Performers do the horse dance on the eve of the Lunar New Year, or Spring Festival, at a park fair in Beijing, China, 30 January 2014. The Year of the Horse, according to the symbol of the 12 year cycle of animals, began last night. (AAP)

The Year of Horse will be a testing time for China’s leaders as they confront tough economic conditions, worsening environmental challenges and increasing tension within the region. Here is my prediction for the ten major trends to look out for this lunar year.

Year zero for reform

The bold reform package unveiled by the ruling Chinese Communist Party (CCP) at the third Plenum of 18^th Party Congress late last year has been greeted with cautious optimism at home and abroad. This optimism will be put to test this year as China faces tough economic conditions.

Maintaining stable economic growth and implementing painful structural reforms are a set of irreconcilable goals in the short term. It is likely that the leadership will err on the side of caution but reform progress will be faster and deeper than under the lost decade of the Hu-Wen administration.

GDPism in retreat

GDPism has replaced Communism as the country’s official economic ideology over the past few decades. There are encouraging signs that officials’ once unflinching faith in it is slowly fading. The party’s KPI matrix is changing to reflect new priorities such as the environment and debt management.

Eighteen provinces in China have lowered their GDP growth targets, reflecting both tough conditions ahead as well as new policy imperatives. But old habits die hard – don’t expect these addicts to wean off the cocaine overnight.

Clampdown on dissent

Though the party is committed to economic liberalization, political reform is not on the agenda. A prominent citizen activist has just been sentenced to four years in gaol for advocating for the educational rights of the marginalized in society.

The party is maintaining a tight grip over China’s ever-increasing army of smart-phone wielding internet users. But these social media savvy citizens will put pressure on officials and hold them to account.

War on Corruption

More than a dozen minister-level senior officials were arrested in the later part of last year including a general who had in his possession a gold statue of Mao. Wang Qishan, the anti-graft tsar is spreading fear among the country’s 24 million officials.

That’s good news for sharks (who can keep their fins) and bad news for Louis Vuitton.

Zhou Yongkang may become the first former member of the standing member of the politburo – the most powerful political body in China – to stand trial. However, the recent revelation that senior party leaders have been stashing cash in offshore tax havens shows how deeply entrenched the problem is.

Managing the debt bomb

China just dodged its first high-profile potential default in the shadow-banking sector this year, which I called China’s Bear Stearns moment (China’s Bear Stearns Moment, 29 January).

More than half of local government debts are due this year. Beijing can choose to roll them over and continue the musical chairs or allow selective defaults to happen. Once again the money is on Beijing taking a cautious approach which does not bode well for the future.

The rise of Chinese corporate giants

When Alibaba gets the official nod to be listed this year, it will become the world’s third largest Internet company behind Google and Amazon. Tencent, which is worth US$100 billion, is bringing its widely popular WeChat app to the US through a partnership with Google.

Lenovo, the world’s largest PC maker, is moving aggressively into the handset market by acquiring Motorola and a chunk of IBM. Huawei is likely to overtake Ericsson this year to become the world’s largest vendor of telecommunication gears.

More than one third of the Boston Consulting Group’s top 100 global challengers to Western incumbent industry leaders are Chinese companies. Welcome to the age of the Chinese corporate titans.

Worsening tensions in the region

China is likely to continue its hardline approach to territorial disputes with Japan, Vietnam and the Philippines while facing pressure from nationalists at home. An ever increasing number of naval vessels patrolling in these dangerous waters make armed conflict a real possibility.

It is unfortunate that three of East Asia’s most important countries – China, Japan and Korea – all have nationalists running their governments, leaving little room for compromise. Expect a mini-arms race. American and Russian death merchants will have a bumper year peddling fear.

Addressing excess capacity

Senior Chinese officials have promised to serve up their own heads if they fail to address the excess capacity issue, which is closely linked to China’s environment problem.

They are still relying on the old Soviet tactic of using draconian administrative controls such as ordering people to close down factories to reduce capacity. It will be effective up to a point. But the key is still to let the market decide. This was after all the overriding theme of China’s reform package, and the Chinese Academy of Social Sciences’ special taskforce on excess capacity tells the same story.

Environmental challenges

China’s fragile environment has been under enormous pressure from years of reckless growth. Concepts such as a “green GDP” is starting to gain traction.

Beijing is taking this challenge more seriously but the scale of problem does not lend itself to an easy solution. In the past few years, Chinese citizens have taken to the streets to vent their anger and NIMBY movements have been tolerated up to a point.

Chinese overseas investment

This issue has replaced trade disputes and currency manipulation as the number one issue confronting China’s economic partners.

Regulators around the world from Australia to Namibia have to deal with the rising tide of Chinese investment. There is a real danger of rising protectionism in the name of national security.

My prediction is that Chinese investors will face greater scrutiny and a popular backlash. Foreign companies in China and especially American technology companies like Cisco, which have already been damaged by the Snowden revelations can expect similar treatment.  

Follow Peter Cai on Twitter: @peteryuancai

Subscribe to the China Spectator newsletter: ​http://bit.ly/ChinaSpec

The United States has rebuked China over its treatment of foreign media following the departure of a New York Times reporter after authorities did not renew his visa.

A White House statement said the US was "very disappointed" that reporter Austin Ramzy was obliged to leave China and that Beijing's actions "stand in stark contrast with US treatment of Chinese and other foreign journalists."

"The United States is deeply concerned that foreign journalists in China continue to face restrictions that impede their ability to do their jobs, including extended delays in processing journalist visas, restrictions on travel to certain locations deemed 'sensitive' by Chinese authorities and, in some cases, violence at the hands of local authorities," it said.

"We urge China to commit to timely visa and credentialing decisions for foreign journalists, unblock US media websites and eliminate other restrictions that impede the ability of journalists to practice their profession," it said.

US Vice President Joe Biden had personally raised the issue of China's treatment of foreign journalists during a visit to Beijing last month.

China has blocked the websites of both The New York Times and Bloomberg News after they published investigations in 2012 into the family wealth of former premier Wen Jiabao and President Xi Jinping, respectively.

AAP

Rare earths miner Arafura Resources has found more than $400 million in savings by reducing planned capital expenditure at a Northern Territory project.

The company, which is a quarter owned by a Chinese state-owned mining investment group, is planning a rare earths mine north of Alice Springs.

In April last, Arafura announced it would build a processing plant at the Nolans project site instead of at Whyalla in South Australia - a move that is expected to save on transport costs.

In August 2012, before the decision was made, Arafura estimated that the capital expenditure cost would be $1.912 billion.

But on Friday, the company told the market that in December last year, planned business investment costs had fallen to $1.504 billion.

The $408 million saving follows the relocation of a dedicated chlor-alkali plant, which now won't be needed following Arafura's decision to have a rare earth separation plant at the NT site instead of in South Australia.

The East China Mineral Exploration and Development Bureau, known as ECE, owns 24.86 per cent of Arafura.

Arafura shares by up 0.3 of a cent, or 3.16 per cent, at 9.8 cents at 1122 AEDT.

AAP

Australia's Foreign Minister Julie Bishop (L) meets with China's Vice President Li Yuanchao (R) at the Great Hall of the People in Beijing on December 6, 2013. AFP

Lowy Interpreter

Former Australian ambassador to China Dr Stephen FitzGerald threw brickbats at the Abbott Government last week.

In a guest post on John Menadue's blog, Fitzgerald took aim at the government for endangering Australia-China relations. He dates his criticism back to Foreign Minister Julie Bishop's summoning of the Chinese ambassador to Australia in late November last year over the establishment of China's Air Defence Identification Zone (ADIZ). The move caused a diplomatic ruckus in China. China's foreign ministry spokesperson Qin Gang called Bishop's statements on the ADIZ 'irresponsible...China cannot accept them.' He called on Australia to 'immediately correct its mistake, so as to avoid damaging China-Australia relations.'

'This is serious', FitzGerald warns us.

And, in a way, it is. Xenophobic nationalism in China has rarely been stronger in recent memory. Chinese President Xi Jinping’s rectification campaign is reaching a high point. The government is pursuing a fiercely anti-Western ideological agenda, and any statements from Western leaders deemed affronting to China are seized upon.

In establishing its ADIZ, China deliberately sought to tread on Japanese toes. It knew that covering Japanese toes was an American boot. What it didn’t know before Bishop stood up was that Australia apparently wants to be the sock.

But it's worth pausing here for a moment. 'In the history of our diplomatic relations, apart from the Tiananmen massacre we've not had such a stand-off', FitzGerald writes.

That's debatable.

The present stare-off is serious, but there have been plenty of other 'serious' episodes before and since Tiananmen. In fact, Australian prime ministers in recent memory seem to have an uncanny ability to provoke Chinese ire before settling down into productive relations.

Most count China among one of John Howard's strengths, but it didn't always look like it would be that way. He managed to offend China within a year of taking office by meeting with the Dalai Lama in 1996. A couple of months later he set about building a productive relationship with Jiang Zemin.

The China challenge is far more daunting today than it was under Howard. Separating politics and economics in the relationship isn't as easy as it was a decade ago.

Still, Julia Gillard managed to follow Howard in affronting China first and engaging China second. In acquiescing to US desires for a Marine presence in Darwin, Gillard set off a storm of criticism in Beijing. 'Australia surely cannot play China for a fool. It is impossible for China to remain detached no matter what Australia does to undermine its security', the state-run People's Daily said in an editorial at the time. In The Age, John Garnaut quoted Song Xiaojun, a former People's Liberation Army strategist as saying, 'They are two losers holding on to each other and making a show...Chinese strategic missiles can reach Australia.'

Gillard, too, came good on China. In foreign policy, she will be remembered for securing a regular high-level strategic dialogue with China in April 2013.

Kevin Rudd did things the other way around. He was initially welcomed in China as an Asia-literate Sinophile. The goodwill was lost, however, with the release of Australia's 2009 Defence White Paper, which contained tough strategic assessments on China's rising power.

Rudd's reputation in China hit rock-bottom as a result of WikiLeaks. In one leaked cable, Rudd warned Hillary Clinton to be prepared to 'use force' against China 'if everything goes wrong.' He told Mrs Clinton on another occasion that 'China is paranoid about Taiwan and Tibet.'

If Chinese officials were relatively muted on Rudd's WikiLeaks revelations, the Chinese public hung him out to dry. Many felt they had been hoodwinked into believing Rudd was a friend to China because he spoke Mandarin.

Prime Minister Tony Abbott is yet to be quite so thoroughly derided in China, and his government's early mistakes have precedents, some of which were arguably more serious.

Abbott this year needs to make sure China forgets about his government's comments on the ADIZ. The focus should be on finally realising an Australia-China FTA and opening the doors wider to Chinese investment. The late December approval of China State Grid's bid to buy large stakes in Australian power companies is a positive sign.

Originally published by The Lowy Institute publication The Interpreter. Reproduced with permission.

Cameramen take photos in front of the headquarters of Alibaba Group at night in Hangzhou city, east China's Zhejiang province, 10 November 2013.                           

When we think of China as the world’s factory, images of endless rows of Chinese workers slaving away on $2 a day dominate our imagination. Though that it is still true in many parts of China, the country’s industry is undergoing a fundamental transformation.

Chinese companies’ cost advantage over competitors from developed markets is eroding. Some factories in Guangdong, the heartland of China’s industrial prowess, have to pay as much as 100,000 yuan ($A19,000) a year for skilled technicians.

Companies from China and other emerging markets such as India and Brazil have built on their traditional sources of strength—low costs and a large captive domestic market—and are expanding overseas in search of new markets and technology.

The most formidable of these companies have been dubbed as “global challengers” by the Boston Consulting Group, which has been compiling a list of top 100 global challengers from emerging markets since 2009. 

Not surprisingly, China is the home to the largest number of global challengers, with 30 such companies. Some of them, such as Lenovo and Huawei, are already familiar to Western consumers; others are unheard of outside of China.

At the top of BCG’s global challenger league table is Alibaba Group, a Chinese e-commerce giant that is likely to emerge as the world’s third largest Internet company behind Google and Amazon once it is listed this year.

It is the world’s largest online bazaar, which sells more merchandise than Amazon and eBay put together.  Alibaba is more than just an e-commerce company.  It has amassed more than 250 billion yuan of funds from its army of small business users and is posing a challenge to Chinese state-owned banking behemoths.

Alibaba has also has expanded its presence in the US through acquiring Vendio, an e-commerce site and Auctiva, which provides listing and marketing tools to sellers on e-commerce sites like eBay. It also debuted in Australia last year, primarily catering for a large Chinese customer base.

Alibaba is just one of several Chinese internet giants eyeing opportunities abroad. Tencent, which has a market capitalisation of one trillion Hong Kong dollars ($A150 billion), is expanding its footprint in the US.  Just to put the company’s size in perspective, it is more than twice the size of Telstra and just a bit smaller than BHP Billiton.

The Shenzhen-based company is bringing its widely popular WeChat app (a social media messaging service), which has more than 300 million users in China, to the US through a newly announced partnership with the Sun King of the Silicon Valley—Google. 

Chinese internet companies also helping the country to change its image as a mere copycat. “Chinese internet companies are no longer behind,” says William Bo Bean, a managing director at the venture capital firm SingTel Innov8.  According to the New York Times.  “Now, in some areas, they are leading the way.”

If you are in the luxury goods retail space, it is impossible to miss China UnionPay’s red, blue and green-banded symbol with UnionPay in English and Chinese. It appears on doors and cash registers of nearly all leading department stores and luxury goods shops around the world, including David Jones.

UnionPay has recently displaced Masters Card as the world’s second largest card payment system and is fighting tooth and nail with American giants such as Visa in emerging markets, especially in south-east Asia. The company processed more than 500 billion yuan ($A84 billion) worth of payment in 2012 outside of China, according to its chairman Su Ning during a recent visit to Australia. 

UnionPay is also one of BCG’s new global challengers in 2013.

The story of Chinese technology giant Huawei is well-known, but worth repeating here. Much ink has been spilled on its alleged role as a Trojan horse for Beijing, but what is often ignored or overlooked is its huge commitment to R&D.

It is written into the company’s constitution that Huawei must spend at least 10 per cent of sales revenue on R&D every year. Last year, it spent $US5.4 billion on research or 14 per cent of its revenue. Every year, the company snaps up the best and brightest engineering graduates from the country’s top universities, offering graduates a 120,000 yuan starting salary, a considerable sum in China.

In 2011, Huawei broke into the top 100 patenting companies in the world when it filed 374 US patents.  The company has overtaken Swedish company Ericsson to become the world’s largest vendor of telecommunication gears in 2013, according to Telecom Lead.

BCG intends the global challenger report as a wake-up call for Western executives, who have been accustomed to their technological lead over their emerging markets rivals. “The game has changed,” says BCG. “Increasingly, challengers and multinationals are competing head to head.”

It is worth remembering that Detroit executives summarily dismissed Japanese auto-makers when they first arrived in the US with their tin-box cars. Many decades later, Toyota is the undisputed king of the industry, while American car-makers had to ask the Congress for bailouts.

Another notable aspect of BCG’s report is that in 2009 China had 44 companies on the list, of which many were state-owned giants. Over the time, they have dropped off the list, including China Mobile, the world largest carrier by subscriber numbers.

It shows that many of China’s state-owned companies are green-house plants, which cannot thrive outside their natural habitats. On the other hand, Chinese private companies such as Alibaba, Tencent and Lenovo are more responsive to the needs of customers both at home and abroad.

Welcome to the age of emerging market global challengers.

China Spectator will examine the rise of Chinese global challengers through a new series and starting with Alibaba Group this week.

Follow Peter Cai on Twitter: @peteryuancai

Subscribe to the China Spectator newsletter: ​http://bit.ly/ChinaSpec

Chinese tourism money has propelled Sydney and Melbourne into a list of the top 25 cities worldwide for luxury goods consumption, according to a study by Boston Consulting Group (BCG).

BCG estimates that consumers globally spent more than US$1.8 trillion on both luxury goods and experiences such as tailored tours which is far beyond the US$390 billion usually cited as total global sales of goods.

The report says consumers are favouring luxury experiences over luxury goods.

“Luxury experiences are by far the most powerful driver of luxury spending everywhere. Collectively, they make up nearly $1 trillion of the annual global total,” said Jean-Marc Bellaiche, a senior partner of BCG.

Emerging markets such as China, Brazil, Russia and India are some of the biggest drivers behind the growth of the luxury goods industry, account for nearly 30 per cent of the global market.

China is set to become the largest source country for outbound tourism and Chinese tourists are already the world’s largest group of tax free shoppers. They will account for a third of all tourists visiting Melbourne and Sydney by 2020.

A Chinese clerk counts US dollar notes next to RMB (renminbi) yuan notes at a bank in Nantong, east China's Jiangsu province, 14 October 2013. Photo: AAP

Before the renminbi (RMB) can challenge the dollar, China needs to develop its currency to be convertible under the flexible capital flows in and out of China. By internationalising RMB through offshore markets, China is able to introduce openness and transparency without fully liberalising its onshore market or open its capital account. This process has started in Asia and is spreading quickly to other parts of the world.

Asia needs a real alternative to the US dollar for intra-Asian trade and as a financing currency because the increasing integration of the global supply chain is bringing China and ASEAN closer together. Given China's position as the main driver of intra-Asia trade, RMB is a sensible option.

Bilateral trade between China and the Southeast Asian economic bloc reached a record high of US$400.9 billion in 2012, reflecting a year-on-year increase of 10.2 per cent. China is “near-sourcing” raw materials, components and finished products from within Asia like never before. Trade between these two huge markets will grow and invoicing it in RMB will benefit businesses on both sides. If a sizable proportion of an emerging-market country’s trade is with China, it makes sense to settle that trade in RMB rather than in dollars.

This is happening in Hong Kong. Cross-border trade settled in yuan increased 6.6 per cent in August to 304.2 billion yuan on a month-on-month basis according to the Hong Kong Monetary Authority. This helps Hong Kong generate the largest RMB liquidity pool outside mainland China. Taiwan and Singapore are catching up quickly after setting up clearing services earlier this year.

By 2020, intra-Asian trade will be worth USD10.8 trillion, almost double Asia’s trade with the rest of the world. This, combined with a secular reduction in overseas dollar payments as US consumer import demand declines and manufacturing returns onshore, will affect Asian trading and settlement patterns profoundly.

In currency terms, RMB will be the biggest beneficiary of this shift: we believe that by 2015, a third of China’s total trade and half of the trade between China and emerging markets will be settled in RMB.

Growing offshore use of RMB is not confined to Asia: Europe is in fact now the largest contributor to RMB payment growth. According to Swift, London now accounts for 28 per cent of offshore RMB settled transactions with China and Hong Kong, and RMB settlement has more than doubled in France, Germany and Luxembourg in the past year.

In order for a currency to achieve investment – and ultimately reserve – status, it has to create incentives for foreigners to trade and hold it.

It is worth pointing out that trading of the Chinese yuan in global foreign exchange markets has more than tripled from three years ago because of the expansion of the offshore market. Daily turnover in RMB has increased to US$120 billion from US$34 billion three years ago.

Dim sum bonds once excited issuers because they allowed foreign companies to raise RMB easily. Buyers found them attractive because they benefited from a rising currency and offered good returns. Their popularity waned during the summer months after the onshore funding rate spike in June and the uncertainty about when the US Federal Reserve will start cutting its stimulus programme. We believe these setbacks are temporary and cyclical phenomena, however. We already see new issuances coming back in September, led by multinational companies with operations in China.

China is already encouraging the development of RMB-denominated onshore assets for foreign investment. In China, cross border portfolio investment – purchasing bonds and equities – has to be conducted under limited quota schemes: the Qualified Foreign Institutional Investor (QFII) and RMB Qualified Foreign Institutional Investor (RQFII) for inward flows, and the Qualified Domestic Institutional Investor (QDII) scheme for outward flows.

Regulators have increased the quota for RQFII, which stands at 270 billion yuan (US$44 billion) and around half of that had been taken up by last month. The authorities almost doubled the quota of the QFII scheme to US$150 billion as Beijing moves to widen channels for foreign investors to buy mainland stocks, bonds and money market instruments. So far, US$46 billion flowed into the mainland under the QFII scheme.

According to the International Monetary Fund, rapid liberalisation of cross-border capital movements could produce over several years net outflows from China equal to 15 per cent of the country's Gross Domestic Product, or roughly US$1.35 trillion. Capital account liberalization may result in net outflows as the holders of China’s vast domestic savings pool seek diversification in overseas markets. This would increase global RMB liquidity, providing another boost to the currency’s internationalisation.

As China’s importance as a trading power increases, some central banks are – or planning to – include RMB in their reserve portfolios. Taiwan’s central bank has added RMB assets to its foreign reserves portfolio and the Reserve Bank of Australia intends to hold up to 5 per cent of its reserves in RMB assets. At the same time, the People’s Bank of China and the European Central Bank have a three-year bilateral currency swap agreement worth 350 billion yuan (US$57 billion) to provide further liquidity support for RMB use overseas. An additional 23 central banks and monetary authorities have signed similar arrangements.

Hong Kong has developed the largest RMB offshore liquidity pool and a range of investment products. The newly-established Shanghai Free Trade Zone can be another channel for Hong Kong to increase the flow of RMB back to the mainland. Hong Kong's pioneering work should benefit the next offshore centres, which – liquidity permitting – will be able to mature and deepen more rapidly.

China is now further internationalising its currency by encouraging the development of multiple offshore centres, not only Hong Kong, Taiwan, Singapore and London. Others such as Toronto, Luxembourg, Zurich, Paris, Frankfurt and even Sydney are quickly catching up and will help the RMB grow.

International currencies should have three basic characteristics: convertibility; broad acceptance; and wide use in various areas of international trade, settlement, investment, debt payment; and stable value. RMB is now broadly convertible on the current account and restrictions on the capital account are being loosened; it is rapidly becoming not just acceptable but desirable in the mercantile capitals of the global economy; and although it is not widely used today, it is showing every sign of being the currency of the future.

Candy Ho is the head of RMB Business Development, Asia-Pacific, HSBC

Hong Kong-based investor William Hui has agreed to buy United Dairy Power for about $70 million.

The sale of Australia’s largest privately-owned milk supplier brings to a close Tony Esposito’s career at United Dairy after 15 years. Esposito, who founded United Dairy in 1999 and has been its chief executive, has searched for a buyer for the Melbourne-based company for about two years.

“Mr Hui is the ideal owner to guide the company on the next stage of its growth,” Exposito said in a statement. It is the first investment by Hui in Australia.

Hui will be the owner of three dairy-processing facilities in Poowong, Victoria and Murray Bridge and Jervois in South Australia. United Dairy will continue to be managed by senior management, led by Mark Smith who will be assuming the position of CEO

Hui said in a statement he wanted United Dairy’s current business and investment strategy to be unchanged.

Cashel House, a Melbourne-based boutique advisory firm, acted as Esposito’s and United Dairy Power’s adviser.

Copper fell for a ninth consecutive session overnight, locking in the longest streak of losses in 18 years on worries about demand from top consumer China after weaker manufacturing data there.

The most actively traded copper contract, for March delivery, fell 1.35 cents, or 0.4 per cent, to settle at $3.1835 pound on the Comex division of the New York Mercantile Exchange, a two-month low.

The losing streak is the longest since a 10-day swoon that ended in December 1995. Futures have fallen by 5 per cent during the current retreat, driven by a slate of data showing Chinese factory activity is slowing.

"Chinese demand is not coming on as strong as it once was, undermining the market," said Stephen Platt, a futures strategist with Archer Financial Services.

China's state gauge of manufacturing activity, released over the weekend, showed growth in the sector slowed to a six-month low in January. The index came in at 50.5 last month, just above the 50 threshold that separates expansion from contraction.

HSBC's separate reading on Chinese manufacturing, released last week, also came in at a six-month low and showed factory activity slowing. China accounts for about 40 per cent of global copper demand.

Copper traders pay close attention to manufacturing reports and other economic data because of the metal's use in products from power cables to appliances and consumer electronics. Some economists consider copper a useful economic indicator because of its reach across areas of the economy.

Copper's retreat in part reflects worries that though the global economy has steadied, growth isn't firing on all cylinders. Global equities markets have slumped recently amid economic and political turmoil in countries from Turkey to Argentina.

"Those markets are such high-intensity users of copper," Mr. Platt said. "If that gets rocked, it can rattle the copper market."

The absence of Chinese buyers during Lunar New Year celebrations, which began on Friday and will keep markets closed through Wednesday, has also weighed on sentiment in the copper market, analysts say. Comex trading volume on Monday was 26 per cent below the average of the previous 50 trading sessions, according to preliminary exchange data.

"The absence of the Chinese continues to keep the markets in the doldrums," brokers with RBC Capital Markets said in a note.

Dow Jones Newswires

A Chinese para-military officer patrols Tiananmen Square in front of the Great Hall of the People (background) after the Communist Party Central Committee's concluded its secretive Third Plenum in Beijing on November 12, 2013. Photo AFP.

East Asia Forum

Now we can see the full script of what I once called Likonomics, the policy framework of the new Chinese leadership. The policy document approved by the Third Plenum is indeed very comprehensive, containing reform measures in 60 areas. Two distinctive features stand out compared with previous reform programs: top-level authority and a full market system.

Top-level authority represents at least a partial departure from the traditional bottom-up, ‘crossing the river by touching the stones’ approach. For many of the forthcoming reforms, such as capital account liberalisation, a bottom-up approach is no longer even possible. There are no more stones to be touched. Reform has to rely more on top-level design. Top-level authority is also necessary for overcoming strong resistance by vested interest groups.

The new reform agenda will likely also serve as the last kick to complete China’s transition to a market economy over the past 35 years. The most important statement of the entire policy document is perhaps the following: wherever market mechanisms work in allocating resources, the government should not intervene. The government will continue to play an active role, but only to provide public goods and overcome market failure.

One central change will be the transformation of China’s growth model – the transition from economic ‘miracle’ to ‘normal’ development. The current growth model is best known for the combination of both rapid economic growth and serious structural imbalances.

But this growth model is already changing, with deceleration of growth and a rebalancing of the economy taking place. So far the changes are caused mainly by rising wages, associated with emerging labour shortage. Higher wages cut into profit margins, investment returns and export competitiveness but increase household income. Therefore, activities slow and external account surpluses decline. Higher wages improve income distribution as low-income households rely on wages and high-income households rely on investment returns. They also raise the consumption share of GDP as household income outpaces national income.

But this is only the beginning. Completion of the growth model’s transition depends critically on implementation of the reforms announced at the Third Plenum, especially financial liberalisation.

This transition should be accompanied by important changes in at least the following six areas: further growth deceleration, because the economy is now more advanced and the labour force is already shrinking; higher inflation pressure, as a result of broad-based and continuous cost increases; improving income distribution, due to not only wage increases and interest rate liberalisation but also more proactive income distribution policies; a more balanced economic structure, with much greater shares of consumption and services in the economy; accelerating industrial upgrading, as rising costs rapidly change the competitiveness of industries; and more volatile economic cycles, as a natural feature of a market economy.

The changes will also impact interactions between and with the rest of the world. For instance, China’s contribution to the global economy should continue to rise, but sooner or later we might see the first external recession triggered by a sharp deceleration of Chinese growth. China used to be a contributor of global disinflation. It may become a source of global inflation in the future. The rapid ascent by Chinese firms in the value chain may constantly force new international divisions of labour.

There are some important implications for international investors.

First of all, predictions of China collapsing should be treated with caution. For years the market has seen waves of crisis warnings related to problems such as property prices, shadow banking and local government debt. While investors cannot simply ignore the risks, it is equally important to be mindful of the fundamentals, balance sheets and reform momentums. Some economists in China have been forecasting the bursting of a property bubble for 10 years now. While economists benefited from their insights, investors who followed their advice lost 10 years of investment opportunities.

There is increasing opportunity to benefit from Chinese outward investment. China is already the third-largest FDI investor. And China’s net capital outflows could be equivalent to between 4 per cent and 8 per cent of gross domestic product if it liberalises its capital account, according to one recent International Monetary Fund study. Chinese direct investment overseas may expand from resources to manufacturing and infrastructure. Countries that do not welcome Chinese money risk seeing it go elsewhere.

The privileged position of monopoly state-owned enterprises is coming to an end. Investments in such enterprises probably paid off handsomely in the past, but this will change as China moves toward a full market system.

Certain assets will always be in shortage in China, especially resources and food, and thus present attractive investments. The challenge of land scarcity is also unlikely to ease. The commodity market too is likely to grow as, while the super cycle might be over, China should still remain a major importer.

China’s new consumer market is also growing. This includes luxury goods and mass products, as GDP per capita rises from $US6000 ($6848) to above $12,000. The service sector’s GDP share could easily add another 10 percentage points in the coming years. This also provides important opportunities for foreign investors. For instance, the Shanghai Free Trade Zone will experiment entry of foreign companies into finance, accounting, auditing, architecture, childcare and elderly care, culture, healthcare, logistics and e-commerce. This experiment could be extended to the rest of China very quickly. One advice for foreign companies doing business in China: be there early. Being late, even by one step at the beginning, could mean missing many steps later, as the market shares of Volkswagen and Toyota in China attest to.

Finally, there is much opportunity for investors to ride on China’s technological upgrading rocket. Many doubt China’s ability to innovate, but China’s economic development during the past 35 years has been a process of innovation. And innovation is happening every day, everywhere. Measured by both number of patents and ratio of patents to R&D expenditure, China is ranked at the top of the world, alongside the US and Japan. China’s ability to innovate is clearly demonstrated by its automobile, information technology and space industries. Zhongxing and Huawei are among the world’s top three companies for patent numbers. The internet is also revolutionising finance, commerce and publishing. Today, e-commerce accounts for 6 per cent of total retail sales. A 30 per cent price discount from department stores implies efficiency gain equivalent to 1 per cent of GDP.

China presents enormous opportunities for international investors. Even if only a portion of the proposed Third Plenum measures are rigorously implemented, by around 2020 China should be a market economy, a high-income country, and the world’s number-one economy and most vibrant consumer market. Between now and then, lots of things will change, and these changes will affect the world.

Yiping Huang is a professor of economics at the National School of Development, Peking University, and an adjunct professor at the Crawford School of Public Policy, Australian National University.

Last night’s big fall on Wall Street tells us that 2014 is not going to be a smooth ride. The task of Alan Kohler, Steve Bartholomeusz and myself is to help you understand the trends but from next Monday there will be a small charge to access KGB commentary. You will also gain a subscription to The Australian as part of the deal. I hope you stay with us.

When there is market turbulence – either up or down – follow where the money is going and it will make what is happening just that much clearer.

And so it was in last night’s turbulence. Let me focus on Australia and the United States.

Traditionally, the Australian dollar should have fallen sharply. But although it slipped, it did not slump because there are two enormous forces pumping money into the country.

The first is of course the mining investment boom but the second is the vast amount of Chinese money coming into Australia to buy and develop inner-city property in Sydney, Melbourne and, to a lesser extent, Brisbane.

In Australia, we have to understand that a number of our key property markets have become Chinese property plays and the trends we see will depend on what is happening in China. This is new territory for Australia (Sydney’s property dam is about to burst, January 21; The Middle Kingdom’s Australian frontier, January 6).

But I emphasise that if global markets keep falling, Chinese investment will not stop our dollar from taking its normal course. In addition, the influx of Chinese property money and mining investment will not stop our share market from receiving a battering today.

Indeed, our share market is also being affected by the dangerous trends we are seeing in emerging countries as it becomes clear that the high risk-taking US investment banks have used part of the liquidity that was sloshing around the US to take risks in emerging countries – and those risks are unraveling.

The fear of the possible losses buried deep in US bankers' accounts is one of the reasons why American bonds are moving in exactly the reverse way to what was expected with quantitative easing. The original theory was that as the US started to taper quantitative easing American bond rates would start to rise and there was great fear as to the effect this might have in the US housing market where interest rates are tried to the US bond market.

But fear of what might be ahead in US markets is driving money into US bonds and of course as the bond prices rise (and rates fall), so the movement accelerates – particularly as the latest manufacturing data shows that US recovery is a slow process.

What markets fear domestically is that too many of the US jobs being created are at the lower end of the pay scale and middle-class America is shrinking. That means that middle class consumer spending, which drove the US to many booms, no longer has the same momentum. That does not mean the US is not recovering but it no longer has the same middle-class spending power to drive forward rapidly.

And of course hanging over all Asian markets, and particularly Australia, the apparent slowdown in China. If that slowdown were to develop momentum it would overshadow all other forces.

A Chinese customer buys fruit at a supermarket in Jiujiang city, east Chinas Jiangxi province, 9 September 2012. Photo: AAP

The Conversation

The political lobbying accompanying the government decision to withhold financial support from SPC Ardmona has overshadowed the big structural issues facing Australia’s preserved food industry.

The two major issues are the shift of market demand towards fresh food and the role of Chinese imports.

The decline of SPC Ardmona’s cannery business is not an isolated event. Heinz closed its cannery business in Goulburn Valley in 2012, Windsor Farm closed in Cowra, and only a few small players remain, mainly in NSW and WA.

Imports, mainly from China, have been singled out and demonised as “cheap, dumped and frequently contaminated”. This is a short-sighted perspective.

China is a big global player in international agribusiness. Chinese importing of fresh food provides opportunities for Australian exporters, but at the same time Chinese exports of canned food compete with Australian products in the local domestic market and in traditional export markets.

The “cheap, dumped and frequently contaminated” label will not stick for long.

China is stepping up consumer protection

While China’s canned food will remain cheap because of economies of scale and because canning technology is not much different in Australia and China, contamination is being addressed more seriously in China with new laws and regulations expected. The flow-on effect will mitigate Chinese consumer dissatisfaction with local food standards, but also improve the quality and safety of Chinese export products.

In January, China’s Supreme People’s Court announced an 18-clause guideline on how to handle civil disputes regarding food, drugs, cosmetics and dietary supplements.

The new guideline, together with an updated version of the consumer protection law, will come into effect on March 15, World Consumer Rights Day, and signal a new wave of regulatory action from the government to tackle China’s food safety problems. It gives consumers backing from the courts to sue manufacturers and retailers of unsafe food. Advertisers and publishers can be sued even before any actual harm is inflicted. Celebrities who endorse substandard products can also be sued if consumers feel they have been misled.

Since the milk powder scandal of 2008, much as been done to alleviate public anxiety and improve practices in the food industry. The Food Safety Law, replacing the outdated Food Hygiene Act, came into effect in 2009 and includes provisions on risk assessment methods, unification of food safety standards, improving supervision, and imposing tougher penalties on violators.

In March 2013, China’s State Food and Drug Administration (SFDA) was renamed to China Food and Drug Administration (CFDA) and elevated to a ministerial-level agency directly under the State Council, in an attempt to consolidate power and streamline regulation of food and drug safety.

The new guidelines change the balance of power between consumers and producers and rely less on local government enforcement. One challenge facing China in food safety regulation is that law enforcement and implementation at the local level do not match the original intent of the law and central policies. With clearer procedures on how to protect their rights, consumers are given more say on food safety. This will increase food producers’ opportunity cost as consumers are now more willing and able to participate in the monitoring process.

Previously, producers and manufacturers had an incentive to sacrifice quality in order to maximise profits, because the chance of being caught and penalised was low. But consumers and social media now play a much more active role in monitoring food safety and have successfully put pressure on the government to enforce food safety standards

Australia has a head start

While enforcement will work for the corporatised food export sector, China’s highly fragmented food industry will continue to face problems because of the scale of monitoring required. Almost 80 per cent of the half a million food companies in China are classified as “cottage industry” with ten or less employees.

Like in Australia, there are social reasons to keep small producers afloat. Along this complex supply chain there is a need to balance the interests of producers, markets and consumers. China’s first policy document of 2014, the No.1 Central Document, underscored the importance of rural reform and the development of modern agriculture.

For Australian agribusiness, this entails opportunities and challenges. Chinese producers will for the foreseeable future not be able to satisfy the demand of urban middle class consumers for top quality food. Australia, in competition with New Zealand, has a head start in this market with an enviable and hard to replicate reputation for clean and fresh food.

On the other hand, Chinese exports will become more competitive in the preserved food market, in particular in such traditional segments as canned food, putting more pressure on Australian producers in those market segments. For SPC Ardmona and its supply chain, the farming communities in the Goulburn Valley, this will require a radical rethink of traditional products and a switch to new product lines.

This article was originally published by The Conversation. Republished with permission.

The Chinese national flag flames in front of a building barely visible due to heavy smog in Beijing, China, 02 December 2011. Photo EPA/DIEGO AZUBEL.

Between now and 2020, China needs an average of two trillion yuan ($A380 billion) a year to address climate change related challenges in the country, according to recent research from China's Central University of Finance and Economics.

At the peak of financial demand in 2020, China would require 2.75 trillion yuan to finance its emission reduction and renewable energy targets. At the moment, the funds available to combat climate change are estimated at only 526 billion yuan a year.

There is a large gap between what is needed and what is available. How to address this challenge will be a huge test for Chinese policymakers and financiers, especially at a time when the country is transitioning from a high-growth economy to more sustainable pace of demand.

One of the many ideas that have been put forward is an inter-generational climate change bond, similar to bonds issued during war time.

Tang Min, deputy president of the China Development and Research Foundation (a think tank affiliated with the Chinese Cabinet), compares the challenge of raising funds to address climate change to that of financing a four-decade long war. 

During war time, governments around the world issue bonds to help them finance the costs of fighting. Future generations are expected to bear the costs of defending their nations through contributing to the re-payment of bonds.

He argues that the best way to address the financing needs of climate change mitigation is through issuing carbon bonds with 40 years maturity, similar to a war bond.  This is a fair way to distribute the burden of financing climate change over several generations.

Tang urges Beijing to issue climate change bonds equivalent to 0.5 per cent of China’s GDP every year until 2050, with yield of 5 per cent. In 2013, the country produced nearly 57 trillion of goods and services; a 0.5 per cent bond issuance means that China could raise nearly 300 billion yuan a year.

Would this bond issuance put an unbearable financial burden on future generations? The answer is no, according to Tang’s calculations.

Assuming China continues to grow at 5 per cent over the next 40 years with annualised inflation of 3 per cent, the total debt liability would actually decline from 0.5 per cent of GDP to only 0.15 per cent over that time period.

Under Tang’s proposal, the new climate change bonds will be backed by the Chinese government and will have the same credit rating as that of the central government.  Beijing also needs to ensure that there is a deep and liquid market for climate change bonds.

If the goal of raising 300 billion yuan a year is achieved, Tang argues that the money could be used to offer subsidies, tax breaks and new incentives to invest in renewable energy technology and attract more private sector investment.

If Beijing is committed to 300 billion a year in new climate change funding, it is likely to attract further 1.5 trillion yuan in private sector funding, according to his calculations.

The new investment will go a long way in helping China address the mounting problem of climate change, a challenge for which the country is ill-prepared, as well as worsening environmental problems such as smog pollution in major cities.

Tang is right in saying that addressing climate change is like waging a global war over many decades and we need to make sure that both present and future generations play their own and fair part in contributing to the cost of mitigation.

Issuing inter-generational climate change bonds is one idea from China worth considering.

Follow Peter Cai on Twitter: @peteryuancai

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2013 may well mark an historic step in China’s economic development.  For the first time, according to just-released official statistics, China’s services sector accounted for the single biggest share of GDP.

In a year which saw China’s official GDP increase 7.7 per cent over 2012, services accounted for 46 per cent of GDP compared with 44 per cent for manufacturing and 10 per cent for agriculture. If sustained, this would mark the point at which China’s economy began to enter a more mature stage of economic development.

This rebalancing of China’s economy will be welcomed by the leadership, which has set down growth of services as a major policy objective. A raft of reforms to promote growth of the services sector was set out in the Third Party Plenum decision late last year. 

As has happened before in the course of China’s thirty-five years of economic reform and opening, policy settings are being aligned with the direction of market-driven economic change.  When the two are aligned, as we saw with the ‘Western Development Strategy’ in the early years of the Hu Jintao administration, this can be a powerful force for change.

The growth of services as a share of GDP began to take off in 2006 as the rapid increase in per capita incomes from the early 2000s gathered greater momentum.  In fact, it should be of no surprise that services have now become the biggest sector.   The growth of the share of services in GDP is the normal course of economic development as incomes rise.

In 2012, China had six provinces, all of which except Inner Mongolia (which is an outlier because of its small population and extensive coal mining) are on China’s eastern seaboard.  These provinces (Tianjin, Beijing, Shanghai, Jiangsu, and Zhejiang) had nominal US dollar per capita incomes above $10,000 and purchasing power parity per capita incomes above $15, 000.  Together these provinces have over 200 million people.  In PPP terms, these provinces would rank with Portugal, Lithuania, Poland and Mexico. Except Lithuania, these are all OECD member countries.

China’s economy can no longer – if indeed it ever could – be discussed as a single entity.  It is rather like an inverted pyramid composed of at least three broad layers. The top section in terms of income are the advanced eastern seaboard provinces and major cities like Dalian, Qingdao, Ningbo, Fuzhou, Shenzhen and Guangzhou, all with developed-country levels of per capita income.

The next level comprises provinces with developing country levels of per capita income, including coastal areas such as Guangdong, Fujian and Shandong and central inland, such as Hebei, Shaanxi, Shanxi and Hubei.  The rest make up lower levels of per capita income that cover the income ranges for less developed countries.

Rebalancing the economy towards services and away from investment-led growth to consumption is occurring as the different provinces move through different levels of economic development. In its latest survey of business conditions in Shanghai, the Amercian Chamber of Commerce describes the emergence of a consumption/services-based economy “as the new normal”.

Reflecting this adjustment to the sources of growth, in 2013 growth in investment in fixed assets fell below 20 per cent (19.6 per cent growth in 2013 compared with 2012) for the first time in over a decade.

But this was only for the more developed provinces and cities. For much of the rest of China, the investment-led growth model of the past still has a lot of relevance and therefore a long way to run.  Growth rates in these provinces are still generally well above the national average. The government’s policies to promote urbanisation with the objective of moving another 300 million people into cities will continue to require massive investment in urban infrastructure and housing.

Urbanisation and the relatively high rates of investment that will accompany it in the poorer areas of China will ensure that notwithstanding the growth in services, China’s economic growth will still require a lot of resources and energy for many years to come.

Services are notoriously difficult to measure. Much is not captured, especially in the informal sector of the economy, and so China’s services sector may well for some time have accounted for the biggest share of total GDP. It is, however, now captured in the official statistics formally marking the beginning of an important to chapter in China’s economic transformation. Overall, this should contribute to more sustainable growth (even if at lower rates) during the credit-fuelled investment binges of the past decade.

Geoff Raby is a Professorial Fellow at Monash University, a NED at Fortescue Metals Group and Chairman and CEO Geoff Raby Associates Ltd, a Beijing-based advisory firm.

New analysis from the real estate advisory arm of Korda Mentha has revealed that the government’s significant investment visa scheme is booming, with the number of approved visas growing exponentially in the second half of 2013.

As per the visa requirements, a “significant investor” is required to commit at least $5 million worth of investment to Australia. Off the Korda Mentha figures, this means that in 2013, the scheme brought in at least $440 million to the Australian economy - around $4 million per day.

The data follows Department of Immigration data released yesterday that revealed nine out of every ten SIV applicants are from the Chinese mainland. This suggests that 90 per cent of the estimated $440 million came from China.

There has been a significant spike in the number of SIV approvals since the Coalition government came into power last September. There were only 15 approvals in first eight months of 2013 under the Labor government. The number of approvals surged nearly 600 per cent in the first two months of the new government.

Click to enlarge

Berrick Wilson, a managing director at Korda Mentha told Business Spectator his firm has established a “direct real estate fund” to cater for the growing demand from SIV applicants who want alternatives apart from cash and fixed income products.

“Our fund is really focused on commercial real estate, low volatility, income producing properties throughout Australia,” he said, “ we really tailor this fund to meet SIV requirements and our minimum subscription is one million dollars.”   

Mr Wilson said he expected to raise $100 million from SIV applicants initially.

Click to enlarge

Korda Mentha data shows Victoria and NSW are the top two destinations for millionaire investors. Business Spectator understands the Victorian government has been proactive in approaching Chinese investors.

GlaxoSmithKline's net profits jumped by a fifth last year as lower taxes offset flat sales.

Earnings after tax rallied 20.8 per cent to STG5.436 billion ($A9.99 billion) in 2013, compared with the previous year, GSK said in a results statement.

Turnover advanced one per cent to STG26.5 billion, but revenue from sales of drugs in China plunged 18 per cent, hit by Beijing's probe into bribery allegedly carried out by senior GSK staff.

Excluding China, emerging markets sales grew by five per cent. US sales expanded by one per cent, while Europe was flat.

"The People's Republic of China, acting through various government agencies, continues its investigation into alleged crimes and violations of law by GSK China's operations," the company said on Wednesday.

"The group takes these allegations seriously and is continuing to cooperate fully with the Chinese authorities in this investigation."

GSK added that it was unable to provide the market with a reliable estimate of any potential financial fallout.

Last July, GSK admitted that senior employees at its China division appeared to have breached Chinese law, after authorities alleged that employees had bribed government officials, pharmaceutical industry groups, hospitals and doctors to promote sales.

Brushing off the probe, GSK chief executive Andrew Witty said the group's annual performance was in line with expectations and forecast that group revenues would grow by around two per cent in 2014.

"GSK's trading performance in 2013 was in line with our guidance, despite some unexpected challenges and reflected the improving balance of our sales base," Witty said in the earnings release.

"I was encouraged by the improved performance of our US business.

"We also saw stabilisation of our European business with the benefits of our restructuring program helping to offset the ongoing economic and pricing pressures in the region."

AAP

Several hundred years ago, young British aristocrats started taking the Grand Tour after they finished at Oxbridge, in search of art, culture and other hedonistic pleasures at ruins, museums and bordellos on the continent.

Now, nouveau riche from emerging markets are following the footsteps of English nobility in reach of new luxury experiences, such as visiting the ruins of great empires.

A wealthy Chinese businessman recently paid $US1.5 million ($1.7 million) to a British luxury travel website for a tour package that will take him to nearly 1000 UNESCO World Heritage sites during the next two years. Meanwhile, his son bought his second Piaget watch (a Piaget Emperador retails for $23,000) and also signed up to dive with hammerhead sharks, according to a 2013 Luxury Society newsletter.

The story of this Chinese businessman’s family is part of broader seismic shift in the global luxury goods industry. Worldwide, luxury is shifting rapidly from ‘having’ to ‘being’ – that is, consumers are moving from owning a luxury product to experiencing a luxury, according to Boston Consulting Group’s report Shock of the new chic: dealing with new complexity in the business of luxury.

The business of luxury experiences such as dining at Michelin restaurants or African Safari hunting trips is growing faster than the traditional luxury business of selling branded clothes, watches, cosmetics and jewellery. Spending on luxury experiences accounts for more than half of the estimated $1.8 trillion revenue in the industry.

Sarah Willersdorf, a principal at the BCG’s New York office, told Business Spectator that changing demographics was one of the key factors behind the shift in the luxury industry.

“It is basically the ageing consumers,” Willersdorf says. “Baby boomers who really drove that first wave are now in their sixties, so they already have all the watches and bags they need and they are spending more and more on vacations, meals and experiences. Chinese consumers are not that far behind.”

BCG’s 2013 Global Consumer Sentiment Survey reveals that nearly 30 per cent of Chinese consumers prefer enriching experiences over products. In comparison, more than half of American consumers value experiences over goods.

This reflects a natural progression in buying habits. Newly affluent consumers like to buy branded goods to show off their status. Once they have bought all these tangible goods they want to have unique experiences.

Australian tourism operators and promotion agencies should be prepared to take advantage of this shifting trend in the global luxury industry. This country has a unique natural beauty and gastronomic culture that should be on the radar of global luxury travellers.

Melbourne and Sydney have emerged as two top global luxury shopping cities thanks to burgeoning local wealth and the ever-increasing number of Chinese tourists who typically spend 40 per cent of their travel budget on shopping.

China is about to become the world’s largest exporter of tourists and they are already the world’s largest group of tax-free shoppers. By the end of this decade, Chinese tourists will constitute 30 per cent of all tourists in Sydney, Melbourne and Japan; 10 per cent in the US; and 50 per cent in South Korea.

As the former executive of Tourism Australia, Andrew McEvoy, said: “China is our fastest growing and highest yielding market. So the idea of cheap and cheerful Chinese is wrong. China will be a one million person and $10 billion market for Australia by 2020.”

Willersdorf says it is important for Australian businesses to undertake more marketing activities in China to raise their brand awareness, as the majority of Chinese shoppers decide what they are going to buy before they leave their home country.

“They could benefit from really trying to build a brand and market more to the Chinese consumers in their own country before they even get on the plane,” she says.

As we are looking for new drivers to boost our slowing economy after the end of mining boom, it is imperative the government and businesses take advantage of this shifting trend in the global luxury travel industry.

Westpac Banking Corporation has become only the third bank to be granted a licence to trade derivatives in China.

Westpac Asia general manager Bala Swaminathan says the licence from the China Banking Regulatory Commission is a critical step towards capturing the growing flow of trade and capital for customers onshore in China.

"A key growth area for our business is supporting the rapid development of the currency and financial markets in China," he said.

"Over the last 12 months we have made significant investments in our dealing rooms in both our Shanghai and Hong Kong branches to support the increasing RMB flows."

Derivatives are securities which draw their value from one or more underlying assets, such as stocks, bonds and currency.

Westpac's Shanghai and Beijing branches will initially focus on developing interest rate derivatives.

It was the first Australian bank to open an office in China in 1982 and is one of only two Australian banks that have permission to operate as a market maker to directly trade between the Australian dollar and RMB.

AAP

iMFdirect

“Economic Shifts in U.S. and China Batter Markets” continuing “Stocks Slide Globally…Investors Head for Exits” read the front-page headline in last week’s New York Times. Not sure about the U.S. part, I’ll leave that to others. But, as for China, this seems quite a stretch. Could be the pundits are erring in blaming the market slide on China, or perhaps the markets are misreading news coming out of China.

The purported China trigger was a survey of manufacturers. The Purchasing Managers’ Index (PMI) fell somewhat, crossing the magic threshold from expansion to contraction. PMIs are useful, but let’s not get carried away. China’s PMI is not the best indicator for growth, the decline was rather small, and January and February data (because of the Lunar “Chinese” New Year) are hard to interpret.

In early January, we actually raised our forecast for China’s growth in 2014. Specifically, from 7.25 per cent projection made in October to 7.5 per cent. The subsequently published 2013 data — 7.7 per cent annual growth — matched our expectation and we reaffirm our forecast for 7.5 per cent growth in 2014.

So, yes, we see a moderate slowing in China’s economy. This is expected, indeed welcome, as China moves to a more inclusive, green, and sustainable growth path (see China: Why Less is More). Our projection is for growth to slow 0.2 percentage points. This is peanuts for an economy growing at 7.5 per cent. And, given the momentum in domestic demand and improved outlook in advanced economies, growth this year could very well be higher.

Specifically, we expect domestic demand to moderate as the government implements its recently announced economic blueprint. While containing the risks from rapidly expanding credit and rising local government debt will put the economy on sounder footing, it will also be a modest drag on domestic activity. This is a good trade-off for securing long-term growth. Thus, buried in our forecasts is a slowing of domestic demand — over half a percentage point — partly offset by rising net exports fuelled by the global recovery.

Global markets are understandably interested in developments in China. It is the world’s second largest economy and a critical source of global demand, especially for commodity producers. Continued healthy growth is thus important for both China and the world. Healthy growth, moreover, likely means a gradually slowing economy.

Slowing to the fastest sustainable growth rate possible, which we estimate would be around 6 percent on average between now and 2030. In this case, China would continue to boost living standards at home while providing welcome support to the world economy for many years to come.

Steven Barnett is a Division Chief in the Asia and Pacific Department of the International Monetary Fund (IMF).

This article first appeared on iMFdirect. Republished with permission.

Mining magnate turned federal MP Clive Palmer has inflamed tensions with China after issuing another stern attack on state-owned conglomerate Citic Pacific.

Mr Palmer, whose privately owned firm Mineralogy is in a dispute with Citic over royalties for the Sino iron ore project in WA, said he would continue to fight companies that try to claim local resources without offering adequate compensation.

"Mineralogy stood as the last sentry at the gate protecting freedom of exploitation in Australia," a statement from Mr Palmer said, according to The Australian.

"Regardless of the cost to Mineralogy and my reputation, I have stood firm against these Chinese-owned companies. I will not stand by and see Australian interests raped and disrespected by foreign-owned companies.”

The statement followed a court win for Mr Palmer’s Mineralogy, with Federal Court judge Stephen Rares ruling it was the legal operator of Port Preston, a key part of the $8 billion Sino project.

Citic told Bloomberg it would consider its legal position after losing the case, though operations and exports should not be impacted.

Mr Palmer, whose legal fight with Citic mainly revolves around royalty payments, said he was confident the decision would lead to further legal victories in 2014.

"I predict this will be the first of many judgments to come our way in the next 12 months,” he said.

Citic Pacific president Zhang Jijing, however, has hit back, labelling claims the conglomerate hasn’t kept its part of the 2006 deal with Mineralogy as “rubbish”.

"Any claim that we haven't paid our fair share in accordance with agreements is just plain rubbish," Mr Zhang said during a speech to the Melbourne Mining Club.

Mr Zhang said the royalty case was “very important” as it could have an impact on other Chinese firms investing in Australia.