China's local governments will begin to issue bonds for 2014 soon, with a larger quota than the previous year granted by Beijing.

Beijing is allowing local governments to sell a combined CNY400 billion ($63.4 billion) worth of bonds this year, more than the CNY350 billion in 2013, according to the country's deficit plan for 2014. China unveiled a larger budget deficit in 2014 as it tries to overhaul the economy and respond to the effects of slower growth.

The finance ministry disclosed a modified rule for this year's local government bond sales on Wednesday. "The local government bonds issuance will probably kick off in mid-June and finish before the fourth quarter as usual, suggesting supply pressure will mount in July and the third quarter," said Shenyin Wanguo Securities in a report Thursday.

The finance ministry has asked the local government to make proper use of the bond proceeds, with increased support for social welfare improvement and economy restructuring, said official Xinhua News Agency earlier.

China began issuing local government bonds in 2009 to broaden local authorities' financing channels. The finance ministry sold all such bonds on behalf of the local authorities in 2009 and 2010, before Beijing launched a trial scheme in late 2011 to allow Zhejiang and Guangdong provinces, and the municipalities of Shanghai and Shenzhen, to sell bonds directly, a potential first step toward bringing China's local-government finances in order.

China is moving to allow local governments to offer debt directly, despite concerns about rising debt levels.  

China's National Audit Office said late 2013 that debt and guarantees issued by local governments had surged 67% to 17.9 trillion yuan by the end of June 2013, compared with the last tally of local debt at the end of 2010, when it totaled 10.7 trillion yuan.

Anecdotal tales of wealthy Chinese buyers driving up housing costs by paying above-market prices have been undermined by a study that finds they often drive the hardest bargains.

The randomised survey of 74,000 established home sales in Sydney by the Finance Discipline Group at the University of Technology, Sydney revealed buyers with Chinese surnames on average spent about 2 per cent — or $13,800 — less on their homes between 2000 and 2011.

Chinese buyers were willing to pay slightly more to live in a Chinese-dominated suburb — such as Sydney’s Chatswood, Haymarket or Hurstville — but still generally paid market rate.

Researcher Lorenzo Casa­vecchia, who has sent his findings to a parliamentary inquiry, suggests the government ignore populist calls to restrict foreigners’ access to residential markets.

“It’s win-win at the moment. We’re attracting foreign investment without causing prices to increase because of it,” he told The Australian. His data controlled for factors such as suburb, type and quality of dwelling.

Monika Tu, who runs a “property concierge” service for Chinese businesspeople buying prestige homes in Sydney, was unsurprised by the findings. “My Chinese people are very smart buyers, very successful business people. They don’t pay over the top; they pay just the right price,” Ms Tu said. “There’s been a lot more activity, especially in the last two or three years, but I don’t think it has raised prices.”

Chinese homeowners accounted for 6.5 per cent of buyers in 2000, rising to 13.3 per cent in 2010 and 10.3 per cent in 2011.

Dr Casavecchia said he and his research partner, Adrian Lee, intend to conduct a larger survey of one million transactions and include more recent figures.

Meriton, the nation’s largest apartment builder, told the inquiry “excessive local government planning requirements and fees” had been more instrumental in pushing first-home buyers out of the market. In a written submission, Meriton suggested allowing first-home buyers to ­access a portion of their super­annuation to buy a first home.

“Meriton’s data suggests foreign investors are not speculators or absentee owners, but rather acquire their apartments for lease or for use as owner occupiers, including those purchased for children studying in Aus­tralia,” it said.

Meriton said it had heard of departed foreigners abandoning their vacant homes and urged a crackdown by the Foreign Investment Review Board to boost public confidence in the system.

Meriton and the Property Council of Australia noted foreign investment “underpins development” in the sector, generating greater supply for Australian citizens. “Banks won’t extend themselves past a certain percentage, and so presages to foreign buyers provide surety to the development,” the Property Council’s Nick Proud said.

The UTS study noted the FIRB’s data captured only a fraction of overseas buyers, since it did not include purchases by permanent residents or properties bought through an Australian solicitor, friend or relative.

East Asia Forum

China is experiencing rapid urbanisation. It is the main engine of economic growth in contemporary China, although it is facing some severe challenges. A major problem is that the majority of the 234 million rural migrants in urban areas have not obtained urban permanent resident status, blocked by the hukou or urban household registration system. The newly released urbanisation blueprint by the Central Committee of the CPC and the State Council, National New-Type Urbanization Plan 2014-2020, announced the acceleration of the process of turning rural migrants into urban citizens.

The plan anticipates that by 2020 urban residents will make up 60 per cent of the total population, compared to 53.7 per cent in 2013 — while urban permanent residents will comprise 45 per cent, compared to 36 per cent in 2013. It is promised that rural migrants in urban areas will be covered by social security and entitled to equal opportunities in education, medication, housing and other public services. Other targets include improved city cluster layouts, and better urban planning, urban administration and urban environment, economising land resources, and protecting urban historical and cultural heritages.

This new style of urbanisation is intended to focus on the needs of the population rather than merely focussing on more building. With full implementation of the plan, a healthy urbanisation trajectory can be expected, although some targets — such as the rate of urban permanent residents — seem somewhat conservative. This may reflect strong resistance to the reforms.

The plan is a step in the right direction. The key issues that remain to be dealt with lie in the implementation of the plan. As the document correctly notes, existing problems in urbanisation are the result of bad institutional arrangements, including defects of the existing hukou system, the land management system, social security systems, budgetary and taxation systems, and government administration systems. Without a holistic reform of these systems, the targets set by the Plan may not be achieved.

The most pressing problem is that of government administration systems. Under the current system, governments at different administrative levels often focus exclusively on short-run economic growth and investment projects to the detriment of public services and social development. While officials may complain that they don’t have enough money to meet social targets, spending on investment projects and government consumption is often unnecessary or inefficient.

According to some studies, the social cost of one migrant worker officially becoming an urban permanent resident is 50,000–100,000 yuan. It is often argued that the total cost borne by the government if all rural migrants were officially urbanised would exceed 20 trillion yuan — far beyond what the government can pay.

But this argument exaggerates the cost to the government. Firstly, it represents an aggregate, not an annual cost. Secondly, it includes additional spending on urban infrastructure that the government already pays for, and should not be double counted. Thirdly, a quarter to a third of rural migrants are already covered by urban social security and public service systems. And fourthly, the cost of workers to join the social security system will be paid by both themselves and their employers, not the government. Potential government top-ups would only comprise a small proportion of these costs.

Once this has been accounted for, and dividing the total government cost by 20 years, the annual cost to the government would be only 0.3 to 0.4 trillion yuan and represent between 3 to 4 per cent of total government revenue in 2013. This is much less than the fiscal stimulus carried out during the global financial crisis to promote economic growth, which cost 4 trillion yuan to the central government and more than 10 trillion yuan to local governments. In 2012, government investment from budgetary funds totalled 1.9 trillion.

Finding the money in the budget for urbanisation and social development is not a problem, as long as the requisite reforms to the budgetary process are made. Other necessary steps are reforms to the social security system, and land management systems to allow market mechanisms to play the decisive role in allocating land resources. All these reforms were stated by both the Plan and the Third Plenary Session document of the 18th Central Committee of the CPC. The hard part is the implementation.

Wang Xiaolu is Deputy Director and Senior Fellow at the National Economic Research Institute, China Reform Foundation, Beijing.

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

East Asia Forum

On May 1, a China National Offshore Oil Corporation deep-water oil-drilling rig was moved to and installed 80 miles inside Vietnam’s claimed Exclusive Economic Zone. The rig is escorted by more than 80 armed and military vessels that have engaged in firing high-power water cannons and ramming Vietnam’s civilian ships.

These developments may fit into China’s ambitious plans to assert its maritime claims. But they do not fit into China’s ambitions to build greater structures of trust in the region. For countries like Vietnam, recent Chinese actions are seen as provocative. China is seen as willing to forcefully make its way in the territorial disputes in the South China Sea.

In terms of timing, these developments pose serious questions about China’s greater goals for its foreign policy toward its neighbouring ASEAN countries. China’s actions may be taken as possible signs that the gap between China’s good words and its deeds is getting wider -- the trust deficit is growing. As a result, prospects for meaningful cooperation and efforts to build a positive image of China have taken a step backward.

In the first place, the recent developments are counter-productive to Beijing’s fresh efforts to extend the olive branch to ASEAN countries. In October last year, the Chinese prime minister, Li Keqiang, attended the 16th ASEAN-China summit in Brunei to celebrate the ASEAN-China strategic partnership’s 10th anniversary. He promoted the 2+7 cooperation framework with strategic trust as the underlying principle of good neighbourliness. He even proposed the signing of a China-ASEAN treaty on good neighbourliness.

It was expected that these developments would make ASEAN leaders at last weekend’s summit less willing to discuss how the group should respond to China’s concept paper on the ASEAN-China Treaty on Good Neighborliness, Friendship and Cooperation -- a step towards materialising Prime Minister Li’s proposal. But China’s behaviour in the South China Sea has strained the level of trust between China and ASEAN members to a new low, making it difficult to now talk about these grand initiatives.

Additionally, ASEAN countries’ consideration of the initiative put forward by Chinese President Xi Jinping in October 2013 to build a 21st-century Maritime Silk Road may also be hindered. Next week, high-level officials from ASEAN countries and China will meet in the 8th Pan-Beibu Gulf Expanded Economic Cooperation Forum in Nanning to talk about this initiative and steps to make it happen. Again, it is expected that an exchange of words about the South China Sea disputes will take place, thus minimising the chance for the Maritime Silk Road to begin to take shape.

More unfortunately, China’s harsh behaviour in the South China Sea against Vietnam this time will serve as a fresh reminder to ASEAN leaders how difficult it has been for countries like Vietnam to approach the weight of China on the South China Sea issue. Individual ASEAN members have tried to deal with China in different ways, only to see an uncooperative -- and more provocative -- China. The Philippines has commenced an arbitration case against China under Annex VII of the United Nations Convention on the Law of the Sea to determine the legal status of the nine-dashed line. Vietnam has employed various bilateral frameworks, including hotlines between top leaders, and their agreements on principles to solve territorial disputes, to engage China on the issue.

When Vietnam’s deputy prime minister, Minister of Foreign Affairs Pham Binh Minh, spoke on the phone with Chinese State Councillor Yang Jiechi, he made it clear that the operation of the HD-981 drilling rig and the ships protecting it in Vietnam’s EEZ had negatively affected political trust between the two countries and peoples. Clearly, there is the perception in Vietnam -- and most probably in the Philippines as well -- that ASEAN as a whole has not been successful in engaging China in serious talks towards signing the Code of Conduct on the South China Sea.

Lastly, the recent developments in the South China Sea have reminded ASEAN countries of the way big power politics operates in the region. The image of the gigantic Chinese rig and vessels -- entering the area claimed by Vietnam -- forcefully driving Vietnamese civilian vessels away with water cannons is cause for concern.

China’s 'big power' mentality and behaviour in the South China Sea is unconstructive. And the ensuing impacts are negative to China’s efforts to build a positive image as well as close cooperation with countries in the region and elsewhere.

Tung Nguyen is a Senior Researcher and member of the research program on the South China Sea (East Sea) at the Diplomatic Academy of Vietnam.

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

China's financial regulators on Friday issued new rules aimed at limiting banks' off-balance-sheet lending activities, as Beijing moves to rein in runaway debt that many economists say threatens the country's financial stability.

The guidelines, which take effect immediately, seek to put a stop to banks using a kind of backdoor transaction that involves disguising corporate loans as less-risky bank-to-bank loans. Analysts at Standard Chartered estimate as much as 2 trillion yuan ($A346.1 billion) could have been lent under this method as of June 2013, the most recent estimate available.

The tightened rules on bank lending come as China's economic growth continues to lose steam. Analysts said it suggests the Chinese government is reluctant to use monetary stimulus to prop up the economy.

"The new rule could further limit credit growth, but if credit declines too fast, it could hurt the economy," said Li Wei, a Shanghai-based economist at Standard Chartered.

Still, the regulations appear to be more lenient than some have expected, raising questions about how effective they would be in terms of getting Chinese banks to better manage risks in their loan portfolio.

The new rules jointly issued by China's central bank and its top banking, securities and insurance regulators, target an increasingly popular strategy among Chinese banks. By making corporate loans look like loans to other banks, they can set aside less capital and reserves, making their balance sheets look healthier.

The most active users of such transactions have been small and midsize lenders, according to bank executives and analysts. One of the most active users has been Shanghai-listed Industrial Bank , according to analysts. Officials at Industrial Bank declined to comment.

Such loans are often made through a web of transactions that take place in the country's interbank market, where banks borrow from each other.

Like other types of shadow credit--or debt created outside the formal bank-lending channels--such loans often are made to borrowers considered too risky for banks' on-balance-sheet lending arms. That can include local governments, property developers and big companies burdened by overcapacity. Aggressive growth in this type of lending has led the International Monetary Fund and others to warn that it makes the Chinese financial system more unstable.

The new guidelines require banks to count such interbank loans as part of their overall loan quota, which regulators set for each bank. These quotas currently don't cover bank-to-bank loans. In addition, the rules require banks to hold capital and reserves against such interbank loans

Also, under the new rules, a bank's lending to any single financial institution is capped at 50 per cent of its Tier 1 capital, which consists primarily of common stock and retained earnings.

Still, the rules don't specifically ask banks to treat those loans the same as corporate loans, effectively saving the banks from having to increase the amount of capital and reserves they need to set aside for those loans. "The new rules can't be described as strict as the regulators just want some controls over the shadow-banking business instead of a full crackdown which might hurt the economy," said Wu Sijie, an analyst at China Guangfa Bank, a midsize lender in southern China's Guangdong province.

Most Chinese banks have already been operating within the limit, according to banking executives and analysts. "We don't expect the new rules to have any significant impact on our interbank business," said a risk official at a large national bank in northern China.

The regulations were formalized after months of wrangling among Chinese regulators, including those at the People's Bank of China and the China Banking Regulatory Commission.

Competing interests of the PBOC, which looks at overall financial stability, and the CBRC, which oversees the formal banking sector, have delayed the issuance of the new rules, according to people with knowledge of the matter. Neither agency has clearly defined authority over shadow lending, the fastest-growing part of China's financial sector.

CBRC officials initially had planned to issue similar rules late last year. But its efforts were met with strong opposition from some of the nation's largest financial institutions, which complained that the rules would reduce their capital levels and crimp profits, according to banking executives familiar with the discussions. CBRC officials have said they need to weigh the potential threat from banks' using the backdoor method to avoid regulation against the possibility of causing a banking crisis by severely undermining their profits and reducing their capital.

Australia's tourism industry has to lift its game if it is to capture the prize of China's new class of globe-trotting travellers, says Crown chief executive Rowen Craigie.

The number of annual Chinese overseas travellers had grown 10-fold to 100 million since 2000 and was expected to double again by the end of the current decade, said the head of the gaming company, which also has interests in Macau casinos.

However, federal and state governments and the private sectors had to do better to fully capitalise on and increase the current 700,000 annual visitors and $5 billion in economic value of that market.

"If Australia doesn't get its act together it won't capture a market share it otherwise would," Mr Craigie said.

Mr Craigie was speaking at the Australia in China's Century Conference at Crown's Melbourne casino complex.

Foreign minister Julie Bishop told the same conference that China's middle class had become the world's most influential tourists and would drive the global industry for years.

Despite the common message that Australia is a nearby regional destination for the Chinese, Mr Craigie argued the tyranny of distance was keeping them away, with nearby Hong Kong and Singapore favoured.

Crown, which is chaired by billionaire and major shareholder James Packer, is desperate to boost its share of China's high-end tourist, high roller gaming market partly through a planned new VIP casino and luxury hotel in Sydney.

Mr Craigie said Australia's travel visa system had to be made simpler for Chinese travellers including printing it in Mandarin and providing it online.

Australian airport arrivals areas were not world-class and neither was training for the tourism industry while state government gaming regulatory and tax settings should be made more "competitive", he said.

"I think the federal government does have an appreciation that we are in an intensely competitive environment in which hundreds of countries are looking at the same tourism prize," he said.

Some of Australia's most powerful business voices have called for the Abbott Coalition government to change rules seen as deterring direct investment from overseas companies, particularly those from China.

"Part of our problem is really creating an environment where the rules are known, and they are predictable," said Business Council of Australia chief executive Jennifer Westacott during a conference on bolstering business ties with China.

Chinese investors have strongly criticised Australia's foreign investment regime, which requires big potential investments to be approved by the opaque Foreign Investment Review Board. The FIRB then makes a recommendation before a final decision by the Treasurer.

The FIRB has approved the vast majority of investments, but has rejected a number of high-profile deals and has otherwise been seen as presenting excessively high hurdles. In September 2009, for example, China Nonferrous Metal Mining (Group) terminated a $505 million ($US470m) bid for a controlling stake in rare-earths miner Lynas Corporation over tough conditions imposed by the FIRB.

In 2008, the country's then-Labor government imposed extra scrutiny on investments by state-backed enterprises and sovereign wealth funds just as China's Chinalco Mining Corporation International--the world's second-largest alumina producer--was targeting Rio Tinto for a $US19.5 billion takeover. Chinalco subsequently walked away.

Since then Chinese companies have complained bitterly about the FIRB's opaque decision-making process. China's government has raised the issue of investment rules in negotiations with Australia on a free-trade deal that both countries hope to conclude this year.

Chinese investment in Australia fell 10 per cent last year as its total overseas investment grew, a KPMG survey found last month. There was an increase, though, in investments in Australia involving smaller to medium-sized Chinese investors, which haven't been hit as hard by FIRB rulings.

Reserve Bank of Australia board member Heather Ridout said there had to be more consistency and predictability in investment rules.

"When I talk to Chinese business, that's what they're looking for," Ms Ridout said at the same conference. "They want much more consistency, much more clarity and much more ... ease of doing business in Australia."

FIRB's reputation in China was probably overstated, Ms Westacott said. She noted that the last deal the FIRB blocked, in November, was US agribusiness Archer Daniels Midland US$2.7bn bid to buy Australian grain handler GrainCorp.

Still, Australia should consider adopting practices used elsewhere, such as Canada and New Zealand, in which decisions on foreign investment are published monthly, with accompanying reasons for acceptance or rejection. She said this would help encourage offshore investment at a time when the economy needs fuel for additional growth following the end of a long mining boom.

Australia should also consider a $1.1bn threshold for FIRB scrutiny of private investment, mirroring arrangements for New Zealand and the United States, Ms Westacott said. The current threshold for other countries is $248m.

"Could it be more transparent? Yes. Could the rules be clearer? Yes," she said. "My feeling about foreign investment is that we should say yes until we can show why we say no. It's really part of us being willing to be a big global player."

Prime Minister Tony Abbott's government, keen to reach a trade deal with China, is expected to agree to a $1bn threshold for FIRB scrutiny for Chinese companies only, although extra scrutiny of state-backed investments from all countries would remain in place.

Mr Abbot's government has refused to lift a ban on Chinese telecommunications giant Huawei Technologies taking part in the construction of a new national broadband network because of national security concerns.

Chinese officials have also privately pointed to Huawei's exclusion as also eroding investment confidence in Australia, Australian lawmakers have said.

China's housing prices fell in May for the first time in nearly two years, as fresh data indicate more cities with price declines and weaker sales.

Average new-home prices fell 0.3 per cent in May from April, a turnaround from the 0.1 per cent monthly gain recorded for April and the first decline since June 2012, data provider China Real Estate Index System said.

Year to year, average new-home prices rose 7.8 per cent in May, decelerating for the fifth straight month, after April's 9.1 per cent increase and March's 10 per cent rise, CREIS said, citing data from its survey of 100 Chinese cities.

Prospects for China's property market, an important engine of growth for the country's economy, are souring. More Chinese cities recorded a month-to-month fall in housing prices in May. Out of the 100 Chinese cities surveyed, 62 showed a decline in home prices, compared with 45 in April.

Many home buyers outside more-developed cities, such as Shanghai and Beijing, have shied away from the market in anticipation of further price cuts and difficulties in getting mortgages.

"We almost became home-mortgage slaves last week," said Ou Yibao, a 29-year-old software engineer in Shenzhen, using a term for those paying off mortgages on expensive homes.

Mr Ou, who told The Wall Street Journal two years ago that he was opposed to buying a home, said he was succumbing to family pressure to make the leap. But after realising housing prices may fall, he said this week that he pulled back on the purchase of a 90-square-meter apartment. "We tore up the contract," he said.

In May, home prices in Shenzhen fell 0.85 per cent from April to 30,890 yuan ($US4,944) per square meter, CREIS said.

China's housing market is plagued by a glut of homes especially in less economically developed cities, where developers are introducing discounts and other promotions to beef up sales.

"Home prices in the first and second-tier cities could fall by 10 per cent to 15 per cent," said Johnson Hu, a property analyst at CIMB Securities. "Sales in May have improved from April's figures, but this is due to an increase in project launches. There doesn't seem to be an improvement in the rate of clearing inventory."

Property firms also face higher debt pressures as margins get crimped. Profit margins of developers have been narrowing for the past five years, according to China Real Estate Research Association. The industry's net return on assets has fallen six percentage points since 2009 to the current 11.09 per cent, it said on Thursday

Citing results from a study of 199 property developers, the association said average assets of property companies represent about 190 per cent of debt at present, a drop from nearly 225 per cent in 2013.

"Many developers I talk to these days are more cautious. They are facing fiercer competition and are unwilling to take risky bets on land like they used to back in 2007," said Huang Qili, a 40-year-old Shenzhen-based architect whose clients are mostly operating in less-developed cities.

Ms Huang added that she has to step in to do market research for what she termed as "fly-by-night" developers, who aren't professional builders but "manufacturing types who bought land and just wanted to make money."

"I'm worried about one of my clients in Quanzhou," she said, referring to a city in southern Fujian province. "There are too many apartments getting built there."

China's central government began a campaign about four years ago to damp speculative demand, imposing curbs on purchases of second or multiple homes and squeezing credit to developers and buyers. It had hoped to prevent prices from spiraling too far out of reach of its 1.3 billion people. More recently it has tacitly allowed some cities to roll back those measures, to support prices in the weaker market.

The country's central bank earlier this month urged banks to make funds available for mortgage loans and asked them to offer reasonable rates to home buyers.

Nationwide housing sales have fallen 9.9 per cent by value in the first four months this year from a year earlier, while construction starts slumped 24.5 per cent over the same period, according to official data.

China said Friday it would expand a recent cut in the proportion of deposits that banks are required to hold in reserve, a move designed to help the rural economy and smaller businesses.

The State Council, or cabinet, said in a statement on its website the reserve requirement for some banks would be cut to an "appropriate level, " without giving further details.

Cutting reserve requirements would make more cash available for lending, potentially supporting the economy. The government cut reserve requirements for some "qualified" rural banks in April, without saying by how much. Most banks have to maintain reserves equivalent to 20 per cent of deposits.

The measures could boost the economy in the short run, economists said.

"The announcement enhances our conviction that policy easing should delay the risk of a hard landing to 2015," said Zhiwei Zhang, an economist at Nomura.

The State Council also promised to expand the scope of financing for smaller companies, permitting banks to write off more bad loans and encouraging asset securitisation to ensure more lending reaches the real economy.

In the same statement, the State Council also said temporary policies to cut fees levied on small businesses will now be kept in place permanently.

Friday's moves are the latest in a series of measures intended to support the Chinese economy, which slowed down in the first quarter of the year.

The government has sped up spending on railway projects and slum renovation. Monetary conditions have remained fairly loose, although the government hasn't cut headline interest rates.

Fees for small businesses will be cut, China's State Council said Friday. They had earlier been removed temporarily.

Government departments collecting unauthorized fees will be investigated, it added.

This will have a "significant impact in reducing the cost of doing business and spurring investment," a statement posted on the central government website said.

The government recently introduced measures to support small businesses--including tax breaks and instructions for banks to increase lending.

Small companies continue to struggle, however. The small business sub-index of the official manufacturing purchasing managers' index registered 48.8 in April compared with 50.8 for the large companies sub-index.

Home prices in major Chinese cities posted their first monthly decline in nearly two years in May, an independent survey shows, providing new evidence the once red-hot market is losing steam.

The average price of a new home in 100 major cities declined this month by 0.32 per cent from April to 10,978 yuan ($1902) per square metre, according to the China Index Academy (CIA), the first fall since June 2012.

Prices dropped in 62 cities and were unchanged in one, according to the academy, the research unit of real estate website operator Soufun.

The biggest monthly fall was in Shantou, in the southern province of Guangdong, where prices slumped 3.64 per cent on April.

"Rising market supply and sharp falls in transactions have put relatively heavy pressure on property developers' sales, leading some to beef up promotions and adjust their pricing strategy," CIA said in a statement.

Year on year, new home costs rose by 7.84 per cent in May, 1.22 percentage points lower than April and the fifth consecutive month the increase slowed, CIA said.

But, in 31 of the 100 cities, prices fell on an annual basis, with those in Wenzhou -- a centre of private enterprise and lending in the eastern province of Zhejiang -- dropping most of all, down 8.30 per cent.

The survey added to signs that China's property market is cooling, with analysts pointing to factors including stringent bank loan criteria, expectations of falling prices, and financial trouble among developers.

China's government has sought for more than three years to contain rising property values, while also promising to add to the supply of affordable housing, as price increases stoke discontent among ordinary citizens unable to afford new homes.

Market control measures have included restrictions on purchases of second and third homes, higher minimum down-payments and taxes in some cities on multiple and non-locally owned homes.

But, at the same time, local authorities in the country make much of their income from land sales to developers, and have often rushed to loosen limits on purchases when property prices have fallen.

Among China's 10 biggest cities, Nanjing had the biggest fall in May, with prices going down 1.36 per cent month-on-month, the CIA statement showed.

Only two -- Beijing and the northern port of Tianjin -- had new home prices increase, with the average cost in the Chinese capital rising 0.69 per cent from April to 33,472 yuan per square metre.

That was up 22.39 per cent from a year ago, narrowing from a 23.94-per cent increase the previous month, CIA said.

China's commercial capital Shanghai recorded the average cost of a new home fall to 32,388 yuan per square metre, down 0.43 per cent from a month ago.

Year on year, the price went up by 14.59 per cent, compared with a 15.34-per cent gain in April, the statement said.

China's manufacturing activity strengthened to a five-month high in May, the third straight month of improvement amid slowing overall growth in the world's second-largest economy.

The official purchasing managers index (PMI) reached 50.8 in May, the National Bureau of Statistics said in a statement on Sunday, up from 50.4 in March.

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.

The result beat the median forecast of 50.6 in a survey of eight economists by Dow Jones Newswires.

A private survey published last month by British bank HSBC put China's PMI at a preliminary 49.7 in May -- also a five-month high -- and above April's 48.1.

China's official May result was the highest since a reading of 51.0 in December.

The data 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 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 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.

Officials, including Premier Li Keqiang, have been quick, however, to stress that the target is flexible -- seen as a hint it may not be achieved.

The price of iron ore dropped 4 per cent in offshore trade on Friday night, ending another tumultuous month for the commodity.

Australia’s largest export has now fallen in price for six consecutive months, with Friday’s fall one of the heaviest during that span, even if it doesn’t rate alongside the 8 per cent nosedive seen on March 10.

The commodity now sits at a price of $US91.80 a tonne, well down on the $US95.70 level seen during the previous trading session and about 30 per cent down on from the start of the year. After a month during which prices fell 13 per cent, the commodity is at its lowest level since September 2012 and just over 5 per cent above a five-year low.

Further weakness in iron ore came as Fortescue Metals Group boss Andrew Forrest struck an upbeat tone on the commodity at the end of last week.

“I’m pretty comfortable with the iron ore price oscillating around the $US110 (per tonne) mark,” Mr Forrest told the Australia in China's Century conference in Melbourne.

“It could wander down to $US80, it could wander up to $US140,” he added, while noting that a bet against Chinese growth was bound to lose.

Meanwhile, global mining giants BHP Billiton and Rio Tinto are set for a rough start to the week on the ASX after the London-listed stock of the two firms dropped by 3.7 per cent and 4.1 per cent, respectively.

The iron ore price falls have been driven by concerns over the cooling Chinese economy, with two data reads over the weekend potentially clouding the picture.

Data from the world’s second-largest economy showed house prices falling for the first time in two years, while the manufacturing sector expanded more than expected.

Clive Palmer, the federal member for Fairfax and a mining billionaire, used to be Beijing’s best friend in Australia. Back in 2011, he infamously called the Foreign Investment Review Board a “racist” body that discriminated against Chinese investors. “They’ve brought in things like the FIRB in Australia, which is an outstanding racist legislation designed to slow Chinese growth and it is a national disgrace,” he said.

Fast forward three years and Palmer is accusing his former business partner CITIC Pacific, which operates Australia’s largest magnetite iron ore mine in Western Australia, of taking the country’s resources without paying its proper dues (ie not giving him enough money).

The dispute is centred on how to calculate the so-called Royalty B, which includes, among other things, the now defunct long-term benchmark price for iron ore. CITIC Pacific has also claimed that Palmer siphoned off the company's funds to pay for his election campaign costs.

Against the background of constant sniping between the eccentric mining baron and a powerful Chinese state-owned enterprise, Australian political and business leaders are ringing alarm bells about the consequences for the bilateral relationship.  

Colin Barnett, the WA premier, fired off the first shot, saying “Clive has damaged our relationship with China. To put it bluntly, the Chinese hate Clive Palmer. In their view, and I think they are right, he’s taking unfair advantage of an agreement … and he is trying to get more money out of them than was originally negotiated.”

Queensland deputy premier Jeff Seeney also slammed Palmer’s antics, saying he has damaged the all-important economic relationship with China: “Clive Palmer is an embarrassment to Queensland and an embarrassment to Australia.”

So, is Palmer’s public spat with CITIC damaging Australia’s relationship with China, which bought $100 billion worth of goods and services from this country last year?

That question was put to a number of leading Australian executives at last Friday’s Australia in China’s Century conference. Andrew Michelmore, chief executive of Chinese-owned MMG, said the legal stoush casted a negative light on Australian business people.

“The general impression in China is, ‘Gee, you know, you have to be very careful with those people in Australia -- look what happens,’ and the litigation in the public arena, loss of face -- there’s a whole lot of issues,” he told the conference. Michelmore said the highly publicised dispute could potentially drive Chinese investors to search for investment opportunities elsewhere, such as Africa.

Andrew Forrest and Ryan Stokes, both of whom have extensive business dealings with the Chinese, also raised concerns about Palmer’s behaviour towards Beijing. “If someone is talking in their book as being China’s absolutely best friend one moment and worst enemy the next … China’s over 21, it can see straight through that,” Forrest said.

Most concerning however is the negative press coverage in China about CITIC’s misadventure in Australia. The country’s leading business publication, Caixin, describes the situation as “when the state-owned enterprise meets the troublemaker”.

An unnamed CITIC executive was quoted as saying “Clive Palmer is exploiting legal technicalities under the Australian laws to swindle money from us and it will have grave consequences for foreign investors and in particular Chinese investors.”

Luckily, a senior CITIC executive said the company still retains its faith in the Australian legal system but also added it would have to reconsider how it invests in the future, including better understanding of the legal system.

The really important question to extend is: do Chinese investors see Palmer as part of the government? So far, he has largely been viewed as a maverick mining baron with a seat in parliament. But this is about to change.

Palmer’s senate bloc is predicted to share the balance of power in the federal upper house after July, with the likelihood of being able to influence legislation and policy. Given his past erratic behaviour, there is no guarantee he will not use that power to his advantage. It would be seriously concerning for an Australian politician to use his political power to strengthen his commercial position against a foreign investor.

So far, Palmer’s dispute has not deterred Chinese investment, as evidenced by the recent flurry of activity, including Baosteel’s bid for Aquila. But this could change with Palmer’s political ascendency in the new parliament after July.

Palmer’s legal dispute with CITIC is doing Australia a disservice as a stable and welcoming investment destination at a time when commodity prices are under further pressure and countries around the world are competing for Chinese capital. 

All the forecasts point to a strong result for first-quarter GDP growth when the national accounts are released on Wednesday, but while the Aussie dinghy is sitting in calm waters and warm sunshine at the moment, there are storm clouds up ahead.

It looks like March quarter GDP was hit by two beams of sunshine: housing investment lifted domestic demand and a burst of iron ore imports by China lifted net exports. Neither will continue.

The Abbott government’s decision to attempt two big, controversial social reforms (university fee deregulation and GP co-payments) at the same time as increasing taxes and freezing welfare indexation has produced a sudden collapse in consumer sentiment, and increasingly looks like a shot to the foot.

China’s problems are also self-inflicted. The authorities there are simultaneously battling air pollution and the credit boom, both of which were allowed to get out of control.

China’s war against credit and pollution, through tight monetary policy and factory closures, will cost it growth and cost Australia exports.

At the same time, both Europe and America are struggling. The European Central Bank is expected to try some more monetary stimulus when it meets this week, to try to force the euro down and get the banks lending, while in the US business investment has stalled and rising inequality is suppressing household demand.

Opening up tertiary education fees to competition between universities might be a wonderful idea and might drive fees down, as Education Minister Christopher Pyne argued yesterday.

Then again, it might be a rubbish idea. The university business might turn out to be what it seems: an oligopoly with a few powerful players able to set prices. Already, one of the most powerful, the University of Melbourne, has foreshadowed fee increases of up to 61 per cent.

Will Monash Uni really slash its fees instead and go after Melbourne’s market share? Hard to say.

Either way, it’s a big reform that is going to cause disruption and uncertainty, and it was a courageous idea to do it at the same time as bringing down the traditional horror first budget.

Likewise, imposing a price signal onto doctor visits with a Medicare co-payment might be a good idea too. Something has to be done to limit health costs.

Except the government has decided to channel the money off into a Medical Research Fund, which is tasked with finding more things to go to the doctor for, instead of improving the budget bottom line. In any case, it seems pretty clear that the Medical Research Fund has not softened the blow to consumers of the $7 co-payment.

Bottom line: the government has taken a mallet to consumer confidence at the same time as exports are coming under pressure.

China’s industrial production growth slowed from 9.7 per cent in 2013 to 8.7 per cent in the first four months of 2014.

The sharpest decline happened in the most polluted areas, in particular Hebei province around Beijing, where IP growth fell to below 4 per cent. The dramatic slowdown in Hebei coincided exactly with the State Council’s introduction of its “Action Plan for Air Pollution Prevention”.

Societe Generale’s economists have surveyed all regional data across China and found that the more polluted the region, the greater the slowdown. The six provinces with the highest level of pollutants accounted for 1.3 percentage points of the 1.7 per cent deceleration in the past seven months.

The Action Plan is resulting in factory closures and a campaign to replace coal with renewable energy. A new Environmental Protection Law becomes effective from January 2015, which will introduce penalties that compound daily for polluting factories in place of the previous one-off charge. Also, local officials have to assume responsibility for the oversight of breaches.

The impact of all this on China’s economic growth and its imports for coal and iron ore from China has been underestimated.

Meanwhile, the monetary authorities are living on a different planet, tightening interest rates even as the economy slows sharply and prices decline. Indeed the risk of deflation in China appears almost as great as it is in Europe.

On top of that, China’s export markets in Europe and America look increasingly challenged, with slow growth and weak consumer demand.

The bottom line is that the Chinese government’s target of 7.5 per cent growth is looking optimistic. Already, growth has slowed to 7.4 per cent in the first quarter of 2014.

At Sydney’s White Rabbit contemporary Chinese art gallery, there is a large oil-on-canvas painting called Dawn-Light Fog, which depicts the fateful night on June 4, 1989 when the Communist Party opened fire on student protestors.

The whited-out canvas tries to capture one of the most famous scenes of the protest, when battle tanks rolled down the Chang’an Dajie, or the avenue of eternal peace. But the objects, including tanks and people, are all but invisible -- even from a short distance -- and the notorious line of tanks fades into a few faint brush strokes.

This is precisely the effect the artist wants to show. One of the most defining moments of Chinese history has not been squarely faced in China and the event and its enormous consequences are fast fading from people’s memories.

The artist, Zhou Zixi, who was in Beijing’s Tiananmen Square during the June 1989 massacre, said “After a long time has passed, when we look back down the road we’ve travelled, our suffering, no matter how great, becomes blurry and distant. Like ink spilled over a book, a sudden disaster gradually transforms into a permeating sadness.”

Just days before the 25th anniversary of the Tiananmen massacre, Chinese authorities are leaving nothing to chance. Prominent Chinese-Australian artist Guo Jian, who was a hunger striker 25 years ago, has been detained after he appeared in a Financial Times article about the massacre.

He told the Financial Times, “I didn’t believe it, even though I had been a soldier. In the army I had never seen that sort of violence. Then I saw the tracers and people falling around me -- they were just gone. I suddenly realised, shit, this was war.”

China University of Political Science and Law is also organising a compulsory study tour for all foreign students on June 3rd and 4th. The notice says, “All foreign students have to attend this study tour!”

The authorities in Beijing are still nervous about an event that happened a quarter of a century ago. Yet at the same time they have been highly effective in erasing the massacre from the Chinese popular memory. When American journalist Louisa Lim showed students an iconic photo of the tank man, a brave citizen who defied a column of tanks, only 15 out of 100 recognised the photo.

Lim writes in her new book, The People’s Republic of Amnesia: Tiananmen Revisited, that a new generation of young Chinese knows little of what happened and appears not to care. Even among Chinese students studying abroad, few have shown any interest in learning about their uncensored history.

Many young Chinese have grown up to believe that the Tiananmen massacre was necessary to maintain stability in the country and thus pave the way for China’s economic prosperity. It was the line used by the architect of the crackdown -- Deng Xiaoping, who told a visiting American physicist “if the rebels had had their way, there would have been a civil war”.

But many of the social ills that prompted tens of thousands of students to occupy Tiananmen Square are still with us today -- corruption, inequality and one party rule. Corruption and inequality have gotten much worse over time as material wealth has improved.

The Communist Party, which is very agile in adapting itself to new circumstances, is acutely aware of its precarious situation in the country. China’s internal security budget is in fact larger than its much-hyped defence spending. The party maintains a vast network of cops, censors and spies to keep the population in check.

The new party boss Xi Jinping, who has been in power for more than a year now, has launched an unprecedented crackdown on corruption to offer the party a chance of redemption in the face of increasing public displeasure with endemic graft.

A quarter of a century after the bloody event, Chinese leaders are still unable to face up to their decision to use tanks to quell unarmed students and workers. Though a new generation of young Chinese has grown up with historical amnesia, the seeds of discontent are still everywhere and they only need the right conditions to germinate, namely a major economic downturn.

Lowy Interpreter

TheFinancial Times ran a front page piece last Monday claiming that China has ordered a ban on state-owned companies using Western management consulting companies. It is alleged by senior Chinese sources that “foreigners use their consulting companies to find out everything they want about our state companies”. Beijing's solution will be its usual kind of import-substitution strategy, the “setting up (of) a team of Chinese domestic consultants who are particularly focused on information systems in order to seize back this power from the foreign companies”.

I'm forever hearing gripes about consultants leaking secrets and transferring knowledge between clients. But this is a far more serious charge, and the insinuation is clear. When China is accused of pursuing commerce backed by shadowy state espionage, it will throw the book right back.

Less sensational, but potentially more troubling, was a decision by a Hong Kong court last Friday rejecting Ernst & Young's plea that it could not give Hong Kong's regulator the audit working papers for a mainland company seeking to list there. Sensing danger, Ernst & Young argued its client's information was a Chinese “state secret”.

International accountants can no longer function freely in China. Beijing's Ministry of Finance is proposing new rules that may banish foreign (and Hong Kong) auditors (including non-local personnel from the Big Four) from the mainland. Just as Hong Kong brokers complain of being restricted in China, this confrontation may “spell doom for Hong Kong accountants … because of Beijing's discriminatory policy”.

This issue has been brewing for years. The US regulator, the Securities and Exchange Commission, recently censured the Big Four for withholding “secret” audit documents of Chinese clients listed in America. The SEC made the same argument as its counterpart in Hong Kong: if Chinese companies wish to list overseas, then foreign agencies need inspection rights in order to ensure financial propriety and to protect investors.

At one level, this is simply a regulatory dispute, albeit a pretty nasty one. The formidable Paul Gillis at Peking University reckons things could get worse, and there are a lot of other accounting problems that China and outsiders can squabble over. But it's about far more than counting beans. This is a high-level contest between financial systems and, essentially, power.

I have commented before about China’s dissatisfaction with the global monetary system. China is not an obstructive power. It is, in its way, a committed member of the current economic order. It has strong support at the UN. But it is hedging too, working assiduously to create alternative financial systems to the established ones. 

Last month, Beijing inaugurated the Asian Infrastructure Investment Bank, a direct challenger to the Asian Development Bank, which is based in Manila and sponsored mainly by the US and Japan. Neither country was invited to join the AIIB. Nor was India. China's finance minister Lou Jiwei notes that Beijing's own China Development Bank already “is far bigger than the ADB and World Bank combined”. AIIB is touted as a multilateral “Asian-led” agency. But much, if not most, of the funding will be Chinese. As one researcher said: “Now China has the ability to show the real money.”

After the desperately poor showing of the Western credit rating agencies in foreseeing the US sub-prime mortgage crisis, China has since promoted its own. One of them, Dagong, gleefully downgraded America's sovereign rating last year. The same thing is happening with central bank support agreements, trade agreements, and security partnerships: Beijing is creating a parallel architecture of global governance to the US-led one. Its financial otherworld is both complementary and competitive.

So why does a seemingly obscure and technical contest over ratings and accounting standards matter? Because in the realm of financial capital, the underlying coin is trust. The Big Four accountants stamp an imprimatur of financial good housekeeping. They present a respected and established version -- however imperfect -- of verity, and are trusted by investors. It is notable that Alibaba, shortly to list in New York, employs a Hong Kong Big Four auditor, even as virtually 100 per cent of its operations are with the PRC. China is challenging this convention; it wants to define its own alternative domestic benchmarks of financial trust that one day may become the global gold standard. In the future, 'truth' may be as the Chinese state deems it.

Foreigners may doubt Beijing's ability to create a fundamentally different global discourse. Yet there is reason to believe that in the economic realm, its endeavour will succeed. The finance industry abides by a cynical principle called the 'golden rule': he who has the gold makes the rules. If China continues its rise in relative economic power yet is frustrated by the international ABCs (accountants, bankers and consultants), it will replace them with its own.

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