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China Daily reports  that the China Banking Regulatory Commission (CBRC) and the Ministry of Commerce are having second thoughts about the tough regulations they set for foreign banks entering the Chinese market. 

According to the terms of the country’s accession to the WTO, China is obliged to open the banking sector to foreign institutions by the end of this year.  But in June, the domestic regulators surprised everyone, none moreso than the foreign banks, by slapping a host of new limitations on foreign financial institutions entering China.  The proposal that caused most upset stipulated that foreign banks could only accept single local deposits of a minimum of a million yuan, which would in effect force them out of most of the market. 

Since then, the overseas banks have been kicking up an almighty ruckus and crying foul and it now appears that the Chinese authorities have been paying attention.  The China Daily article states that bickering between the CBRC - who are more interested in protecting the domestic players than welcoming the outside banks - and the Ministry of Commerce - who are concerned about WTO compliance - may see the idea shelved or changed.

For the reason why there has been such an outcry from the foreign players about this, see this story and this one.  China has the highest rate of personal savings in the world, estimated at almost 50% (compared with 10% in the USA).  Yet, surprisingly, it seems that even as Chinese people get richer, increased interest rates are encouraging them to save more rather than spend more.  China Daily reports on the results of a nationwide survey of 20,000 people, which found that the number of people who believe "saving is a better option than spending" has risen 2.2 percentage points in the last quarter alone. 

The market potential is simply enormous.  No wonder the bankers were so mad.  

Members of the International Monetary Fund today voted overwhelmingly to approve a controversial package of reforms that will give greater power and imporatance in the IMF to China and three other countries.  The changes will see China’s share of the votes in the IMF rise from the present 2.98% to 3.719%, with the shares of South Korea, Turkey and Mexico also rising by similarly small amounts.

Although the amounts seem insignificant, the IHT described the moves as "a swing in the global order" and  Henry M. Paulson Jr., US Treasury secretary was quoted as saying “It looks like a small step forward, but it’s a large step".  Not everyone was happy with the decision, though, with India dismissing as "flawed" the entire process of reform.

The Western powers, however, have agreed to support China’s expanding role in the hope that the increased power will force China to become more responsible in the way it gives handouts to other countries.   China’s influence as an international donor is growing, but in keeping with the stated dictums of its foriegn policy -  ‘A Peaceful Rise’ and ‘Non-interference’ - its donations are notably free of the ethical clauses that accompany Western contributions.  Such catch-free handouts are welcomed by certain states that have become pariahs in the west.  The list of countries that have benefitted from Chinese donations raises eyebrows: Zimbabwe, Sudan and Myanmar are just three of the countries depending on charity from Beijing to stay afloat.

On a related note, the military junta in Myanmar today expressly thanked China for its support in opposing a resolution in the  UN Security Council to formally list Myanmar on the council’s agenda.  The resolution was passed last Friday by 10 votes to 4.  The dissenters were China, Russia, Qatar and Congo.

Every so often its good to be reminded that the Chinese economic miracle is not all it seems.   Beneath the g-force economic growth and jaw-dropping statistics lie a fallibility and frailty that are thrown into stark relief by stories like this.  

Municipal authorities in Shanghai have cut prices yet again for the superfast Maglev train that links the airport and the downtown area.  In an effort stave off the seemingly inevitable decision to abandon the technological boondoggle, maglev management have made discounts of up to 40% available to those who buy 30 one-way tickets.  This comes a little over a year after ticket prices were slashed from more than 75 yuan to less than 50 yuan.

The Shanghai train is the only commercial train in the world utilizing maglev technology.  It was conceived as a symbol of the astonishing rise of both Shanghai and China, and as an advertisement for the country’s technological development.  As such, it is a project of which the government is fiercely proud and keenly protective. But commercially, and indeed logistically, it has been an collosal failure.  It has never turned a profit and shows no sign of doing so.  In fact, the local government have been keeping this white elephant on the tracks by underwriting annual losses of almost half a billion yuan.

The train whisks passengers from its terminus to the airport in just 8 minutes, at a top speed of 432 kilometres.  But few bother to take it because, despite the speed, it’s surprisingly inconvenient.  For one thing, it doesn’t actually go from the city centre, but from a station about 10 km from downtown.  You can get the subway to the Maglev station, but that’s still a 20 minute journey from Pudong or Nanjing Road.  And anyone who has tried to lug their suitcases on or off of a Shanghai subway at rush hour in People’s Square will understand why people forego the experience of riding this transportation marvel in in favour of taking a bus or taxi. 

In spite of all this, authorities continue to talk up maglev technology and China’s role in developing it.  There is even talk of extending the existing maglev line, and discussions are ongoing between Chinese and German authorities about building a maglev connecting Shanghai and Hangzhou.  Talks on the development of this line stalled earlier in the summer, however, when the German side rejected China’s demands for the German technology in exchange for the construction contract.

This idea received a further blow when the airport maglev caught fire while in service in late August.  The irrepressible People’s Daily, as only the People’s Daily can, performed outrageous cartwheels of logic in an effort to put a positive spin on this mishap involving the symbol of the country’s technological prowess, claiming that, rather than dampening enthusiasm for maglev technology, the fire would strengthen the Chinese hand in the negotiations with the Germans. 

Good news for Gordon Brown and the Labour party, though.  George Osborne, David Cameron’s Shadow Chancellor, is reportedly dead set on splashing billions of taxpayers’ pounds on maglevs in the UK if the Tories get into power. "“If Japan is developing this technology, if China has already introduced this kind of train, if Germany is looking at this technology, why are we not doing so in Britain?” he said.  Mr Osborne would be well advised to look closer at the Chinese model before repeating such statements.

The problem of false reporting of statistics is now so serious in China that the National Bureau of Statistics has established a new department to deal with it.   

Just today, China’s Environment minister blamed worsening air quality on falsified statistics, claiming that local authorities repeatedly lie about pollution emissions and falsify environmental data to secure approval for construction projectss.  "It is clear the conflict between economic growth and environmental protection is coming to a head,"  he was quoted as saying.

The NBS themselves drew attention to the figures for national GDP growth rate for the past year, and the discrepancy between the NBS’s own calculations and the numbers supplied by local governments.  The NBS puts the national GDP growth rate at 10.9%, yet the local authorities of 23 of China’s 31 provinces estimate their growth rates at 12% or more.  Inner Mongolia, for example, claims GDP grew at 18.2%, while Jiangsu puts its growth at 15.4% (link). 

The reason for this discrepancy between NBS’s overall growth rate and that of the individual provinces is that the NBS assumes that the local governments are cooking the books and adjusts its figures accordingly. 

Last year, China was forced to revise its GDP growth rate for 2004 by more than 10%, from 6 percent to 16 percent, after an audit revealed that the statistics gathered around the country were wildly inaccurate.  From property vacancy rates to the numbers of people killed in natural disasters, the only reliable thing about official statistics in China is their inaccuracy. 

The new moves by the NBS to combat the problem are laudable, but will likely be completely ineffective.  They will have no effect because they do nothing to combat the root of the problem, which is that the civil service system as it current stands actively promotes fraud and corruption.  

Cadres don’t rise through the official ranks on merit or abilty (though doubtless there are those who absolutely deserve on merit to be where they are).  Rather, promotions are apportioned according to a complicated points system.  Officials are given a  set of  often very  detailed targets  that they must meet, e.g. they must attract a certain amount of inward investment or ensure a specified GDP growth rate.  If they hit the target, they are awarded points. If they  amass enough points they can move up to the next level, with a higher salary and more responsibility.  So there is an inbuilt motivation for lowly officials to falsify stats and submit exaggerated reports.  At the same time, the officials further up the line who should be checking these stats, are just as interested in gaining promotions, so they are just as motivated to ignore or even encourage false reporting from their subordinates.  Doing so makes them look good and earns them more points, perpetuating the failure of the system.

The Globe and Mail ran a story last week on the frosty diplomatic relationship between Canada and China, focusing on China’s refusal to allow Cananda to market itself as a tourist destination.  It is a sobering parable of the price of doing business in China, and the  compromises that have to be made in order to succeed.

The Canadian authorities ran afoul of Beijing in 1999 when they refused to extradite China’s "most wanted man" Lai Changxing, a billionaire businessman who had fled China as the investigative net closed on his supersized smuggling operations.  That Lai has major questions to answer in China about how he accumulated his vast fortune is not in question, but Canadian authorities turned down requests for his repatriation because they believed that he would be executed for his crimes were he sent back to China, and therefore sending him back would be in violation of Canada’s human rights laws. 

Chinese authorities gave assurances that they would not seek the death penalty in this case, but since several other associates of Lai were executed for lesser crimes than those of which Lai is accused, Canadian authorities turned down China’s requests.  For this slight (and also ,in part, for cosying up to the Dalai Lama by giving him honorary citizenship) Canada was denied the right to advertise itself in China as a tourism destination , an almighty snub that has had continued and far- reaching effects on the Canadian tourist industry (and by extention the Canadian economy). This article claims that Canada is losing out on 700,000 tourists annually, each of whom would spend an average $1,800.

There is, the story says, a Canadian tourist office in Beijing but it receives only a dozen or so vistors a week since they can’t publicize their country or their services.  What’s more, despite being one of the first countries to apply for the priviledge, Canada has yet to receive Approved Destination Status, the ‘golden ticket’ that will allow cash-rich Chinese tour groups to visit the country.

So for doing something that, by Canadian legal standards at least, would be seen as "the proper thing to do", the Canadian government has cost itself incalculably large amounts of revenue from free spending Chinese tourists.  Not only that, as long as they are denied ADS, they will continue to lose ground to other countries competing for a share of the Chinese tourist market.

Things don’t show much sign of improving, either, with the incumbent Canadian conservative government taking about 5 minutes to get on the bad side of the Chinese government, with "Reds-under-the- beds"-style scaremongering about Sino-sponsored espionage. 

The fact is, though, that Canada will have to eventually make its peace with Beijing. It simply cannot afford not to, such is China’s economic and diplomatic sway. The question is how far they are willing to go, and how far they will have to go, to regain Beijing’s friendship.

This is a question that has cropped up again and again in relation to foreign companies and countries doing business with China.  From Yahoo aiding the conviction of investigative journalists to Google’s Party-friendly google.cn, to certain EU member-states lobbying to lift the EU arms embargo, observers have wondered whether the moral cost of doing business in China can be offset by the material gains, both for the companies involved and the Chinese people themselves.

Last week, Human Rights Watch put out a report criticizing foriegn Internet companies for their compliance in censorship and other nefarious activities in China. Entitled A Race to the Bottom, it called for foreign companies in China to start making "ethical choices" about the way they do business here and advises them to lobby the Chinese government to end censorship, refuse to hand over data to the authorities, refuse to censor any material and encrypt all emails.

But, noble as Human Rights Watch’s goals no doubt are, the very obvious reality is that their proposals are extremely unrealistic and there is likely not a single major multinational company willing to adopt any of them, for the simple reason that to do so would mean being turfed out of the China market (as articulately explained by the Peking Review blog).

We are sure to see this issue arise again and again in the coming months and years, particularly with IT and Media companies coming into the market here.   As foreign media penetration increases in China, for example, officials are striving to gain even greater control over it, an untenable antagonism that will only end when one or both sides agree to compromise (as, Google did).

But this game of ethical chicken is being played on an uneven field. For its part, the Chinese government can offer to any foreign companies willing to forego their ethical standards access to the "China Dream": 1.3 billion customers and an emerging class of nouveaux riches eager to splurge.  The foreign media and IT companies, on the other hand, unless they play by Beijng’s rules, can only offer Chinese authorities a world of headaches, by providing the public with greater access to uncensored foreign news and other material detrimental to the long-term health of the government.

In these circumstances,  it’s clear to see who the winner will be.

When Chinese authorities actively encourage unionization at a major multinational corporation and then start prosletyzing for more unions, and when that major multinational corporation happens to be not-exactly-union-friendly "associates-not-employees" Walmart, something is quite obviously amiss.

Although both Walmart and the Chinese authorities will likely spin this as a victory for the common man to whom the unions will give a voice, the reality is, naturally, quite different.  Independent trade unions are illegal in China.  The only legal union is the government-sponsored and party-controlled All-China Federation of Trade Unions. It is therefore highly unlikely that the ACFTU is going to begin agitating for shorter hours and higher pay.  As the WP points out "the role of the state-sanctioned unions isn’t to channel the discontent into achievable gains; it’s to contain it to the employer’s benefit"
 
It remains to be seen, however, whether this will have any effect on Walmart’s profitability in China. The chain has been having trouble in other regions of late, completely pulling out of Korea and Germany within the last few weeks.  The Chinese market is very different to these other markets, though. Walmart has been rapidly expanding its operations here, and now has 59 stores in 29 cities.  There are many Chinese competitors in the market, but few of them can compete with Walmart in terms of either product ranges or prices, particularly in the second-tier cities where Walmart currently seems to be focusing its efforts.

Work has apparently begun on a new Disneyland in Shanghai.  This report says that it will open in 2010 and will be almost 4 times bigger than the Hong Kong Disneyland.  This has been in the pipeline for years, but it was previously reported that Disney wouldn’t open in Shanghai unless it had a guarantee that it could launch a Disney channel on Chinese TV.

It is interesting to note that Disney have promised that this park will be bigger than Hong Kong’s.  The HK one is the smallest off all the Magic Kingdoms and one of the many complaints levelled at it since it opened is that there aren’t enough rides inside (a mere 16 apparently, compared to 52 at the original). HKDL did not release visitor numbers for its first year of operation but it is suspected that they are well short of the target.   (Notwithstanding the mini-riots caused by crowds trying to storm the place over the Spring Festival)

On a related note, this blog’s former stomping ground, Wuhu city in Anhui province, has announced that it will build the biggest theme park in China.  It’s due to open next year, and the developers are expecting 3 million visitors a year.   Given that Wuhu’s rather run-down train and bus stations can hardly cope with the current capacity, some serious upgrading would be necessary to cope with an extra 9,000 visitors on average every day. 

The much greater worry, though, is where Wuhu is going to find these 3 million extra visitors once it has splashed the cash (2 billion RMB) on this new development.  It’s is certainly well located, near Nanjing, Hefei and other major centres. But even Wuhu natives would surely admit that the city doesn’t have many tourist draws, and would struggle to sell itself as a holiday destination.  Most people have never even heard of it, and many of those that have, know it only as the hometown of popular pop moppet and actress Zhao Wei.

What’s more, as this report outlines, themeparks are cropping up all over the country as grasping investors eye easy ways to soak up some of the disposable income of the emerging middle class.  Even the VP of the China Association of Amusement Parks is worried (and this is surely not a good sign): "If you go to any medium-sized and large-sized cities, you will find a theme park that is built up or under construction. I am kind of worried  what do we do with so many amusement parks?"

Exactly.  It’s the same old cycle of Innovation - Imitation - Saturation that has happened so many times before in the Chinese market.  As soon as someone starts making profit from something, the market becomes flooded with barely distinguishable versions of the same basic product, and before long nobody is making money.  Remember the short-lived Chinese pizza craze? 

Air China announced yesterday that, faced with weak public demand, it is slashing the size of its Shanghai IPO by 40%. 

This may be bad news for the Chinese stock market which, after years of uncertainty, finally seemed to be sorting itself out.  A one-year moratorium on IPOs ended in May, and since then  12 companies have raised almost 40 billion yuan on the Chinese market, compared with only 5.7 billion in 2005.  The weak response to the listing of China’s largest airline may indicate that the market has become saturated.

On the other hand, it may also demonstrate a new-found maturity in the market, as investors become smarter about their investments and eschew unattractive offerings.  Investors had already been complaining that Air China’s share price was far too high, compared to both its valuation and the value of its shares when it listed in Hong Kong.

There are a slew of high-profile domestic IPOs lined up before the end of the year, the most notable being ICBC (the Industrial and Commercial Bank of China).  ICBC is reportedly aiming to raise 10 to 15 billion from a listing in Hong Kong in the Autumn, to be followed by a large offering in Shanghai.  

The China Securities Regulatory Commission is adamant that, despite fears of market saturation, the schedule for listings won’t be changed, although it seems that moves are afoot to reform the IPO pricing system.