for China as it did for other countries, the substantial increase in working age citizens is likely the main driver behind China's real estate prices.

Source: UN Population Division; THE BEIJING AXIS Analysis

Furthermore, people in China are increasingly moving from rural areas to cities. This is certain to continue, as China still has a low rate of urbanisation compared with most countries. As of 2008, only 43% lived in cities compared with 82% in the United States. The drastic rise in the real estate prices of Beijing and Shanghai are likely an indication of increased demand due to the trend toward urbanisation rather than evidence of a calamitous property market bubble.

Another point the paper makes is the influence the working age population has on real interest rates. Through a tendency known as 'consumption smoothing', people tend to save when they are more productive during their working years in order to consume when they are less productive – retirement. Not only are savings invested in assets with fixed returns, but also in riskier assets such as stocks. However, in China there are capital controls in place which not only include legal barriers for equity purchases by foreigners, but even more so restrict Chinese citizens from purchasing shares abroad. The result is that China’s working age population – at an all time high, in a country with one of the highest savings rates in the world – is largely confined to domestic equity markets, perhaps driving up prices to what may be perceived as bubbles.

The China bears who recommend short selling Chinese stocks should take note. The negative effects from eased credit conditions in China, although not completely unlikely, have yet to be seen. As for now, there are around 740 million reasons – the current number of China’s working age population – to be optimistic about China’s economic future.

Photo: Shirin Neshat, New York magazine

More manufacturers jump on the 'green' bandwagon amid stricter export regulations, growing alternatives and rising demand.

Treading the 'green' path is on the rise among manufacturers in China, albeit at different levels of adoption. Be it in the garment, jewelry, stationery, paint or consumer electronics industries, more companies are adopting ecologically safe materials, including recycled substitutes.

Suppliers are motivated by two main factors. Most are compelled to do so because of increasingly stringent product regulations in their key export destinations, namely the EU and the US. RoHS (Restrictions of Hazardous Substances), for example, curb the use of elements and compounds that are perilous to the environment. Among these are lead and cadmium. Although the EU directive applies only to electronics products, makers in other industries such as fashion jewelry are taking heed and dispensing with these substances.

A few are tapping the eco-trend as a marketing tool to help them move into upscale manufacturing, away from the cutthroat competition of the low end. Because there is a premium attached to green models, companies can charge 5 to 50% more for these items.

Natural, Sustainable Alternatives

Apart from ensuring components are free from toxins, many companies are incorporating materials that are grown with as little impact on the environment as possible.

Cotton farmers are the leading users of insecticide globally, accounting for 16% of total consumption. Organic cotton that is cultivated without toxic pesticides and synthetic fertilizers promotes healthier products, preserves biodiversity and reduces the amount of noxious chemicals which seep into the environment.

Tencel, which is a brand of regenerated cellulose fiber made from dissolved wood pulp, is another eco-friendly material that is often used in pants and in coats. It is normally mixed with cotton at a ratio of up to 1:3.

Rayon from bamboo is also incorporated in the production of garments. Aside from being biodegradable, it is one of the most efficient natural fibers in terms of moisture absorption and breathability.

Other natural materials that makers are turning to are silk, bamboo charcoal, and soybean and milk protein fibers.

Apart from the textile application, bamboo is being employed as an alternative to wood, which is currently in short supply. Some makers have even found ways to reshape the naturally hollow and cylindrical plant by processing it in high-pressure machines.

Bamboo's short maturity cycle, wide availability, and proven strength and durability make the material not only an ecologically safer option to wood, but also a more profitable one.

Recycled Substitutes

Wood pulp, the most common material for making paper, has been linked to a number of environmental issues, including deforestation, and air and water pollution. This has prompted suppliers to turn to earth-friendly alternatives, which are becoming increasingly available. Among these are non-wood pulp paper, including cotton, bamboo and reed pulp, as well as bagasse and stone variants.

Recycled paper such as the kraft type is also a green option. In terms of quality, recycled paper holds up against conventional versions. It has some usage limitations, however, including unsuitability for color printing.

"Although products made of eco-friendly paper are priced higher, the acceptance of customers is high. Both our old and new customers place orders actively for such products," said Wang Hao of Zhejiang Guangbo Group Co. Ltd, a stationery maker.

Toy makers cited recycled sawdust, which is usually discarded as a wood byproduct, as a suitable substitute material. Apart from yielding environmental benefits, it improves crack- and heat-resistant properties in toys such as role-play sets. Being easier to process than wood, this alternative also has a shorter production time and simpler molding procedures.

In the beauty and cosmetics line, the trend is reflected in the simpler and recycled or recyclable packaging being adopted by many makers. Refills are likewise being promoted with greater frequently.

This posting was contributed by Global Sources, a leading business-to-business media company and a primary facilitator of trade with greater China.

In 2008, about 130 million people worked as rural-to-urban migrants in China's cities, making up around a third of the total urban labour force. As they are heavily active in exporting sectors that were impacted by the downturn in the last two years, around 15% of the migrant workers (or 20 million people) are said to have lost their jobs in 2008 based on a survey carried out in 15 provinces by the Ministry of Agriculture in January 2009.

But that was then. Now in 2010, various media reports in February highlighted a shortfall of a many as a million migrant workers in Guangzhou and Dongguan. People's Daily has published statistics collected by Guangdong's human resources and social security departments stating that by February 22 this year, more than 3 million migrants had returned from other provinces to Guangdong, much less than the almost 7 million migrant workers who had originally left for the Spring Festival holiday. Guangdong's enterprises, the report stated, currently lack the services of about 900,000 workers, of which most are needed in labour-intensive industries, although technical workers are said to make up 32% of the shortfall. In Dongguan, more than 20% of migrant workers are not expected to return to work now that the Spring Festival is over, according to one survey. 

So what happened to China's migrant workers? Much of the reason for the current shortages is being put down to the explanation that the pressures forcing migrant workers to industrial zones in the big cities are just not so intense, at least not now. Due to gradually increasing incomes in rural areas and the growth of second- and third-tier cities, many workers no longer have to make the trek to Shanghai for menial labour, or they can go somewhere else closer to home.

Consider for example the following chart, illustrating the changing income levels in rural and urban areas in China in recent years:

Income levels of both urban and rural households have been steadily increasing, and while urban households initially experienced higher growth rates compared to rural households, this disparity has been decreasing in recent years, and the convergence is especially evident since 2004 (see above). So if things are looking up in the countryside, why bother at all going to the big city?

The current shortage of migrant labourers is not the first time this has happened in China; in fact, the economic upswing of the same year (2004) also caused labour shortages in the cities (see source 2 below). The cities are not taking it lying down, however, and apart from simply raising wages, much is being done to continue attracting migrant workers. Shanghai will this year become the first Chinese city to provide free education to all school children of migrant workers, and a government advisor in February announced that young migrant workers will be granted more social service benefits and will be assisted to buy or rent homes in smaller cities closer to their home villages, not in expensive places like Beijing or Shanghai. The government is apparently also considering amending its election law to increase the number of rural representatives that can be elected to the legislature from the current one deputy for every 960,000 rural residents. 

Yet while many migrants are enjoying the luxury of choosing to stay away, many more of them are inexorably drawn into the cities with all these locations have to offer. Over the past decade, over 200 million people have entered the cities through official or unofficial migration, and the share of agriculture in employment has declined from 326 million in 1998 to 270 million in 2008. As a rapidly developing economy, China's urbanisation rate has increased from 18% in 1978 to 44.9% in 2008. Yet throughout the country, less than one quarter of the rural population has migrated (see source 2 below), suggesting vast potential for further migration as China's urbanisation rate increases.

And today's migrant workers are different from older generations who only laboured on building sites. Now, a new generation - born after 1978 - plays an important role in city life, and People's Daily has described them as white collars who now pay much more attention to their own labour rights and are opinionated on equality and fighting discrimination.

No surprise then that many migrant workers choose not to return to the cheap factories in Guangdong and Dongguan. 

Further reading on China's migrant workers:

1. How much do we know about the impact of the economic downturn on the employment of migrants? (Meng, Kong, Zhang), ADBI Working Paper Series, February 2010.

2. China's labour market in transition. Job creation, migration and regulation (Herd, Koen, Reutersward), OECD Economics Department Working Paper No. 749, February 2010.

Trade sanctions have clearly strained China’s steel industry. Seamless steel tubes, Oil Country Tubular Goods (OCTG), drill pipes, steel mesh panels, wire shelves... the list of newly sanctioned Chinese steel products goes on. Among the numerous made-in-China products impacted by international trade frictions, China’s steel industry has been hit the hardest, and given the severity of these trade disputes, the consequences for China’s steel enterprises are substantial.

Price and quantity decreases

Proposed last April, the oil well pipe anti-dumping and anti-subsidies action undertaken by the US International Trade Commission will adversely affect Chinese exports of as much as USD 2.8 billion. These exports are supplied by around 200 steel mills, and these provided oil well pipes to the US during early 2008 and Q1 2009. The monetary value at stake makes this the largest steel trade dispute in US history.

The oil well pipe anti-dumping and anti-subsidies case is only a sample of the international trade sanctions that have targeted Chinese steel makers in recent years. Since 2008, the EU, the US, Russia, India and other countries have successively launched anti-dumping and anti-subsidy surveys on China’s seamless steel pipes, oil pipes, drill pipes, steel mesh panels and other steel products. As a result of the financial crisis, global market demand has rapidly declined, exacerbating ongoing trade frictions – particularly within the steel industry. According to China Customs, in December 2009 China exported 3.34 million tons of steel, which contributed to a total of 24.6 million tons for the whole year 2009. This annual figure represented a 58.5% y-o-y decline.

Of all steel goods, pipe products were the most severely affected. In 2009, China's seamless pipe exports dropped by almost 50% compared to 2008. In 2009, China's export price for oil well pipes to the US was only USD 1,600/MT, well below highs of USD 3,600/MT in 2008.

Entering new markets

Some Chinese producers have adjusted their strategies in response to the sanctions. As an example, take one of China’s major seamless steel manufacturers, whose exports accounted for 48% of total sales volume before the financial crisis. In 2009 its shipments to major regions such as North America and Europe fell by more than 70% compared to the previous year, yet its total 2009 export volume dropped by only 10%. Its secret weapon: new markets – the company’s sales in Asia increased by 30% and African sales by 100%.

Other steel mills have followed suit, successfully exploring new markets such as Southeast Asia, the Middle East and Africa, thereby weathering the decline in demand from mature markets.

Along with the shift from mature to developing markets, export product structures are also changing. Many manufacturers are shifting their focus from high value-added products such as oil well pipes to a number of oil and gas transmission pipeline products, primarily in demand in countries in Southeast Asia and Africa. These regions are without well-established steel industries, ensuring less risk of new trade frictions arising from local competition.

Expanding domestic demand

Many Chinese steel mills capitalised on the national stimulus package which enlarged the domestic market in 2009. One of China’s largest stainless steel mills stated that although their exports declined by more than 50%, domestic sales increased by 58%, causing profits to remain consistent with those of 2008.

As of November 2009, China's net exports of steel have been largely restored to earlier levels. Nevertheless, China’s steel exports are facing more difficulties as overcapacity problems mount and international protectionism becomes more severe. As a consequence, China’s steel industry may yet have to adjust again in the near future.

A new shade of green is gradually sweeping across China's export manufacturing industry, one that took a while to take root, and companies are riding the environment-friendly wave.

Pressure from the national government and tightening regulations in overseas markets are compelling a growing number of suppliers to modify their business strategies and incorporate ecologically safe processes. The transition is neither extreme nor desperate, but the impact could be widespread as many midsize and small companies are also taking "green" initiatives. Due to the sheer number of these suppliers, they account for a large portion of the pollution and wasteful practices in the country.

Irrespective of size, companies are introducing long-term strategies anchored on recycling, waste reduction and sustainable energy adoption.

Recycling is the most common practice among factories, one that is carried out internally or through third parties. This, however, goes beyond reusing offcuts and scrap materials. Highly polluting industries such as leather tanning have always been required to invest in wastewater cleaning systems, but very few actually do. Now, many are investing large sums in such facilities not only to comply with local ordinances but also as a marketing tool. This comes as an increasing number of buyers are including social responsibility as a criterion in supplier selection.

Fujian Guanxing Leather Co. Ltd in Shishi, a city under the municipality of Quanzhou in Fujian province, has invested USD 3 million in a 6,000-ton capacity wastewater processing station. Once operational, the facility is expected to save the company USD 1.4 million annually.

In fact, waste recycling is becoming the norm in the city, one of the major garment and textile hubs in the province. More than 20 manufacturers have now installed treatment systems such as those from Carrousel. The majority of Fujian factories that dye fabrics in-house have similar facilities for their sewerage as well. Moreover, several local governments have set up complementary wastewater recycling services to help ensure a continuous supply of fresh water.

When it comes to material refuse, many large enterprises contract professional disposal services. Small and midsize businesses often transact with recyclers and junkyard operators.

Guangdong Weiermei Underwear Co. Ltd, for instance, sells fabric cutoffs to waste collectors. Watch exporter Shenzhen Full Success Gift Mfg Ltd and lock specialist Make Locks Manufacturer Ltd vend metal scraps to recyclers.

Some companies involve customers in their green efforts. On request, Shenzhen FJY Electronic Co. Ltd uses recycled materials during production. Doing so has the additional benefit of lowering unit costs.

Adopting degradable materials, however, does not always bring a similar effect. In the beauty and cosmetics industry, bottles made from such substances are about 20% more expensive than conventional plastic.

While recycling and reusing are gaining more adherents, only a handful of operations are tapping sustainable energy sources such as wind or solar power. Cynthia Garments Making (Dalian) Co. Ltd has taken steps to do so by using solar water heating at its workers' dormitories.

This posting was contributed by Global Sources, a leading business-to-business media company and a primary facilitator of trade with greater China.

January 2010 is the beginning of a new decade yet it also inaugurates a new era in international trade with the commencement of the ASEAN-China Free Trade Agreement. The 1.9 billion citizens of its member countries now comprise the largest free trade area in the world. In terms of total trade volume, the ASEAN-China Free Trade Agreement ranks third behind only the European Union and the North American Free Trade Agreement.

After its signing in 2002, China and the six veteran ASEAN members – Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand – have incrementally reduced their tariff levels, typically at 5% per annum. As of January 1 2010, 93% of the commodities exchanged between these countries will have their tariff rates reduced to zero. The newest members of ASEAN – Cambodia, Laos, Myanmar and Vietnam – are scheduled to follow suit with most of their intra-ASEAN tariffs eliminated by 2015.

The trade agreement seems to have been effective. Since the first provisions of the treaty went into effect in 2002, trade has soared between China and ASEAN countries. The exchange of goods among China’s top five trade partners in ASEAN – Indonesia, Malaysia, the Philippines, Singapore and Thailand – expanded at an average rate of 22.9% from 2004 through 2008. In the four newest ASEAN members during this five year time period, imports to China have grown at an astounding rate of 36.1%, albeit with great variation between countries and years.

Source: UN Comtrade; Beijing Axis Analysis

From this rapid increase, China has edged out the United States to become ASEAN’s third-largest commercial ally, behind Japan and the European Union. China-Asian trade totalled USD 231 billion in 2008. Although the first half of 2009 saw a decrease of 24% over the same period the previous year, indications of a global economic recovery suggest that expansion should once again resume in 2010.

Currently, trade between China and its southeast Asian counterparts is characterised by China swapping finished products, such as electronic equipment and machinery, for inputs such as oil/lubricants, plastics, rubber and intermediate electronic components. The effects of the free trade agreement may gradually change this. It is expected that a number of Chinese manufacturers may expand into areas with cheaper costs.

Take Cambodia, for example. Due to its net exporter status of cotton and to its low production and labor costs, Chinese garment factories may be enticed to relocate given these factors and the extremely competitive environment of China. Provisions of the free trade agreement, such as fair treatment of foreign investment and impediments to nationalisation make foreign direct investment within treaty participants a more viable option for such manufacturers.

Despite the progress already underway through this new agreement, there are still a number of obstacles that must be overcome in order for it to reach its full potential. Road and rail networks are limited between China and ASEAN members; exchange almost exclusively takes place by sea. The Chinese government has allocated USD 25 billion to alleviate this problem, but the construction process will take years to complete. The fact that the free trade agreement has been made without the guidance of the WTO is also a concern. Given the lack of transparency in China and in several Asian countries, restitution in legal disputes may be difficult to obtain.

But the effects of these glitches seem to be minimal. The ASEAN Secretariat estimates that the agreement will contribute an additional 0.3% to China’s GDP and another 0.9% to the GDP of the whole of ASEAN. One may expect that at the beginning of the next decade, the ASEAN-China Free Trade Agreement may yet truly rival those in North America and Europe.

The new January 2010 edition of The China Analyst is now available. We are pleased to once again provide this publication as a free resource online. In this edition, we look at the the threat of protectionism facing China; we delve into China’s prominent role in the rare earths industry; and we look at the new era for China and Africa after November’s FOCAC meeting.

Then of course there all the usual sections analysing China's economy in range of perspectives: Macroeconomic Monitor, China Souring Strategy, China Trade Roundup, China Facts & Figures, China Capital and China Business News Highlights. The four regional focus sections analyse the latest trade and investment relations between China and Africa, Australia, Latin America and Russia. In this edition we also launch a new Strategy section, which includes a map comparing China's economic performance in 2009 with the rest of the world, and a section discussing the business strategy of China International Marine Containers (CIMC), a great success story for China Inc. 

To download this free quarterly publication by THE BEIJING AXIS, please click on the link below

The China Analyst - January 2010.pdf

or go to the Knowledge section of THE BEIJING AXIS website to see the full range of our publications. As always, we welcome your feedback and hope you enjoy this edition of The China Analyst.

In the post financial crisis era, many countries are seeking new paths for economic growth and are implementing defensive measures to preserve their own domestic industries. Given these circumstances, along with the recent anti-dumping cases raised by the US Department of Commerce in regards to China's steel plate and pipe products, maybe it is time for China to rethink its business development methods and to shift its focus to value added products.

美国当地时间29日，美国商务部初步裁定，对从中国进口的钢格栅板征收反倾销税。部分企业涉及的关税高达145%。

钢格栅板是用钢材作为原材料的深加工产品，被主要用于工业类建材。根据美国商务部的统计数据显示近年中国出口到美国的钢格栅板增长极为迅速。据悉，美国商务部计划于2010年4月做出最终决定， 当前多家被卷入的中国厂家正在积极应诉。

除此外美国国际贸易委员与30日的表决也使得美国对中国产用于油井钢管征收反补贴税的裁决获通过，该裁决随即将正式生效。

据媒体统计，自一月奥巴马就职以来，已经对中国产品开展了至少十余次“反倾销、反补贴”调查。中方已多次就美国对中国出口产品征收关税表示不满，称这种贸易保护措施阻碍自由贸易。

后危机时代各国都在寻求新的经济增长方式。在这个大背景之下，中国经济增长方式的转变就显得更为迫切。正如商务部发言人所说：“转变外贸发展方式是我国从外贸大国成长为外贸强国的必然选择。”

China’s steel industry suffered severely in 2009. Due to the global financial crisis, a majority of developed countries entered economic recession. The resulting decline in demand, especially for steel, produced deleterious effects which were not lost on China’s steel industry. However, a pickup in domestic demand has greatly helped local producers recover from the crisis and has promoted their further development.

China’s steel industry displayed five major trends in 2009:

I．Both the output and the consumption of crude steel are expected to exceed 565 million tonnes to reach a new high.

1. The actual deduction in crude steel inventory will be more than 500 million tonnes. China's stimulus package has caused an acceleration in industrialisation and urbanisation, resulting in higher steel consumption due to a surge in construction activity.
2. In November, the output of crude steel surpassed 1.57 million tons, an increase of 37.4% over the same period in 2008. In September, the average daily output was at its highest in 2009 at 1.69 million tonnes.

II．China’s steel exports have experienced setbacks, as the vibrancy of the domestic market has outpaced that abroad. Although a major net exporter of steel in previous years, China now imports quantities which rival the out-going totals.

1. From January to November the net export of steel equaled 980,000 tonnes, a reduction of 98% y-o-y.
2. It is predicted that annual imports of crude steel and billet will total 23.8 million tonnes, while exports will equate to around 25 million tonnes. This narrowed gap between imports and exports signifies that China is no longer predominantly export oriented in rudimentary steel.
3. Excluding billet, China increasingly imported more steel than it exported from April to June, a trend which restarted again in November. It is expected that imports will continue to dominate through 2010.

III. The structure of demand has changed significantly, with a shift toward more toward long products.

1. From January to November 2009, the output of rails, long products and narrow tape all increased by 24% y-o-y.
2. The output of plate (narrow tape excluded) increased very little – only 8.4%.

IV. The overall steel market was relatively stable this year. Price movements fluctuated within reasonable levels.

1. As a result of the global financial crisis, the international demand for steel decreased substantially causing a severe drop in the commodity’s price. The price of steel on the Chinese market was also affected.
2. The decline in the price of steel accelerated after October 2008, dropping to 1994 price levels by the beginning of November 2008.
3. From November 2008 to November 2009, the steel price moved within a narrow range, and has remained at a similar but slightly higher level in comparison to November last year.

V. The profitability of the steel industry dropped sharply this year. Small to medium sized steel mills who specialise in long products profited more than larger steel mills who specialise in plates.

1. From January to October 2009, the total industrial output value for 70 medium to large sized steel mills decreased by 20% y-o-y – sales decreased by 20% y-o-y while profits decreased by 70% y-o-y.
2. Medium to large sized steel mills ran deficits for seven months, from October 2008 to April 2009. The deficits switched to profits only in May of this year, and until recently, these profits have remained small.

The 30-second advertisement below promoting Made in China products has been airing on CNN since late November 2009. The advertisement was produced under the auspices of four Chinese industrial chambers of commerce (China Advertising Association of Commerce; China Chamber of Commerce for Import and Export of Machinery and Electronic Products; China Chamber of Commerce for Import and Export of Light Industrial Products and Arts/Crafts; and China Chamber of Commerce for Import and Export of Textiles) and supported by the Ministry of Commerce of China.

This advertisement represents China’s first ever global branding campaign to enhance the image of the Made in China brand. The theme of the ad is Made in China, Made With the World. It attempts to highlight how Chinese and overseas firms work together to produce high-quality goods. Appearing in the ad are products used in daily life, including running shoes made with US sports technology, an iPod player with software from Silicon Valley, a French-designed fashion label and a European-designed refrigerator - all sporting the Made in China label. As such the ad is a clear attempt to link Made in China with Designed in the West and to illustrate China's capability and potential to manufacture quality products.

Before this advertisement, the global branding image of Made-in-China products was derived from individual companies such as Haier, Tsingtao, Huawei, or from Chinese companies investing capital overseas, such as Lenovo. The new theme of Made in China, made with the world, however, points to a whole new trend in the development of the Made-in-China brand. Yet this is only the start of the global reconfiguration of the Made-in-China brand. What do you think of the ad? Have a look and let us know in the comments section below. 

Most of the world’s leaders are saying that the global recession is over. But does this correspond to the data? A few leading indicators, both conventional and unconventional, will be examined to determine the outlook of the global economy.

OECD Leading Economic Indicators

The Organisation for Economic Co-operation and Development (OECD) releases its Composite Leading Indicators (CLI) on a monthly basis. Each country’s index is comprised of different statistics. For example, China’s includes items such as the production of chemical fertilizer and the tonnage of cargo handled at ports, while for the United States the interest rate spread and consumer sentiment are measured. Periods of expanding or diminishing economic activity fluctuate around the value of 100, deemed to be the long term economic trend. Movements in the CLI generally precede similar movements in the business cycle.

According to the OECD’s leading indicators there is an overwhelming trend of economic recovery. Countries such as China and India have even eclipsed the 100 mark, suggesting that they are back on track in terms of more long term trends. From the OECD data, it seems that the worst days of the recession have indeed passed.

Baltic Dry Index

The Baltic Dry Index is another way to predict future economic growth. It is published by the Baltic Exchange in London and gives an overview of the marine shipping price for raw materials worldwide. This is a useful indicator because the availability of cargo ships is relatively stable, whereas the need for international shipments in dry goods—things like coal, metals, and grains—varies considerably depending on economic activity. An increase in shipping activity means an increase in future output.

This index collapsed in late 2008, but has since recovered. It is now listed at over four times its previous value in January 2009. This largely agrees with the OECD leading indicators in reflecting a wide-ranging recovery for the world economy. The Baltic Dry Index can be tracked on Bloomberg.

Skyscraper Index

This one is less conventional. The Skyscraper Index is a measure based more on casual observation than statistical analysis. The argument behind it is that the construction of record-breaking towers is often initiated just before an economic crisis. Ground was broken on the Singer Building and Metropolitan Life Building before the panic of 1907; the Empire State Building’s construction in New York corresponded with the Great Depression; the Sears Tower in Chicago preceded the downturn of the 1970s; just before the Asian financial crisis there were the Petronas Twin Towers in Malaysia; and more recently, there was the Burj Dubai before its city’s debt problems.

If the soothsaying behind this index is correct, it doesn’t bode well for China. The country will see new towers such as the Shanghai Center, the 117 Tower in Tianjin, the Ping An Insurance skyscraper in Shenzhen, and the China World Trade Center Tower 3 in Beijing within the next few years. These projects come at a time when some have warned of the possibility of asset bubbles in China. A slowdown in this rapidly growing economy would have adverse effects on the rest of the world.

For the sake of optimism thus, following the conventional indices is recommended.

Putin’s visit to China in October has brought numerous promising projects for bilateral cooperation between China and Russia. More and more Chinese companies are becoming involved in deals with Russian companies, both in exports and imports.

However, when doing business with Russian clients it is important to understand their way of thinking, especially when you are looking to sell your products on the Russian market.

From my personal experience in sourcing for Russian clients from Chinese producers, the following issues—standard with any sourcing project—must be managed: price, quality, supplier reliability, delivery time, payment terms, availability, product certification, and transportation time, etc. What are the most critical issues specific to Russian companies? The top three would have to be payment terms, product certification, and language barriers.

Language

Effective Communication is a crucial aspect of any business deal. The existence of a language barrier is a particularly formidable challenge faced by Chinese companies aiming to enter the CIS market. Effective communication will allow certainty in the decision-making process; misunderstanding, however slight, may lead to unexpected troubles or worse—failure. The simplest way to avoid these unnecessary pitfalls is to have an effective conduit between your company and the client. A few of the best ways to do this are:

1. To establish a local representative office
2. To find a solid partner in Russia
3. To hire a long-term translator in your domestic office
4. To hire a short-term translator during your client’s visit to your factories or during your trip to Russia

The listings above are ordered according to the level of importance of the prospective deal. The first option is most acceptable for a Russian client, while the third and forth options are the easiest options to use when visiting a Chinese company. Any aggressive, long term, business expansion into Russia would require a representative office in Russia or even a joint venture with a local Russian company.

To be continued

Building on the last post on this blog regarding protectionism, trade protectionism is now a big concern in China. Chinese GDP relied heavily on foreign trade before the financial crisis. As one of the three engines of China's GDP growth, the exporting sector has just started to recover in 2009, but it now faces the threat of protectionism. The ‘anti-dumping’ cases that some Chinese suppliers are confronting will probably not effect China’s economy and exporting sector too heavily in the big picture, but the protectionism message sent by US government from these cases is a serious concern that China needs to consider and be prepared for.

自9月初美国通过了轮胎特保案的最终裁定，对从中国进口的所有小轿车和轻型卡车轮胎征收为期三年的惩罚性关税开始，贸易保护主义的抬头开始成为国内进出口行业愈加热议的问题。事实上，轮胎特保案只是中国目前遇到的众多贸易争端之一。09年以来，中国很多行业的产品出口遭遇到了类似的问题。（如下表）.

国家 美国
行业 无缝钢管
事件 继欧盟之后，美国商务部10月7日宣布对从中国进口的无缝钢管发起反倾销和反补贴税调查。此举可能导致美国对此类产品加征接近100%的新关税。
时间 2009年10月7日
影响 无缝钢管可能失去全球最大出口市场

国家 欧盟
行业 无缝钢管
事件 10月6日，欧盟部长理事会发布公告称，裁定中国输欧无缝钢管对欧盟产业构成损害威胁，决定征收17．7％～39．2％的最终反倾销税。
时间 2009年10月6日
影响

国家 美国
行业 轮胎
事件 美国对中国轮胎发起的特保措施，决定对从中国进口的所有小轿车和轻型卡车轮胎实施为期三年的惩罚性关税，意味我国会损失10亿美元出口额，影响10万左右工人的就业。
时间 2009年9月11日
影响 涉案金额高达22亿美元

国家 美国
行业 油井管产品
事件 美国对中国油井管产品进行反倾销、反补贴合并调查，这是中国迄今为止遭遇最大涉案金额的贸易摩擦官司。
时间 2009年4月
影响 涉案金额高达32亿美元

国家 美国
行业 铜版纸产品
事件 美国宣布对中国出口美国的铜版纸产品征收临时反补贴税，改变了美国坚持了23年的不对非市场经济国家实施反补贴法的贸易政策。
时间 2009年3月30日
影响 涉案金额高达22亿美元

国家 印度
行业 高新技术产品
事件 印度对我国同步数据传输器发起贸易救济调查。
时间 2009年2月
影响 涉案金额为8.8亿美元

国家 印度
行业 玩具
事件 印度宣布今后6个月内将禁止进口中国玩具，浙江、广东地区的一部分玩具企业受到不少影响。
时间 2009年2月
影响 浙江、广东地区的玩具企业受到影响。

注：表中数据引自新浪财经

以上数据看起来非常惊人，但整体来说，中国进出口的走势还是在恢复中的，这些单个的反倾销案件对中国某个特定公司或行业造成的损失并不是特别影响大局。比如，根据近期中国海关公布的数据，9月PMI新出口订单指数53.3%，连续5个月超过50%并保持上升。9月季调后的新出口订单趋势53.8%，自09年1月以来持续上升。

但是受金融危机影响，国外市场的消费能力萎缩使得我国这种出口恢复还是非常缓慢。在这种背景下，以美国为代表的国家或地区实施的贸易保护主义所造成的数个反倾销案件对中国造成的心理影响恐怕远远大于经济损失。奥巴马曾在G20峰会上提出针对对美贸易顺差大国(主要是中国)的“可持续及均衡增长框架”协议。美国政府认为，全球经济的不平衡(特别是美中贸易的不平衡)与危机的发生有一定的因果关系。当然，将源自美国而祸及世界的此次危机，归于这种不平衡尤其是中美贸易的不平衡，显然是嫁祸于人的不公平做法。根据克鲁格曼的说法，金融危机的根本原因是因为“美国人花费的比他们挣的多，通过国家借债的方式把借来的钱用于修建房屋和购买消费品以及为联邦预算赤字融资”。

但无论如何，当前美国政府对于贸易逆差的态度从而有可能引发的贸易战或贸易保护主义全球化蔓延才是我们真正值得担忧的。比如近期中国商务部对美汽车产品发起的“双反”调查，也对美国的贸易保护主义明确表明了态度。

毫无疑问，此次奥巴马的访华之行会成为中美双方国内的各相关行业热切关注的事件，甚至在更大的范围内吸引全球各国的眼球。美中双方对于贸易问题的相关谈判结果会成为以后在相当长一段时期内中国的进出口景气风向标。当然早在今年年初的时候中美双方就有过类似的对话，并且没有对以后的贸易环境形成很大的冲击和影响。而这次我们也同样只能拭目以待，希望双方能够在克制的基础上达成一定共识，以更开放的态度鼓励双边甚至多边贸易的运行。而同时对于某些已经或可能受到影响的厂家和行业来说，加速技术升级换代和积极开拓多区域的国外市场无疑也是必需要准备的应对手段。

The European Union's trade commissioner, Catherine Ashton, claimed in a document released last week that despite 223 restrictive trade measures since October 2008, a protectionist worst-case scenario has been avoided, especially as the Group of 20 leaders made commitments to protect free trade. Yet a spokesman from China's Ministry of Commerce over the weekend proclaimed that China has suffered heavily from trade protectionism, which has been rising since the start of the financial crisis. And he gave some stats to back it up. In the first 9 months of the year, the spokesman said, 19 economies launched 88 probes into Chinese products, involving USD10.2 billion worth of export goods. The number of probes is up 29% compared to the same period last year, while the monetary value is up a full 125%. The 88 probes against Chinese products included 57 anti-dumping cases, nine of anti-subsidy and 15 safeguard actions and 7 cases of special protection. The spokesman particularly singled out the United States - responsible for 14 of the 88 probes with a value of USD5.84 billion, an increase of 639% y-o-y.

According to data from the WTO's Global Antidumping Database, in Q3 2009 WTO member governments initiated 44 new product level investigations in response to domestic industry requests for the imposition of import restrictions, most of these (37) occurred under a national antidumping law. The cumulative number of new requests for protection during the first three quarters of 2009 was 30.3% higher than for the same period in 2008, and China continued to be the exporting country most targeted by new investigations in Q3, facing 23 (or 62.1%) of 37 new product-level investigations. For the whole of 2008, industry demands for new import restrictions against China under these policies were up 22.7%, while a 7.8% increase is expected in 2009. Interestingly, however, in the report accompanying the data, author Chad Bown concludes that

WTO member use of trade remedies to target China's exports is not a new, crisis-related phenomenon, as it continues a trend dating back to China's WTO accession in 2001 and even earlier.

So protectionism may have been on the increase since the financial crisis - yet the targeting of Chinese exporters in this regard is nothing new. The series of anti-dumping duties recently levied in the US on imported Chinese products (notably on tires and steel pipe) have, however, caused the contentious shadow of protectionism to fall squarely over US President Obama's impending visit to China. The Chinese have countered with tariffs and investigations of their own, notably on whether cars imported from the US are being sold below market prices in China, yet surely these matters can all be talked out in a civilised manner when the two finally sit down for what is now a well overdue chat. 

Gauging the current outlook for China's small and medium-sized enterprises (SMEs) is not easy. Depending on the way you a look at them, China's SMEs can be an unwieldy mass hard to regulate and prone to quality and intellectual property (IP) violations (as this blog has reported before), or a rising class of innovative entrepreneurs who traditionally struggle on their own, unable to obtain financing from China's banks.

For obvious reasons related to their vast numbers, varying sizes, locations, industries and types of business, they are not an easy bunch to pin down. Yet if you heard anything about SMEs in China in the last year, it is likely to be something related to how disproportionately they have been affected by the financial crisis, intermingled with sordid tales of falling exports and job losses. At the same time, the traditional story on SMEs is that they are not favoured lending targets for banks, and China is no exception to this.

China's large state-owned enterprises (SOEs) are now regular headline features with ever-larger investments and acquisitions the world over, yet SMEs are the backbone of China's economy. They are said to account for about half of tax revenues, 68% of exports and around 60% of GDP. According to statistics quoted here in June 2008, 99% of China's SMEs offered 75% of new jobs and created 50% of the country's wealth, although they have little more than a 10% share of the capital. Nevertheless, they are also said to be responsible for 65% of China's invention patents, yet China's State Intellectual Property Office is well aware of problems regarding a lack of awareness of IP protection, as 80% of SMEs in China supposedly have no IP department at all.

SMEs' struggle to obtain financing and the attendant economic hardship in China is well documented, and well predate the financial crisis. According to China Daily, in 2007 in Guangdong province, for instance, only 2% (amounting to USD 286 billion) of loans extended in the province were given to SMEs, while in the first half of 2008 it was reported that 67,000 SMEs in China went bankrupt while over 20 million factory workers could have lost their jobs. Electricity use by SMEs fell by almost 50% year-on-year during the first half of 2008, according to China's National Bureau of Statistics.    

Furthermore, China's small players are said to have been given short shrift in the government stimulus spending, as this has benefited mostly big state-owned firms. The Wall Street Journal's China Realtime Report this week reported on figures provided by China's central bank and banking regulator to illustrate how China's small businesses are currently doing at getting loans. SMEs, they said, accounted for 14.1 trillion yuan of outstanding bank loans at the end of September, up 28% year-on-year, whereas overall bank lending was up 34.2% in September. According to the Wall Street Journal's calculations, this meant that SME loans accounted for 36% of total lending, although it could actually be less than that. Yet by the end of the first half of this year, China's Banking Regulatory Commission reported that Chinese banks' outstanding loans to SMEs stood at 12.52 trillion yuan, accounting for 53.7% of the total outstanding loans to all enterprises. According to the Wall Street Journal, thus, the latest figures would seem to show that the explosion in bank credit has indeed been weighted toward large, state-owned companies, and that small firms' share has been shrinking.

Yet an official from China's Banking Regulatory Commission announced in September that China's five state-owned commercial banks and twelve joint-stock commercial banks have by the end of the first half of 2009 all established specialised institutions for providing financial services to SMEs, and plans are afoot to set up 1294 new rural financing institutions within three years. The official also stated, however, that even though SMEs in China currently enjoy the same finance and tax policies as larger enterprises, the non-performing loans ratio on SME portfolios is 4.5% as opposed to only 1% for large-scale enterprises. He called on the government to reduce the business tax rate for loans to SMEs.

A directive issued by the State Council on September 22 seems to have been aimed at this, and committed the government to loosening rules for bank loans to SMEs in order to tackle difficulties in raising funds. The directive promised tax breaks for small firms with an annual taxable income below 30,000 yuan for the year 2010. In August, after a meeting of the State Council chaired by Premier Wen Jiabao, it was decided that restrictions on SMEs entering certain industries will be loosened and detailed measures for government procurement from SMEs will be put forward. In addition, the creation of a Growth Enterprise board would be speeded up to increase financing options for SMEs, and subsidies will be offered to financial institutions that lend to new businesses. In October, Li Yizhong, head of the Ministry of Industry and Information Technology, disclosed to the media that China will continue to launch many favorable tax policies to support technology SMEs, like reducing by half the income tax payable of small enterprises, lower land use tax for SMEs, and the postponement of tax payments of SMEs who face certain difficulties. The National Development and Reform Commission has even encouraged China's SMEs to pursue foreign investment opportunities and to set up trading entities and overseas research institutions. It also affirmed the government's support on the development of small private venture capital firms via tax breaks.

So what ultimately can we take from all this? By their very nature, many SMEs all over the world will always struggle. Yet China's government seems aware of how important the well-being of China's SMEs is, and has acted accordingly. Indeed, it is possible to bicker about numbers and their veracity, but if the bank lending figures quoted above tell us anything, it is that China's SMEs have not been shut out altogether in favour of the SOEs (as some have feared), and perhaps their supposedly perennial struggle for financing is somewhat exaggerated. Yet if the high-level picture seems to be changing, it probably will not mean much to the myriad small businesses and workers that toil daily throughout the length and breadth of China to make a living, on their own accord. They may have a long way to go on intellectual property and quality issues, but with their problem-solving, adaptable way of doing business, they may in future be part of the solution rather than the problem.


Appendix: Additional recent SME-specific announcements:

• 2008-09: The B2B online giant Alibaba.com has launched a kind of matchmaking service for its members and banks. The service was launched last year in Zhejiang province, where Alibaba says 600 businesses used it to acquire loans worth more than USD 146 million. The programme has subsequently been expanded to Guangdong, Shandong and Jiangsu provinces and several coastal cities, and ultimately Alibaba expects to facilitate more than USD 878 million in loans. Because Alibaba can provide detailed information on its members, the key shortcoming that Alibaba is attempting to overcome in this way is the lack of a well-established credit rating system in China. 
• June 09: A central government fund plans to extend grants of 1.7 billion yuan to technology-based SMEs. Grants from an Innovation Fund will go to 2,725 projects from the IT, pharmaceutical, new material, new energy and environment protection sectors
• September 09: The China Association of Small and Medium-Sized Enterprises announced it was scheduling a series of 'speed dating' sessions in 14 cities to introduce SMEs to new financing sources. At a pilot event in Shiyan in Hubei province in May, contracts of nearly 1.8 billion yuan were signed 
• September 09: An article from CCTV reported that a bond insurance company dedicated to helping small firms issue corporate bonds was set up. Established by the National Association of Financial Market Institutional Investors and six large state firms including PetroChina, the new company aims to raise the credit level of SMEs through warrantees and by issuing financial derivatives
  
• October 09: China's long-awaited Nasdaq-style Growth Enterprise Market board is launched (see also this report). Hailed as an important step for stimulating enthusiasm for entrepreneurship and boosting private investment, the board will cater largely to technology and innovation-oriented startups that typically find it harder to obtain bank loans. The first 28 companies to list on the board, ranging from software to medical equipment makers, are said to have raised 16 billion yuan in their initial public offerings

Image: http://news.southcn.com