As the Prime Minister prepares for a similar business dele­gation to the US next month, an official report has identified 20 deals that resulted from the Australian trade promotion last month.

The Austrade analysis found that there were 13 commercial agreements in areas such as dairy exports, building technology, solar power and financial services, as well as seven other “significant” agreements.

Trade Minister Andrew Robb drew on the findings last night to make the case for “real, concrete outcomes” from a trade mission that took almost 600 companies to Shanghai and three regional Chinese cities.

“Even more importantly, there are also the intangibles,” Mr Robb said. “We built trust. We built relationships.

“And undoubtedly we built momentum in the free-trade negotiations — both by showing the strong commercial ties between our countries and the political will for an agreement.”

The combined value of the 20 commercial agreements is estim­ated in the Austrade analysis at $894 million, while there were separate agreements worth $57m to draw Chinese investment into Australian companies.

Mr Robb’s trade mission was the largest of its kind to China and was joined in Shanghai by a dele­gation of 20 top chief executives who accompanied Mr Abbott.

In one deal struck during the visit, the Victorian company Pactum Dairy Group signed a contract to export more than 25 million litres of milk a year to Bright Dairy of China.

The Victorian town of Shepparton, which was at the centre of the debate over the future of fruit company SPC Ardmona, is one of the winners from the contract as Pactum expands its dairy facility to meet the new demand.

In another deal, Blerick Tree Farm in West Gippsland formalised a deal to supply ornamental trees to China, where the landscaping industry is still being developed amid mammoth construction projects.

Solar-power developer RayGen resources signed a $60m deal to supply concentrated photo­voltaic technology to China.

In the health sector, Blackmores struck a deal with Chinese online retailer Glamour Sales to sell vitamin and dietary supplements.

At a formal lunch on the last day of the visit, Chinese Vice-Premier Wang Yang signalled the progress on a free-trade deal by telling Mr Abbott he expected a “bumper harvest” on bilateral ties later this year.

Mr Abbott heads to North America next month for meetings with US President Barack Obama and Canadian Prime Minister Stephen Harper, two key figures in talks on regional trade pact the Trans-Pacific Partnership.

Based on the results from the Asian mission, the Prime Minister’s office is preparing a similar business delegation to the US.

China’s growing debt problem weighs heavily on global investors and many are concerned about the stability of the financial system. Alan Greenspan, the longest serving US Federal Reserve Chairman, believes Beijing has enough financial fire power to prevent a total collapse and offers a solution -- contingency convertible bonds (What Alan Greenspan thinks of China’s ills, 29 April).

Greenspan, whose lax monetary policy has been partly blamed for the subprime meltdown in the US, thinks not all bubbles are bad even when they burst. The only disruptive type of bubble that can cause serious damage to the economy is a heavily leveraged bubble.

“Not all bubbles that break are toxic, meaning they don’t all cause major implosion in the economic system. The dotcom boom was a huge boom when it collapsed and you can’t see it in the economy,” said Greenspan in China.

Similarly in 1987, when Dow Jones Industrial Average nosedived 22 per cent, Greenspan thought everything was going to break loose and it didn’t. “Nothing happened,” he said. The former Federal Reserve Chairman explains the reason why earlier bubbles didn’t create major problems is that people who owned these toxic assets like tech stocks during the dotcom bubble and general stocks in 1987 were not heavily indebted.

“When price of stocks crashed they lost a lot of money, but defaults occurred,” he said. It was not until 2008 housing crisis, thing fell apart. People who held the toxic assets (mortgage-backed securities) were heavily indebted. And as a result, there was a series of defaults.

Many Chinese companies and local governments are heavily indebted. The Chinese corporate sector has a debt-to-GDP ratio of 125 per cent, one of the highest in the world among major economies. Local government debt surged nearly 60 per cent in the last two and half years, according to a recent survey by the National Audit Office (Paper tiger: China's potential debt disaster, January 9).

Is contingency convertible bond the solution to China’s debt problem?

Greenspan advises that the Chinese, in fact everyone, should consider making contingency convertible bonds mandatory to prevent a similar crisis from happening again in the future. So what is contingent convertible bond?

According to Bank of International Settlement, these bonds are hybrid capital securities that absorb losses in accordance with their contractual terms when the capital of the issuing bank falls below a certain level. Put simply, it means debt can be converted to equity during an emergency, so debt the level is reduced and bank capitalisation gets a boost.

“Contingency convertible bonds, which have a wonderful characteristic of turning into equity when things begin to crumble, does cost a little more to the issuer -- maybe two per cent,” he said, “ if we had those mandated, as I think they ultimately will be, it will very significantly reduce the probability of a type of crisis we had.”

Bank of International Settlement, which is like the central bank of central banks, also believes the contingent convertible bond offers a solution to the problem of securing additional external capital to shore up banks’ balance sheets during the time of crisis when private investors are reluctant to put up more money.

RMB appreciation

The artificially undervalued yuan has been a perennial source of tension between Beijing and Washington. The US Treasury has recently criticised the fall in the value of yuan after years of consistent appreciation.

To Greenspan, there is no argument that yuan is under-valued and as evidenced by the vast accumulation of foreign reserve. However, he is sympathetic to Beijing’s policy of suppressing the value of its currency.

“If you look back through Chinese history, the Chinese Communist party knew that Chang Ke-Shek [CCP’s bitter nationalist rival in the civil war] had an inflationary, unbalanced and heavily unemployed society and that is the reason they lost it,” he said in China.

“So there is very great sensitivity to maintain people employed and not to have a situation in which there are a vast number of Chinese who are unhappy and unemployed,” Greenspan said.

But Greenspan questions whether Beijing can continue to keep the value of yuan artificially suppressed. The deputy governor of the Chinese central governor who is in charge of the $4 trillion reserve also expressed his concerns about where and how to park such a vast amount of money (Cashed up China Inc needs to spend, December 5).

Greenspan said “It can only go so far and now we can see how far it can go. I think RMB over the longer run will continue to increase relative to dollar, but at the pace that existed before.”

Activity in China's manufacturing sector edged up in April, showing increased strength for a second straight month, however the result missed market expectations.

The China manufacturing purchasing managers' index printed at 50.4 in the month, up from 50.3 in March, but lower than the 50.5 expected by analysts surveyed by Bloomberg.

The index tracks manufacturing activity in China's factories and workshops and is a closely watched indicator of the health of the economy. A reading above 50 indicates growth.

A preliminary estimate published by British bank HSBC put China's PMI at 48.3 in April, better than 48.0 in March. HSBC is scheduled to release its final reading for April on Monday.

"The improvement of both PMIs reflects that a cyclical upturn is underway supported by the recent pro-growth targeted policies, and suggests that China's growth momentum is stabilising," ANZ Bank economists Liu Li-Gang and Zhou Hao said in a research note.

But Zhang Zhiwei, economist with Nomura International in Hong Kong, urged caution despite the improving PMI.

"We do not believe the economy has passed a turning point," he wrote in reaction to the result, adding that growth is set to slow to 7.1 per cent in the second quarter.

"We expect the government to loosen fiscal and monetary policies in the next few months," he said.

Thursday's data, the first official reading on the world's second-largest economy in the current second quarter, came after China's economic growth for the first three months of 2014 came in at its weakest pace in 18 months.

Gross domestic product (GDP) grew 7.4 per cent in the first quarter from the same period the year before, weaker than the 7.7 per cent in the October-December period.

The result was the worst since a similar 7.4 per cent expansion in the third quarter of 2012.

China's leadership says it wants to make private demand the key driver for the country's economic growth, moving away from over-reliance on huge and often wasteful investment projects that have girded decades of expansion.

Such a transformation is expected to result in growth that is slower but seen as stable and more sustainable in the long run.

China in March set its annual growth target for this year at about 7.5 per cent, the same as last year. But officials, including Premier Li Keqiang, have been quick to stress that the target is flexible -- seen as a hint it may not be achieved.

Three people were killed and dozens injured in what state media say was a terrorist attack involving knives and explosives at a railway station in the capital of western China's Xinjiang region on Wednesday, hours after President Xi Jinping used a rare tour there to demonstrate his government's commitment to combating terrorism.

Assailants attacked people with knives at the station exit, according to a report on the Xinjiang government news portal. Explosives were detonated at the same time, the report said, injuring at least 79 people.

The blast occurred just after 7 p.m. local time, according to the Xinhua news agency and other state media. One photo distributed by state media showed a street littered with debris and abandoned suitcases.

A man answering the phone in the public security bureau office at the southern train station, the region's largest, in the city of Urumqi confirmed the explosion. "Yes, a blast happened not long ago, but we are busy arranging rescue efforts so I can't say any more now," the man said before hanging up.

State media, which issued only brief dispatches about the blast, didn't identify the source but Xinhua said it was powerful and appeared to originate around suitcases left near the station exit. A spokeswoman for the Xinjiang government couldn't be reached to comment.

Xinjiang has seen widespread ethnic violence in recent years between some members of the Turkic-speaking, mainly Muslim group called Uighurs and the China's dominant Han ethnic group, which largely controls the government and police.

Information flow out of Xinjiang is often limited. In Wednesday evening's broadcast, state broadcaster China Central Television reported the president's four-day visit there only when it was over—and around the time the blast occurred.

Mr. Xi's visit to Xinjiang—his first there since becoming China's leader and its military chief in late 2012—followed recent acts of violence outside Xinjiang that the government has blamed on the region's separatists. Those included a stabbing spree two months ago that left over 30 dead at a train station in the southern city Kunming and a jeep's explosion in October on a sidewalk adjacent to Beijing's Tiananmen Square.

Mr. Xi denounced the attack and urged security forces to find the perpetrators, Xinhua reported.

While in Xinjiang, Mr. Xi visited army bases and special forces with orders to "strike first" at terrorists. Early Wednesday he was at a hotel some10 kilometers (about 6 miles) from the Urumqi railway station to honor local workers but is thought to have left the city by the afternoon.

If authorities determine Wednesday's explosion was a bomb, the timing and location would suggest an ability to strike for maximum impact: In addition to Mr. Xi's visit, Wednesday marked the eve of a long May Day holiday weekend that in Urumqi was to include a ceremony to mark the opening of a new intra-province rail system.

"If you can conduct attacks at symbolically important times you are choosing your own targets," said Philip B.K. Potter, an expert on terrorism at the University of Michigan. "That shows capacity."

On his tour, Mr. Xi visited a frontier base in the Silk Road city of Kashgar near the border with Pakistan and reviewed antiterrorist drills. Mr. Xi was quoted in state media as saying police should have the means to counter terrorists, a reference to recent plans in several Chinese cities to arm more officers with guns.

Xinjiang is already one of the most locked-down places in China. If Wednesday's blast was deliberate, "It will be seen as a failure of the security services," said Andrew Small, a fellow with the Asia program at the German Marshall Fund of the United States, a think tank in Washington. In Kashgar, Mr. Xi visited a primary school where he encouraged Han teachers to learn the Uighur language and said ethnic minority children shouldn't neglect Chinese, the nation's mother tongue, in hopes of promoting national unity.

The language used by Mr. Xi echoed statements by past leaders who have failed to address deeper problems in society, said Alim Seytoff, a spokesman for an exile group, the World Uyghur Congress. He added, "even Mao Zedong had pictures taken with Uighur farmers."

The Economist has published a short but headline-grabbing piece crowning the dragon, which argues the Asian powerhouse is about to overtake the United States as the world’s most pre-eminent economy at the end of this year. That’s five years earlier than the previous prediction by the International Monetary Fund.

According to the forecast, the Chinese economy, as measured in purchasing power parity (to better reflect cost of living in different countries), will grow larger than the United States in the next seven months. It is worth noting that China held the title of the world’s largest economy until 1890, when the US overtook it.

The revised estimation is based on new data from the International Comparison Program -- a partnership of official statistics agencies hosted by the World Bank -- which calculated the cost of living in 199 countries. China’s PPP exchange rate is 20 per cent higher than previously thought.

So is this a big deal? Symbolically yes, but it does not change the world economic pecking order in reality. The United States is still the world’s most pre-eminent economic power by a wide margin, regardless of whether China’s GDP as measured in PPP will be larger at the end of this year.

If we want to assess China’s economic importance and spending power internationally, the market-based exchange rate is still a much better measure. If we use this traditional method of calculation, it will take China at least another 10 years to overtake the United States as the world’s largest economy.

China’s GDP is about $8.2 trillion and the size of the US’s is $15.7trn. So the Chinese economy is only about half the size of the US, according to the prevailing market exchange rate. If we look at it on a per capita basis, an average Chinese citizen earns $US6000 ($A6466) a year, a bit over 10 per cent of your average American, at $US51,000.

If we want to assess the true economic strength of the country, it is not enough to look at GDP in isolation, though it is an important indicator. Even in China, commentators and analysts are talking about the quality of growth, not merely the quantity.

On this front, there is no question the US is still leading the pack. Silicon Valley is still the Mecca of innovation and the home to some of the best known global brands such as Google and Apple. And while China is showing some promising signs in catching up with the United States in areas such as e-commerce, telecommunications and biotechnology, it is still decades behind in many other areas.

Alan Greenspan, the former US Federal Reserve Chairman, said recently in China that the country’s phenomenal growth in productivity was based on imported foreign technology and it could not last forever.

Apart from technology, the US still dominates the global financial market. The yuan may be rising but the greenback is still the undisputed, leading international hard currency. New York remains the global financial hub that attracts even some of the best Chinese companies to list there. It will take China decades, if not longer, to develop a sound legal and regulatory framework to support Shanghai to rival New York.

It is only a matter of time before China overtakes the United States as the world’s largest economy. Basic law of arithmetic will see to that due to a larger population and a higher growth rate. But it will take much longer for China to compete with the US in terms of the quality of their respective economies -- let alone for your average Mr Wang enjoying the living standards of Mr Smith.

It is too soon for China bulls to pop the champagne.

Lowy Interpreter

China has made progress implementing the reform agenda of last November's Third Plenum. Private and foreign investors, especially those in Hong Kong, find themselves at the crux of Beijing's plans for markets to play a 'decisive' role in its statist economy. Two recent reforms are potentially momentous. First is the 'mixed ownership' model for state-owned enterprises (SOEs). Second is the Rmb550 billion 'through-train' cross-trading facility between the Hong Kong and Shanghai stock exchanges. While seemingly unrelated, these two developments are interwoven into a broader quest to make the economy more flexible, competitive and responsive to market signals.

State capitalism badly underperforms the private sector in China (see graph below). The result is a misallocation of capital on a grand scale, which worsened after the legendary 'command stimulus' of 2009 — headlined at Rmb4 trillion, but in reality perhaps an order of magnitude bigger if you count local government and associated credit spending. Beijing wants to purge these excesses by introducing private sector expertise and discipline.

Click to enlarge

That's where mixed ownership and the through-train come in. By allowing SOEs to share ownership of certain assets, and by permitting greater capital account exchange with the outside world, China's SOEs can be whipped into shape by sheer force of financial discipline. Actually, there is nothing much novel here. Socialist European nations championed mixed economies decades ago. But China's reforms are significant for their sheer scale, thus the potential upside if they succeed.

The poster-child of SOE reform is Sinopec, one of China's three oil giants. Sinopec is spinning off its retail marketing division, with some 30,000 petrol stations. There is undoubtedly upside to this business and the IPO could value the unit at US$50 billion. Sinopec will raise much-needed cash by bringing in outside stakeholders. But as any businessperson will tell you, majority control (and seats on the board of directors) ultimately counts for everything. Sinopec chairman Fu Chengyuproposes that only 30% be sold, broadly and preferably to domestic investors, who'll figure out among themselves their board representation. Sinopec will duly take note of their advice, no doubt.

Is this 'divide and conquer' governance? What restraints could minorities exert if Sinopec were ever called into 'national service' again like in 2009? To be sure, aligning management incentives with public share prices can work. But the carpet-bagging of wealth by management has always been a pernicious problem, as when relatives of executives mysteriously end up owning under-priced assets of SOEs. Past forays by private capital into infrastructure PPPs ended badly for these minorities, who found little redress in China's SOE-friendly courts. Today, they will demand extra inducements.

There is a strong sense of a system that remains captive both to the regulators and to state-appointed managers (some of whose positions actually overlap). The yield gap between private and SOE borrowers has actually been widening recently, reflecting market belief in Beijing's guarantees of SOEs. But if big SOEs are never permitted to fail, how can investors gauge the risks?

This leads to the second topic: the through-train. If there is a governance dispute or scandal in an onshore company, will Hong Kong investors be treated the same as mainlanders? Will Hong Kong's regulators, who today run a tight ship, make special forbearances for powerful PRC interests? Shirley Yam sees the scheme as aFrankenstein, 'a marriage between beauty and beast.' A WSJ editorial asks, 'will Hong Kong pull Chinese standards up, or will China drag Hong Kong down?' And will the train be shut down at Beijing's whim if markets misbehave? No wonder global investors fret over Shanghai's inclusion in global benchmarks as 'crazy, terrible and unfair.' Other technical questions must be resolved in the next six months before the pilot is fully operational, but the real unknown is how two radically different systems can mesh.

The China that Xi Jinping dreams of is 'a giant Singapore' where SOEs are run professionally for profit, with real outsiders and a stern rule of law – yet with the government calling the big shots. But China's overweening party-justice-military-state won't achieve best-in-class governance. Sinopec looks nothing like Singapore.

The contradictions in China's dexterous hybrid model aren't ideological; the Party's pragmatists reconciled those differences long ago. Instead, the problems are thoroughly practical. A party editorial unwittingly reveals the conundrum, exhorting SOEs 'to turn their political advantage to a competitive advantage.' Inviting private capital into politically advantaged companies could simply worsen corruption. If the leadership is serious about reform, those advantages must be curtailed; but then private investors may feel short-changed. Either way, the risk is what Minxin Pei would describe as a 'trapped transition' – capitalism stuck in no-man's land.

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

Three Chinese coastguard ships sailed into disputed waters in the East China Sea Friday as Beijing maintained its defiant stance after US President Barack Obama backed Tokyo in the row.

The Japanese coastguard said the Chinese vessels entered the 12-nautical-mile band of territorial waters around one of the Senkaku islands, which China also claims and calls the Diaoyus, shortly before noon (0300 GMT).

It was the third such incursion since US President Barack Obama vigorously reasserted on April 24 that Washington would defend Japan under a bilateral military treaty if China initiated an attack in the tense dispute.

China has already dismissed Obama’s position, saying that the islands are “China’s inherent territory”.    

Chinese vessels and aircraft regularly approach the East China Sea archipelago — thought to harbour natural resources — after Japan nationalised some of the islands in September 2012, setting off the latest spate of incidents in a long-running territorial dispute.

Relations between Tokyo and Beijing have fallen to their lowest point for years.

Since the publication of Bob Carr’s Diary of a Foreign Minister, much of the subsequent media coverage has focused either on his snobbish tendencies or on his supposed singling out of the Israel lobby’s influence on Australian foreign policy. Yet little has been made of the other lobby Carr refers to in the book -- namely, the China lobby.

Unlike the Israel lobby, which boasted its own faction within caucus -- the self-described ‘falafel faction’ -- the China lobby is altogether less cohesive and organised. Nonetheless, Carr saw fit to refer to them as such and, early on in his term as foreign minister, was keenly aware of their concerns.

“Australia had just made its decision about Huawei and we had announced a rotating of US marines through Darwin. Both left the Chinese somewhat uneasy,” Carr told China Spectator.

“It looked therefore like the relationship with China was going to suffer. That brought to the fore former Australian prime ministers, the academic Hugh White and some Australian business leaders with a big stake in China and its growth.”

At the time, billionaires Kerry Stokes, James Packer and Andrew Forrest were making overtures for -- as Carr put it in the diaries -- a "pro-Chinese re-alignment of Australian foreign policy".

Stokes, who has demonstrated a keen understanding of the Chinese market over almost 20 years, said he was repulsed by the presence of US troops on Australian soil not under Australian command and thought the decision to welcome them had upset many ordinary Chinese.

Just a month earlier, Tony Abbott -- then opposition leader -- had talked about political reform in a speech in Beijing. Kevin Rudd had previously criticised China’s human rights record in a speech to students at Peking University when he was prime minister.

“It’s difficult to imagine anything more disrespectful than someone coming to your own home and asking you to change your décor,” Stokes told the Australia in China’s Century Conference.

James Packer, who has extensive gambling interests in Macau, added: “I think we as a country have to try harder to let China know how grateful we are for their business.”

Paul Keating had launched Hugh White’s book TheChina Choice and Malcolm Fraser was getting started on his own book on China-Australia-US relations, Dangerous Allies, which argues that Australia should cut all military ties to the US.

The sour notes from these separate actors were reaching such a crescendo it gave the impression the ‘China lobby’ was singing in unison.

“The pro-China lobby are over-egging the pudding. They want to make us fidgety and defensive about our China policy. Make us anxious,” Carr wrote in his diaries.

The following week Dennis Richardson, the secretary of the Department of Foreign Affairs and Trade and a former head of our domestic spy agency, implied that Stokes and Packer were putting their own commercial interests above that of Australia’s.

“Since when does any country worth its salt auction its alliance to the highest bidder?’’ Richardson asked an audience at Sydney University.

As Carr outlines in his diaries, Richardson’s first piece of advice to the new foreign minister earlier that year was unequivocal: his first overseas trip as foreign minister could not be to China but to the US.

“Going to China first is just not worth the fuss,” Richardson told Carr.

Despite Richardson’s advice, the complaints of the China lobby were now being heard in the US.

“There is a hint that the Americans feel our strategic vision is being distorted by Chinese pressure to our political system” Kim Beazley wrote in a cable that Carr pounced on.

Ultimately, Carr settled on a formulation that sat neatly between the arguments of the panda-huggers and the dragon-slayers.

“Don’t fuss too much over the Chinese and feed their games; recognise that they may enjoy putting us on the defensive; but don’t poke them in the eye either,” Carr wrote.

“I was determined to get the relationship back on a strong footing but I was not going to do it under any pressure,” Carr told China Spectator.

Carr’s line on China finally appeased the China lobby. In his last entry in the diary, Carr chalks it up as a win that he hadn’t heard from them in almost half a year.

In many ways, Carr’s formulation echoed John Howard’s stance of engaging economically with China while maintaining a special relationship with the US, which after all shares our common values, institutions and history.

On his recent trip to China, Tony Abbott reiterated Howard’s stance.

“I think China understands and respects the other relationships Australia has. And the point that I've been repeatedly making on this trip is that you don't make new friends by losing old ones.”

But perhaps Abbott’s greatest masterstroke was to pre-emptively mollify the pro-China business lobby by bringing them along with him on his trip to China.

“I congratulate Tony Abbott on doing it,” Carr told China Spectator.

“We need to make sure we’re behaving like Team Australia. I think that’s in Australia’s interests.”

The US Treasury has slammed China again for returning to the old habit of intervening in the currency market to hold down the value of the yuan, just hours after official data showed the country has accumulated nearly $US4 trillion in foreign reserves -- the largest in its history.

Since the middle of February, China’s currency has depreciated 2.7 per cent against the dollar, breaking the long-term trend of appreciation due to intervention from the Chinese central bank. Most analysts believe the Chinese action was designed to punish currency speculators who believed the yuan was a one way bet and to prevent the influx of hot money into the economy.

The US Treasury Secretary Jack Lew raised this issue with his Chinese counterpart for probably the millionth time during a recent G20 meeting.

“During 2014 … the exchange rate has reversed direction, depreciating by a marked 2.68 per cent year-to-date,” the US Treasury’s semi-annual currency report says. “The Chinese authorities have been unwilling to allow an appreciation large enough to bring the currency to market equilibrium.”

So is China’s currency still undervalued?

The answer is surprisingly ‘no’ if you believe estimations from the Peterson Institute for International Economics, a prominent pro-trade think tank in the United States, and from well-regarded Stanford economics professor Ronald McKinnon.

Let’s start with Peterson’s estimation first. The World Bank released the latest purchasing power parity estimates of GDP last week, which better reflect the lower cost of living in developing countries. The headline-grabbing news, according to many analysts’ interpretation of the data, was that China would overtake the US as the largest economy in the world by the end of 2014 (The Chinese dragon is breathing smoke, not fire, May 2). 

However, the comprehensive survey of prices across 199 countries in the world also affords an opportunity for economists to examine the controversial question of whether China’s currency is still undervalued. Martin Kessler and Arvind Subramanian of the Peterson Institute conclude: “We can say with some confidence that the renminbi is now fairly valued.”

This is a quite dramatic change. China has been pursuing a mercantilist policy of artificially holding down the value of its currency to encourage exports. As late as 2005, the Chinese currency was estimated to be 30 per cent undervalued against the US dollar.

Kessler and Subramanian use the PPP approach to estimate whether the Chinese currency is undervalued. Without going into too much technical detail, the basic idea behind the PPP approach is that there is a positive relationship between prices and income per capita known as the Balassa-Samuelson effect.

Poor countries usually have lower price levels -- especially in non-tradeable goods and services sectors -- and they can channel resources to tradeable sectors. A low price signals a depreciated exchange rate. So economists can calculate the equilibrium exchange rate and level of prices for a given level of income.

They illustrate this point in the below graph. Kessler and Subramanian use both linear and quadratic models to estimate the equilibrium exchange rate and the later model takes into account that the relationship between prices and income is weak for poor countries and more robust for emerging economies like China.

As you can see from the graph, China’s currency is only slightly undervalued -- by around 1.7 per cent in 2011 -- and even a tad overvalued if we believe the quadratic model.

In fact, we should not be surprised by this result. The Chinese yuan has been steadily increasing for the past few years. The real appreciation of the yuan was about 7 per cent between end of 2011 and March 2014, according to the Bank of International Settlements.  

China’s current account surplus, which is another visible sign of the country’s undervalued currency, has declined significantly in recent years. For example, China’s current account surplus as a percentage of GDP was 10.1 per cent in 2007 and it declined to only 1.9 per cent in 2011. China’s current account surplus is still pretty big, only because the economy has grown at 9.8 per cent for the last 30 years.

Ronald McKinnon, a highly regarded economist from Stanford University, also argues that the Western demands for yuan appreciation are misguided. The trade imbalance between the US and China is largely due to the US fiscal deficit. And the continuous fall in the wholesale price index -- the best measure of tradeable goods prices in China -- suggests the yuan may even be slightly overvalued (China's currency conundrum, April 29).

Yi Gang, a deputy governor of the Chinese central bank who is in charge of looking after the country’s foreign reserves, made it clear at the beginning of the year that the country would float the Chinese currency soon and that the exchange rate between the yuan and the US dollar was close to equilibrium.

Yi, a former star economic professor, is in fact quite happy for Chinese consumers and importers to benefit from the rising value of the yuan. However, he didn’t rule out central bank intervention in the foreign exchange market in the future. He said future intervention would be rule-based and free from political interference (Cashed-up China Inc needs to spend, December 5, 2013).

Kessler and Subramanian, McKinnon and Yi’s estimates all suggest that the Chinese yuan is fairly valued against the dollar. This heralds a new age when China starts to abandon its decade-long mercantilist practices of holding the value of yuan.

The end of Chinese mercantilism -- and relief for the rest of the world -- may be in sight, say Kessler and Subramanian.

Activity in China's manufacturing sector improved slightly in April, but remains in contraction, according to the HSBC China manufacturing purchasing managers' index.

The HSBC China manufacturing PMI printed at 48.1 in April, a slight improvement on the read of 48.0 in March, but a downward revision on 48.3 in the earlier flash reading.

HSBC chief economist, China, Hongbin Qu, said the latest read implied that domestic demand contracted at a slower pace, but remained sluggish.

"Both the new export orders and employment sub-indices contracted, and were revised down from the earlier flash readings," he said.

"These indicate that the manufacturing sector, and the broader economy as a whole, continues to lose momentum.

"Over the past few days, Beijing has introduced more reform measures which could support growth by inducing more private sector investment."

Mr Qu said HSBC believed bolder actions will be required to ensure the economy regains its momentum.

Vietnam protested a Chinese decision to begin drilling for oil in disputed Southeast Asian waters, calling the move illegal Monday and demanding that Beijing pull back from the area.

Beijing's deployment of its first deep sea rig was the latest in a series of provocative actions aimed at asserting its sovereignty in the South China that have raised tensions with Vietnam, the Philippines and other claimants.

The United States shares many of the regional concerns about China's actions in the seas, which are potentially rich in gas and oil. Last week, President Barack Obama signed a new defense pact with the Philippines aimed at reassuring allies in the region of American backing as they wrangle with Beijing's growing economic and military might.

The China Maritime Safety Administration posted a navigational warning on its website advising that the CNOOC 981 rig would be drilling in the South China Sea from May 4 to Aug. 15, in an area close to the Paracel Islands, which are controlled by China but Vietnam claims as their own.

It said ships entering a 3-mile (4.8-kilometers) radius around the area are prohibited.

Vietnam's foreign ministry said the area where the rig was stationed lay within Vietnam's exclusive economic zone and continental shelf as defined by the 1982 U.N. Convention on the Law of the Sea.

"All foreign activities in Vietnam's seas without Vietnam's permission are illegal and invalid," the ministry said in a statement. "Vietnam resolutely protests them."

Vietnam's state-owned oil company, PetroVietnam, demanded that China National Offshore Oil Corporation "immediately stop all the illegal activities and withdraw the rig from Vietnamese waters."

Many analysts believe China is embarking on a strategy of gradually pressing its claims in the water by seeing what it can get away with, believing that its much smaller neighbors will be unable or unwilling to stop them. Vietnam has accused Chinese ships of cutting cables to its exploration vessels and harassing fishermen, as has the Philippines.

Chinese assertiveness puts Vietnam's authoritarian government in difficult position domestically because anger at China, an ideological ally, runs deep in the country. This is exploited by dissident movements, who accuse the government of being unwilling to speak out against Beijing.

Tran Cong Truc, the former head of a government committee overseeing the country's border issues, said the latest Chinese move was especially provocative.

"This act by China is much more dangerous than previous actions such as cutting the exploration cable or fishing bans," he said.

Since Chinese Communist Party Secretary General Xi Jinping came into power more than a year ago, much has been written about his consolidation of political power, his more hardline approach to foreign policy as well as his anti-graft campaign. 

On the economic front, Premier Li Keqiang has been doing most of the talking. He has resisted the temptation to open the purse to stimulate the economy in the face of much weaker growth momentum.

So what does Xi, arguably the most powerful political leader in China since Deng Xiaoping, think about the economic policy? Yang Weiming, the deputy head of the leading group for financial and economic affairs (the most powerful economic decision-making body in the country) penned an article in Study Time, the official journal of the central party school, explaining Xi’s top ten economic priorities.

(1) Beijing plans to double the country’s GDP as well as the income of its citizens within this decade. Provincial and local officials usually set up their growth goals above the national target in order to stand out, but Xi wants to make sure that local officials take regional disparities and local conditions into account when setting their goals.

Many provinces have recently lowered their own GDP growth targets to cater to Xi’s preference for slower and more sustainable growth. Hebei province, which is responsible for much of China’s steelmaking capacity, is deliberately shedding capacity to meet Beijing’s demand for more environmentally friendly industrial policies.

(2) When comes to the economic growth rate, Xi thinks speed is important, but quality, efficiency and sustainability also matter. Though Beijing has an official growth target of 7.5 per cent, it has made it repeatedly clear that the government would tolerate a slower growth rate below the target provided that certain red lines -- such as the unemployment rate -- are not crossed.

(3) Xi understands that China is going through a tough period of economic adjustment. The country is under a triple assault of recovering from the after-effects of 4 trillion yuan stimulus package, which saddled local governments with debts and excess capacity, implementing painful structural change as well as adjusting to much lower growth.

After three decades of fast growth and a lost decade of reform under the previous government, a lot of problems are beginning to surface. 2014 and the subsequent few years will be a very testing time for the Chinese leadership.

(4) Xi wants to maintain “strategic calm” in face of mounting problems, which means resisting the temptation to fall back into the old habit of using fiscal stimulus to prop up the economy. It seems that the bitter after-effects of the 2008 stimulus package still haunt policymakers today.

(5) Xi is determined to rein in the problem of massive over-capacity in the Chinese economy. Yang says the party boss is willing to break his “bones and tendons” to address the issue of overcapacity in sectors such as steel, shipbuilding and solar industries.

For example, the steel industry has a debt to equity ratio of 80 per cent and many steel mills are essentially on life support from China's state-owned banks. The government has been taking a relatively hard line in shutting down blast furnaces in provinces like Hebei to curb excess capacity.

(6) Beijing sees urbanisation as the next new driver of the country’s economic development. China’s urbanisation rate is 53.7 per cent. However, Xi warns against development aimed at lifting the urbanisation rate artificially.

Urbanisation should be regarded as a natural process of Chinese economic development and it should not be pursued as a political objective, says Xi, according to his senior economic advisor Yang. It is clear that China is already suffering from massive over-investment in the property sector, especially in third and fourth-tier cities.

(7) Xi wants to create a mega-metropolis around Beijing that would incorporate Hebei and Tianjin and he wants to transfer some of Beijing’s non-essential functions to other smaller satellite cities around Beijing. In fact, there are market rumours about moving part of the government bureaucracy to Baoding, a medium-sized city in Hebei. The property market there is going through the roof.

(8) Xi wants to pursue a more environmentally responsible development policy. All evidence suggests that China is on the brink of an ecological disaster: 20 per cent of the country’s soil is heavily polluted and air pollution in cities is causing tens of thousands of premature deaths every year, according to official statistics.

The Chinese population is getting increasingly agitated about the environment and there have been many protests against new petrochemical plants in the coastal areas. The world’s second largest economy is creating millions of environmental refugees who are fleeing to places like Australia and New Zealand.

(9) One of the most repeated mantras from the government is centred around improving people’s livelihood. Though Chinese wages have been increasing at double digits for the past few years (for example, wages of Chinese migrant workers increased 13.9 per cent in 2013), the trouble is that social inequality is widening even faster than increases in wages.

(10) Xi wants to exert greater control over economic policymaking. It is consistent with his approach to consolidate power under his personal authority including national security and taking charge over the country’s entire reform process. 

East Asia Forum

President Obama faced a stark choice when he went to Japan last week. Either he had to commit himself and his country unambiguously to supporting Japan militarily over the Senkakus/Diaoyus, or he had to accept that the ‘pivot’ — and by extension his whole foreign policy and US leadership in Asia — was no longer credible.

To see why that was so, we need to understand what’s been going wrong with the pivot ever since Obama announced it in November 2011. The problem has not been that Obama couldn’t make it to APEC last year, or that John Kerry has spent too much time in the Middle East, or that the sequester has cut the Pentagon’s budget.

The problem has been that Washington has been unable to quell doubts about whether America really was willing to use ‘all the elements of American power’ to resist China’s challenge to the regional status quo based on US leadership in Asia.

This is, after all, precisely what the pivot is all about. And the pivot got into trouble almost as soon as it was announced when, early in 2012, Beijing set out to test it on the Scarborough Shoal. The pivot failed that test when Washington was not willing to support Manila in resisting China’s takeover there.

Since then the pivot has faced an even bigger test in the East China Sea. China’s increased assertiveness there since late 2012, including the Air Defence Identification Zone declaration late last year, has directly challenged Obama’s claim that America is willing to do whatever it takes to retain leadership in Asia. It does that by posing in stark terms the question of whether America is willing to engage in a conflict with China in order to protect its allies and retain its position of primacy.

Fifteen years ago the answer would not have been in doubt.

But over the last 18 months, Obama himself has studiously avoided making any commitment on this question, while his senior officials have sent mixed messages. Obama’s own silence on this question became all the more significant when last month in Europe he very clearly and explicitly affirmed US willingness to fulfil its alliance obligations to its NATO allies in the face of Russian actions in Ukraine. If he is prepared to commit himself in Europe, why not in Asia?

The natural conclusion to draw in Tokyo, Beijing and elsewhere in the region, has been that when push comes to shove the answer would be no. It has seemed that as China has grown more powerful militarily and economically, the US is no longer willing to bear the costs and risks of conflict with China to support its allies and, therefore, to sustain its leadership position in Asia.

That is what pressed Obama to make his clear and unambiguous statement of support for Japan in Tokyo last week. But that, alas, is not the story’s end. Everything now depends on how China reacts. That in turn will depend on whether the Chinese believe that Obama really means what he says, and will be willing to act on it if he is put to the test. If they do believe him, they will presumably back off in the East China Sea and let tensions ease.

If they do not, they will call his bluff and keep pressing, confident that America will urge Japan to back down over the Senkaku/Diaoyu issue to avoid Obama’s brave words being put to the test — which would be a clear win for Beijing. The risk is that Obama’s reputation for muddled statecraft over issues like Syria will encourage Beijing to believe he is bluffing.

If so, Obama will only be able to preserve the status quo if he really can convince Beijing that he is willing to go to war with China rather than see the US step back from regional leadership. And he will not be able to convince Beijing of that unless he really believes it himself.

Much therefore depends on a clear understanding of what a conflict with China over an issue like the Senkakus/Diaoyus would be like. One hopes that Obama did not make his statement in Tokyo last week without thinking very carefully about this. If he did, he will have faced some hard and unwelcome facts.

America would not lose a war with China in the East China Sea, but America has no clear way of winning it and no sure way to control it and limit the risk of escalation. Without a clear win for one side or the other at the conventional level, the outcome of such a conflict would most likely depend on which side could better convince the other that it would be willing to use nuclear forces rather back down.

And no prudent policymaker can be very sure that it would be America. Ultimately, the danger is that China is as serious about changing the status quo in Asia as America is about preserving it. If that is so, President Obama’s brave words in Tokyo have not saved the pivot. They have just set the stage for the next test.

That is why Obama should abandon the pivot. Its aim — to compel China to accept US leadership in Asia — is probably unachievable, and is certainly not worth what it would cost to achieve against a country as powerful and determined as China is today. But abandoning the pivot does not mean abandoning Asia. There are many ways America can remain a major power in Asia which are different to the model that the pivot aims to perpetuate, and which China might not be so determined to resist.

They would involve sharing power with China in some way, which would not be easy. The question for Obama, and America, is whether sharing power with China would be worse than going to war with it.

Hugh White is Professor of Strategic Studies at The Australian National University.

This article was originally published on East Asia Forum. Republished with permission.

Chinese state media reported Tuesday that six people were injured in a knife attack at a railway station in the southern city of Guangzhou, the latest act of violence against civilians in one of the country's urban centers. 

The government-run Xinhua news agency provided few details about the early Tuesday knifings but quoted local police as saying six were injured in a "violent attack" at a station in the capital city of Guangdong. A brief statement from the Guangzhou police said an officer shot and detained one attacker. State media gave no description of the attackers. 

Last Wednesday, more than 70 people were injured and three killed in an apparent attack at the main train station in the northwestern city of Urumqi in Xinjiang. In March, more than 100 people were injured and more than 30 killed by knife-wielding attackers in the southwestern city of Kunming. 

Chinese authorities blamed both of those attacks on separatists from the country's predominantly Muslim Uighur ethnic minority. Among the dead in both incidents were suspected attackers. 

Chinese President Xi Jinping, who had left Urumqi shortly before last week's attack, vowed fresh measures to reduce the risk of terrorism in urban centers. Among the steps announced after the Kunming attack was to arm more police officers with guns.

As long as the Chinese economy continues to outgrow its fully industrialised counterparts, the debate between China bulls and bears will rage on. In my view, they both are right and wrong. But I’m not sitting on the fence because there is some nuance required here. Here’s why bulls don’t know why they’re right, and bears don’t know why they’re wrong. 

Bulls insist 40 years of rapid growth, interrupted only by a couple of mediocre years after the 1989 countrywide riots, prove that China can adapt to almost any situation. It is, after all, still at a low base with GDP per capital less than $US7000. There is still a lot of room to grow, and grow it will. After all, China is such a large potential market in and of itself, and this can sustain economic growth for a long time.

Look at Alibaba.com as an example. Its success is based on a service that largely matches Chinese buyers with Chinese sellers -- a Chinese company created for China. Its profit margins are way superior to that of Amazon, Yahoo or any other Western dot.com company. For bulls, this is what China is capable of.      

Bears have plenty of ammunition to point to as well. So much scorned and mocked by bulls when China seemingly sailed through the Global Financial Crisis, bears point to China’s response to the GFC as the primary reason why they are China bears.

To wit, China responded with the largest ever stimulus in economic history. Formal bank lending more than doubled in one year from 2009-10. The outstanding loan-book of banks expanded by almost 60 per cent in the two years from 2009 onwards. If one includes the shadow banking sector, debt to GDP levels are well above 200 per cent. The fact that local government financing vehicles (local government state-owned enterprises that eagerly accepted the cheap credit and wasted much of it on ghost cities and other foolish property ventures) possibly have distressed debts of somewhere between $US1.5-$US2 trillion is not reassuring. Throw in corruption and other institutional failings, and one can see why bears are now probably in the ascendancy.

In the interest of full disclosure, I have been a short-term China bull but medium- to long-term China bear since around 2007, as the release of a book I authored, Will China Fail?, would suggest. I have also been consistently sceptical that China’s leaders can implement the reforms that they continually promise (China can’t beat economic laws, August 20, 2013).

For the sake of this article, one can agree that a major (if not the major) battleground is the Chinese financial and banking system. Sure, China is still growing at about 7 per cent. But exporting to advanced economies is no longer a viable driver of growth, domestic consumption is not growing fast enough to pick up the slack, and China has become even more reliant on fixed investment to drive rapid growth.

The problem is that there has been so much capital investment that the country is running out of profitable things to build. Hence the problems with chronic over-capacity, empty cities, and empty houses fuelling what many believe to be a residential property bubble. For many bears, it only takes a couple of high-profile defaults to bring down the financial house of cards since the drying up of credit will lead to a cascading series of defaults and loss of confidence that will expose the true state of bad loans lurking in the Chinese financial system.

Indeed, it appeared a close shave in September-October 2013 when interest rates spiked dramatically on China’s overnight interbank market (what financial institutions borrow from each other to meet short-term liquidity needs). In the past, when it seemed like a spike was becoming serious, the People’s Bank of China had stepped in to inject more liquidity in the system. This came on the back of warnings by agencies such as Fitch Ratings downgrading the country’s sovereign debt ratings on account of these concealed financial frailties.

As panic between financial institutions ensued, interbank lending rates momentarily reached an astounding 30 per cent, up from rates of about 2.5 per cent. Finally, the People’s bank responded, announcing that it would ensure liquidity in the system.

As expected, bulls and bears learnt different lessons from the episode. Bears believed that this was a dress rehearsal for China’s impending ‘Lehman moment’, referring to when the American investment bank’s collapse triggered the GFC in 2008. The spike in interbank rates was proof that China’s financial institutions were spooked by the systemic problems caused by easy money and indebtedness rampant throughout the economy.

For bulls, the opposite conclusion was reached. China didn’t have its ‘Lehman moment’. Things stabilised quickly. Besides, growth will cure China’s debt ills and the boom continued despite a few wobbles here and there. The fact that a ‘Lehman moment’ was avoided with minimum fuss proves the resilience of the Chinese economy, and perhaps the policy skill and execution of its authoritarian leaders.

This now gets me to the point of the article. If we use the absence of a ‘Lehman moment’ as the litmus test for China’s economy, then the bulls appear to have won the day. Furthermore, China is unlikely to have a ‘Lehman moment’ simply because its political economy more broadly, and banking system more particularly, is very different to that of America’s, or from the rest of the advanced economies for that matter.

In 2008 -- and after the collapse of Lehman Brothers -- commercial banks, having lost confidence in the solvency of other banks (and therefore that other bank’s capacity to pay back their short-term debts), panicked and stopped lending to each other. The lifeblood of liquidity in the whole financial system, credit, dried up immediately as banks treated each other like institutions about to fail -- almost fuelling a self-sustaining prophecy. This was the beginning of the GFC from which America and the industrialised world is only just beginning to recover.

China’s banking system is very different. It is dominated by state-owned banks that ultimately do what Beijing tells them to do. The evidence: the massive expansion of loans and credits from 2009 onwards. This arose from government directive, not from commercial decision. Even when interbank rates spiked in September-October last year, the People’s Bank intervention was followed by political directives that the banks must lend to each other again at normal rates -- which they duly did. The point is that along with a still-closed capital system which minimises capital flight out of the country, China’s banks won’t stop lending to each other or external clients because Beijing will force them to do so to keep the economy ostensibly humming along.

So the bulls are right in that China can avoid its ‘Lehman moment’. But they miss the point that a closed and command system capable of perpetuating and exacerbating the serious misallocation of capital will have little motivation to genuinely fix these capital misallocation problems.

In other words, the Chinese banking system is not resilient because it is lean, efficient and rational, but because it suppresses the emergence of genuine market and price signals (e.g. a spike in interbank and retail interest rates resulting from a rise in non-performing loans) that would lead to the slowing of investment activity.

By the way, such a system is not cost-free, even if GDP continues to grow rapidly. The great beneficiaries of such a system are inefficient SOEs nurtured and protected by the government, and which need more and more capital to prevent them from defaulting on their debt obligations. The losers are more deserving private sector firms starved of capital and opportunity, and households whose savings, in returning meagre interest, are effectively used to subsidise inefficient investment activity by SOEs.

Conversely, the bears predicting a ‘Lehman moment’ collapse are likely to be waiting for some time. But they are nevertheless correct about the serious flaws in the Chinese political-economic and financial system. They are also correct that these problems are getting worse and worse, even if they are wrong about an imminent collapse.

To sum up: bulls don’t know why they’re right (and are actually wrong in many respects) while bears don’t know why they are wrong (but are actually right in many respects) -- if that makes sense. So should we be long or short on China? That depends on whether one can tell when an economy with chronic problems deteriorates into an economy with a terminal one. But that’s for another time.  

Dr JohnLee is the Michael Hintze Fellow and Adjunct Associate Professor at the University of Sydney, non-resident senior scholar at the Hudson Institute in Washington DC, and a Director of the Kokoda Foundation.  

Alibaba - often described as a Chinese version of Amazon or eBay - has filed documents for its US stock listing, widely expected to be one of the largest offerings in history.

The initial filing with the US Securities and Exchange Commission indicates $US1 billion ($A1.08 billion) will be raised in the public offering, but that amount is expected to be greatly boosted with later amendments.

The IPO is part of efforts by the world's largest online retailer to expand globally.

The document leaves out information including whether the listing will be on the New York Stock Exchange or Nasdaq.

A group of investment banks will lead the offering including Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Morgan Stanley and Citi.

Analysts say the listing is expected to raise somewhere around $US15 billion, which would make it the technology industry's largest IPO since Facebook's in 2012.

Talks between Alibaba and the Hong Kong Stock Exchange broke down last year, in part because the city's listing rules prevented Alibaba founder Jack Ma and senior management retaining some control over the board of directors.

Alibaba wanted an alternative class share structure to give selected minority shareholders extra control over the board, but the Hong Kong bourse declined to change its rules.

Alibaba operates China's most popular e-shopping platform, Taobao, which has more than 90 per cent of the online market for consumer-to-consumer transactions. Taobao has more than 800 million product listings and over 500 million users.

Trip Chowdhry, analyst with Global Equities Research, said it remains unclear how well Alibaba will fare outside its home market.

"It's a very strong player in China, a little weak on mobile initiatives, very strong in payments," he told AFP.

"It may be a little premature to extrapolate the success of Alibaba outside China because in the consumer internet space, it's not clear if citizens living outside China will trust a Chinese company with their information."

With the first ‘public filing’ of Alibaba’s prospectus with the US Securities Exchange Commission overnight, Alibaba’s choice of the US as its IPO venue has been formally confirmed. Foreshadowed in preceding months, its choice of the US over Hong Kong is no surprise.

Much attention has been focused on the regulatory issues that have driven this move. The US regulators have a much more permissive approach than Hong Kong to the so-called ‘Variable Interest Entity structures’ -- complex contractual arrangements designed to circumvent Chinese prohibitions on foreign investment in the internet sector while shifting the economic benefits of the business to the foreign listed company.

Hong Kong also has notoriously refused to waive its ‘one share, one vote’ rule to allow Alibaba founder Jack Ma and his management team to retain control of the company. While this led to much hand wringing and soul searching in Hong Kong, this was the correct decision. Hong Kong is a market where listed companies are invariably dominated by powerful controlling shareholders, whether in the form of dynastic ‘tycoon’ families or Chinese state-owned conglomerates. Allowing these controllers to extract more money from the investing public without having to suffer commensurate dilution of their control would have quickly made a mockery of corporate governance and shareholder rights in Hong Kong, and may ultimately have led to the death of the market. While the Hong Kong authorities have announced their intention to conduct a market consultation to consider amending the rules, this process was always going to be too slow for Alibaba.

READ MORE: China sends Alibaba reeling with a regulatory kinghit

But regulatory issues aside, it is also important for Alibaba to consider that life as a listed company begins, not ends, at IPO. A listed company does not exist in isolation but in an ecosystem comprising the broader market in which the company trades. This ecosystem depends on a sufficient core of investment bank research analysts covering the sector and willing to write research reports and provide ongoing coverage of the company, which in turn attracts investor attention and hopefully trading volume from what needs be a large pool of fund managers focused on the company and its sector. All of this benefits from the network effect of a large number of similar companies listed on the same market providing a ready source of ‘comparables’ to help investors assess valuation and allow investors to diversify their investments across a portfolio of companies in the sector.

The US market -- and the Nasdaq market in particular -- has all of these features. Hong Kong cannot compete with the tech sector research coverage, large tech-savvy institutional investor base, and the significant number of Chinese dotcoms already listed and actively trading in the US, including major players such as Baidu. Tencent is the only notable Chinese tech company listed in Hong Kong.

So, in light of all of this, it is not at all a surprise that Alibaba should choose to follow the herd to the US. Rather, the surprise is that China’s powers-that-be should acquiesce in its doing so.

Alibaba began essentially as a sourcing agent, connecting Chinese manufacturers with global buyers. It has since grown into a behemoth with increasing significance to the wider Chinese economy. Just one figure demonstrates this: Alibaba represents 5 per cent of retail sales in China. Not just ‘online’ sales -- all retail sales. Its payment channel, Alipay, is also the dominant player serving other online retailers. And, as reported in China Spectator and elsewhere, Alibaba is now looking to branch out into financial services as well, with Jack Ma's bold pledge that “If banks don’t change, we will change them” (The Secret to Alibaba’s success, April 17).

READ MORE: Alibaba and the Chinese banking thieves

In the context of the Chinese government's ongoing efforts to realign the economy from an export-driven to a consumption-led model, the importance of consumer market players like Alibaba will only increase. That the Chinese government would allow such a strategic player to subject its fortunes to the whims of a foreign regulator is astounding -- especially a foreign regulator that is actively engaged in an ongoing and bitter dispute with its Chinese counterparts on access to auditors’ working papers. If a recent US administrative court decision to ban Chinese branches of the global Big Four auditors from signing off on US GAAP audit reports is not overturned on appeal, it could ultimately lead to the mass delisting of all Chinese companies from US exchanges, and cut off their access to international capital markets. It is hard to believe that the Chinese government would be sanguine about this.

It is also surprising that Alibaba -- recognising that its continued business success, in particular as it seeks to expand into financial services, necessarily requiring numerous government approvals and permits -- would not be inclined to take seriously any ‘friendly advice’ being offered to it by Beijing that a listing in Hong Kong (regarded as much closer to home and within the control of Beijing) would be preferred to a US listing.

All of this gave the sense that what we were witnessing in the course of the past year or more of posturing from all sides was a large and very public game of regulatory ‘chicken’, and sooner or later one side would blink. But, even now that it appears no side has blinked and the US listing is confirmed, this should really be seen as just the latest step in a lengthy and ongoing negotiation, and by no means the end game.

One possible next step, resulting in a (typically Chinese) ‘face saving’ resolution for all parties, would be for Alibaba to undertake a secondary listing of its shares in Hong Kong after the US listing is completed. Hong Kong’s requirements for companies seeking a secondary listing are significantly relaxed, with many listing rule requirements readily waived under the assumption that the overseas ‘primary’ regulator (in this case, the US SEC) carries most of the responsibility for regulating the company and protecting investors’ interests. One of the Hong Kong rules that might be readily waived in this case could be -- you guessed it -- the ‘one share, one vote’ rule. This would be politically palatable in Hong Kong, as it would only be a secondary listing, and the standards for companies seeking a primary listing in Hong Kong would not be compromised. At the same time, a Hong Kong secondary listing would bring Alibaba a step closer to home. This would give the Hong Kong regulators time to conduct their market consultation, and if this ultimately were to result in the rules being relaxed, Alibaba’s secondary listing in Hong Kong could be upgraded to a primary listing -- and the homecoming would be complete.

Antony Dapiran is an international lawyer based in Hong Kong.

When Mao Daqing, the deputy chief executive officer of Vanke, the largest property developer in China spoke candidly at a closed session of property developers and analysts a week ago, he didn’t expect his speech to be leaked.

His candid assessment of the Chinese property market has sent shock waves throughout the country and especially to the challenged property sector. Vanke and Mao have been on the defensive since.

Mao, who thought he was speaking under Chatham House rules, revealed some of the biggest challenges facing the industry. He mentioned the anti-graft campaign as having an impact on sales in the high-end property market in Beijing.

In the last three weeks, he had to receive at least 14 inspection groups from the prosecutor’s office and from the central disciplinary commission of the Chinese Communist Party, which is waging a war against corruption under the hard-nosed Wang Qishan.

“For us developers, the impact of the anti-corruption campaign on the sales of high-end property is very serious. It does not only mean fewer corrupt officials are buying high end apartments but also directly and indirectly related people and industries,” Mao said according to the leaked transcript.

Serious as it is, the anti-corruption drive seems to be least worrying for Mao compared to other dire trends. One of them is the massive build-up of inventories across the country.  According to Vanke’s data, it will take more than 12 months to sell its existing inventory in 21 major cities and more than 24 months to clear stocks in another nine cities.

In some smaller third and fourth tier cities, the build-up of inventories is simply mind-boggling.  Mao used Tangshan, a major steel-making city in Hebei province as an example saying it would take more than 100 months to sell its entire inventory in the city.

Tangshan has the highest GDP in the entire province but its economic prosperity is largely based on heavy industries such as steel, coal and cement. Most of the companies in the city are either cosy monopolies or state-owned enterprises. Though the city has many millionaires, they usually have their homes in Beijing.

Mao says Tangshan is a typical city in China’s industrial belt, which is dominated by the state sector. Private enterprise and capital have not taken off and the new push to close down heavily polluting industries is making the problem worse. The only source of income for the local government is selling land and the problem will get worse.

Wang Tao, UBS’s chief China economist is also warning about the risk in the property sector. “Property supply has been growing faster than underlying demand, while investment demand for housing is being eroded and inventories are building up. We think a more persistent and sharper downturn in the property sector is the biggest risk for China’s economy in the next couple of years,” she said in a note to clients.

Another sign of weakness is how highly leveraged some of the property developers are. According to Orient Securities, the average debt to equity ratio is 65 per cent in the property sector and 43 per cent for leading developers in 2012. Their leverage is likely to have increased in the past year after their aggressive buying spree of over-priced land.

Chinese banks have been tightening their lending to developers as well.  Mao has found out from more than 20 chief executives of banks that they have abandoned lending targets to developers. During good times, bankers are under pressure to lend a certain amount to developers but it is no longer the case.

Chinese banks like the Bank of China and the Industrial and Commercial Bank of China, which are some of the biggest lenders to the property sector, are setting up specialised departments with experts from the property sector to analyse project by project.  It shows banks are getting more risk averse.

“Banks are using market criteria to judge and assess projects,” Mao said, “if they don’t meet the lending target, they will become picky.”

Given the real estate sector makes up 16 per cent of GDP, 33 per cent of fixed asset investment, 20 per cent of outstanding loans, 26 per cent of new loans and 39 per cent of government revenues in 2013 -- what happens in this sector will have a large bearing on the health of Chinese economy.

UBS thinks there is a 15 per cent probability that a sharp property downturn could lead to GDP growth dropping to five plus per cent in 2015. Nomura is even more pessimistic than UBS. Its chief China economist Zhang Zhiwei says the question is no longer “if” or ‘when” but rather “how much” China’s property market will correct.

He believes the country’s GDP growth will slow down to 6.7 per cent this year without additional policy stimulus.