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China eyes 7% growth minimum

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Chinese Premier Li Keqiang has suggested the country's government would likely intervene to stimulate economic expansion if China's growth rate falls below seven per cent, according to media reports.

Mr Li said at a recent meeting with economists that the government sees seven per cent as the “bottom line” below which the government cannot allow growth to slide, Xinhua News Agency reported.

China's second quarter GDP growth rose 7.5 per cent from a year earlier, on pace with an official 2013 target.

Hong Kong-based economist Chang Jian told Bloomberg News that Mr Li's comments affirmed that the Chinese government sees an acceptable range of growth for this year as being between seven and 7.5 per cent.  

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Chinese premier suggests govt will intervene if growth falls below 7%.
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China bears are safe to come out

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I was invited by the Asian Development Bank headquarters in Manila last year to give a talk on China’s economic challenges including whether its economy could ‘rebalance’ away from investment by increasing consumption, and whether the county was ready for its demographic challenges ahead. After accepting the invitation, I was subsequently told that it was standard ADB policy that I refrain from criticising the Chinese Communist Party and its role in the country’s economy, and it would be preferable if I did not directly criticise their policies.

In the end the talk did not go ahead. I suspect an executive decision by a more senior official was made to effectively withdraw the invitation. As several of my articles in Business Spectator (for example, here and here) would reveal, I would have very little to say about these topics if no criticism of CCP policies were allowed.

But it did reaffirm a few reasons in my mind why international organisations like the ADB, the World Bank and International Monetary Fund are among the last to diagnose structural problems in China.

Take the World Bank’s ‘landmark’ China 2030 report which came out in early 2012. The diagnosis about reform needed in China’s state-dominated economy, and in particular its financial sector, was fairly old news by then. Likewise the argument that China needed to enact these reforms in order to encourage a consumption driven economy: an argument that the IMF ‘ummed and ahhed’ about until very recent times when they overwhelmingly accepted the logic of it (for example, see here.)

Given that the evidence of China’s structural problems have been around even before the Global Financial Crisis and China’s unprecedented investment surge in response to it, why are these well-resourced and authoritative organisations late to the party? I would suggest three reasons – one is institutional, and two are based on human psychology.

Let me explain the institutional. Non-governmental organisations (or NGOs) like the institutions mentioned above serve different functions. But they need the cooperation of national governments to effectively do their work. When the IMF, for instance, analyses the debt and fiscal crisis in the European Union and policies responding to these problems, it can do so without fear or favour because EU governments will see it as their duty and obligation to cooperate with IMF researchers no matter the conclusion of the research. It would be unthinkable for Italy or Spain to deny IMF officials access to briefings, interviews, data or other information if the IMF were to make an adverse finding against the policies of governments in Rome or Madrid.

In contrast, cooperation by officials in Beijing cannot always be assumed, while Chinese officials are not afraid to attack and even intimidate organisations (and individuals) that publish adverse findings. At the very least, denial of access to briefings, interviews, data and other information is not uncommon for individuals and organisations publishing findings that contradict those of the Chinese government. Take the recent Doing Business report by the World Bank which ranked China a lowly 91st out of 185 economies. Rather than accept the criticism as countries with open economies and governments tend to do, Beijing is lobbying to eliminate the rankings altogether. China’s deputy executive director at the World Bank, Bin Han, made the accusation that the report used the “wrong methodologies, failed to reflect facts, misled readers and added little value to China’s improvement of the business environment” – suggesting that Han sees his role as spokesperson for Beijing’s official narrative rather than as a World Bank employee. This is despite the fact that the report and its methodologies are well established and regarded amongst international experts, and that China had little complaint about the World Bank annual initiative when its rankings were improving.

The point is that pressure is brought to bear on high profile institutions and individuals that deviate from Beijing’s official version of developments and analysis. In doing their work these NGOs understandably want to avoid incurring the annoyance or anger of Chinese officials since they need the cooperation of Beijing. The result is usually institutional self-censorship for fear of stirring controversy with a very defensive country despite it being the second largest economy in the world. The final product also tends to be a watered down document that is agreed upon by consensus between researchers, and even sometimes with the subject country when it comes to China.

This is a shame because there are many excellent and ground breaking studies on China by researchers in these NGOs, especially the World Bank, which do not see the light of day. Several have complained to me that pieces of work critical of the Chinese growth model several years ago – and by necessity the role of the CCP in the Chinese economy and policies – languished as ‘working papers’ read by an academic few. They did not see the light of day because taking those positions would have been too awkward for the organisation vis-à-vis Beijing.

Indeed, the World Bank’s China 2030 report was only possible because it reflected a growing consensus formed within China that the role of state-owned-enterprises (SOEs) had become too dominant and that the whole model needed to be reformed. The report was drafted and redrafted in cooperation with many officials in Beijing. By the time one waits for, and secures, that kind of official endorsement and expert-consensus, one is generally way behind the cutting edge of economic research. Tellingly, the report refrains from overtly criticising the CCP or its motivations in maintaining an SOE-led political economy. One has to pity the excellent researchers within these organisations who knew and published about China’s faltering model years before, but will never receive the credit for it. 

The other reasons why these NGOs tend not to take positions on China that are ahead of the curve are based on human psychology. One is that it is very difficult to get senior managers and researchers to change their mind, even when contrary evidence comes to light. Consider your own workplaces. How many people in decision-making positions openly admit that they were wrong on some important matter? Such stubbornness is even more apparent among well-credentialed researchers, whether they are in NGOs, academia or think-tanks. Most people will defend their long-held position by ignoring contradictory evidence or else dismissing it – and those with PhDs will tend to do so eloquently.

To be sure, the future of the Chinese economy is unknown. But the evidence that it is an increasing dysfunctional and unsustainable model has been out there since early this century. Until the last couple of years, the minority who were bearish on China were dismissed and mocked as ‘alarmists’ and ‘provocateurs’ by many who had invested their careers and credibility (and also money) in believing that the Chinese model was invulnerable.

Then there is the matter of herd intellectualism. It is not fatal to the career of a researcher or decision-maker to be wrong – provided that they share the error with the vast majority of other experts and peers. But to be in error when you have stuck your neck out in a minority position is potentially fatal to your standing and reputation. I remember conferences and workshops several years ago when experts would confide in me that they had grave concerns about the Chinese economy. Because this went against the consensus view, their true convictions were rarely aired in public and their instinct was to self-censor when it came to delivering bad news about China. 

Given the weight of evidence, it has now become fashionable to be a China bear. Those who once mocked China bears now offer sage warnings about the Chinese economy – a phenomena that annoys those who have long been sceptical about ‘capitalism with Chinese characteristics’ to no end. As I argued, there is little reputation loss or deleterious career consequences for turncoats because they are in the majority position – then as China bulls and now as China bears.

Coming back to the point of this article, it takes an act of intellectual courage and a willingness to risk one’s career in order to be ahead of the curve in these large institutions. Unfortunately, one is more likely to get ahead by spruiking received and majority wisdom more eloquently and persuasively than the guy next to you.

Whether you are a long-term China bull or bear is up to you to decide. The point of this article is the following:

1.     Don’t exclude awkward evidence or lines of argument, as the ADB demanded that I do.

2.     Dissect and attack the arguments of those with whom you disagree, not their standing or motivation – avoid labels like ‘alarmist’ or ‘provocateur’.

3.     Do not defend your errors at any cost. Remember the allegedly famous quote by John Maynard Keynes: ‘When the facts change, I change my mind. What do you do, sir?’

4.     If you are in a position to do so, reward those who stick their necks out – provided that they give sound evidence and argument for doing so.

Dr John Lee is the Michael Hintze Fellow and adjunct associate professor at the Centre for International Security Studies, Sydney University. He is also a non-resident senior scholar at the Hudson Institute in Washington DC and a director of the Kokoda Foundation in Canberra.

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Major institutions like the World Bank and the Asia Development Bank have been behind the curve on China because of self-censorship. That kept research bullish long after cracks began to appear.
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Markets: Feeling the Xi pinch

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Graph for Markets: Feeling the Xi pinch

Spare a thought for the Chinese officialdom this morning.

China’s government has banned its own party and government agencies from constructing new building for five years and ordered new projects be suspended. This is all in the name of cutting wasteful spending.

It has not been an easy year for Chinese Communist Party cadres, their families, developer mates and local government officials. If they have engaged in questionable activities President Xi Jinping has promised to expose and prosecute them, and business deals are under strain because of such scrutiny. Recent efforts by China's central bank to limit speculative lending resulted in the country’s interbank rate rising to a record high last month.

All this could drive one to drink. But even that is being cracked down on by President Xi’s orders. The price of the clear, fiery alcohol Moutai, used in Chinese banquets, quadrupled in price between April 2007 and January 2012, according to Platinum Asset Management. The price of Moutai has since been treading water which, apart from tea, may be the only officially approved liquid consumed at gatherings that involve Chinese officials.

Meanwhile, all is not good news for Australian miners. Less speculative lending in China's property market means less building and demand for steel. A drop in steel demand will result in less demand for Australian iron ore.

China’s economy grew at 7.5 per cent in the second quarter. Ridding the economy of extravagance and corruption may mean President Xi will have to accept growth that is lower than his stated goal of 7.5 per cent this year. If the president and his new leadership team accept this then Australia’s economy and the earnings of its resource stocks will receive more than a knock.

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The Chinese government's ban on constructing new state buildings could have dire flow-on effects for Australian miners.
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China's HSBC flash manufacturing PMI hits 11-month low

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By a staff reporter

China's HSBC flash manufacturing purchasing manager' index fell to a eleven-month low in July, as weaker new orders and faster destocking weighs on the nation's manufacturing sector.

The HSBC flash manufacturing PMI fell to 47.7 in the month, from 48.2 in June.

Hongbin Qu, chief economist, China at HSBC said the lower reading on the July HSBC flash China manufacturing PMI suggested a continuous slowdown in manufacturing sectors thanks to weaker new orders and faster destocking.

"This adds more pressure on the labour market," he said.

"As Beijing has recently stressed to secure the minimum level of growth required to ensure stable employment, the flash PMI reinforces the need to introduce additional fine-tuning measures to stabilise growth."

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Slowdown in nation's manufacturing sector hastened by weaker new orders.
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China acts amid rising growth fears

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By a staff reporter

The Chinese government has introduced a round of modest measures intended to stoke growth that come as the strongest signal yet that the country's most senior leaders are increasingly concerned amid signs of economic slowdown.

As part of the limited stimulus, small businesses will see the elimination of some taxes, costs will be cut for exporters and funds will be arranged for the construction of railways, according to media reports.

China's cabinet, the State Council, said it hoped the measures would “arouse the energy of the market”.

Under the terms of the “mini stimulus”, the government will eliminate all value-added and operating taxes on businesses with monthly sales of less than Rmb20,000 ($A3,553.14) beginning August 1.

Secondly, approval processes and administrative costs for exporters will be simplified. One such move will include the temporary cancelation of inspection fees for commodities exports and simplified customs inspections of manufactured goods.

Lastly, the government will open funding avenues for railway projects to encourage private investors to participate.

The move comes in the wake of data showing China's economic growth rate slowed to 7.5 per cent year-on-year in the second quarter, with analysts forecasting a further growth decline.

JP Morgan's top China economist, Zhu Haibin, said in a research note that he expects the Chinese slowdown to be countered with a series of targeted micro-measures, rather than a widespread and costly stimulus program like the one China embarked on in 2008, according to The Wall Street Journal.

Senior Chinese government officials recently suggested the Chinese government sees seven per cent as a benchmark below which officials are not willing to allow growth to tumble.

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Govt hopes measures will stoke growth as officials warm to stimulus.
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LIVE TODAY: Australia's opportunity in China

China seeks to halt slowing growth

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AAP

China has unveiled moves to boost growth, including reducing taxes on small firms, as a slowdown in the world's second largest economy shows no sign of abating.

Chinese Premier Li Keqiang announced the measures, including encouraging railway construction and foreign trade incentives, at a cabinet meeting on Wednesday.

Analysts hailed the moves as a mini-stimulus but investors were unimpressed, sending the stock market down 0.60 per cent on expectations the measures are unlikely to arrest slowing growth.

China's economy expanded 7.5 per cent year-on-year in the April-June period, slowing from 7.7 per cent in the previous three months, raising worries the world's second largest economy could be headed for a sharp downturn.

On Wednesday HSBC's preliminary purchasing managers' index for July - a closely watched gauge of manufacturing activity - contracted to an 11-month low.

Among the moves, small firms with monthly sales of less than 20,000 yuan ($3,260) will be exempt from paying turnover tax and value-added tax (VAT) from August 1, the statement said.

"Small businesses... are playing an important role in promoting economic development and market prosperity as well as expanding employment," it said.

VAT is levied on the difference between a commodity's retail price and its cost.

The tax exemptions will benefit more than six million small companies, the statement said.

The government will also set up a fund for railway development and keep the yuan's exchange rate at a "reasonable" level to boost international trade, it said.

Exporters complain a stronger yuan is hurting their overseas sales by making their products more expensive.

China's exports slipped 3.1 per cent to $174.32 billion in June, according to Customs figures, another sign of a further slowdown in the Asian economic giant.

Lu Ting, an economist with Bank of America Merrill Lynch, called the new policies a "small stimulus".

"Premier Li's team has been surely working around the clock to arrest the slowdown," he wrote in a research note on Thursday.

"These three measures will have limited direct impact on boosting aggregate demand in the short term but they can surely help boost confidence," Lu said.

Despite the persistent sluggishness in the domestic economy, China's finance chief earlier this month ruled out the possibility of introducing any major stimulus this year and said the country would focus on structural reforms.

"This year China will not introduce any large-scale financial stimulus policies but will fine-tune its policies to promote economic growth and employment," finance minister Lou Jiwei said.

China in 2008 launched a nearly $600 billion stimulus spending package to boost its economy during the depths of the global financial crisis.

"The (latest) move, obviously not a massive stimulus, is aimed at stabilising growth rather than stimulating the economy for a strong rebound," said Ma Xiaoping, a Beijing-based economist for HSBC.

"It's incorrect to interpret this as a turnaround in policy," she said.

In 2011, China launched policies to facilitate financing for small firms and encourage development of private financing.

In late 2012, China's top economic planner approved around seven trillion yuan ($1.1 trillion) worth of infrastructure projects, including railways and airports.

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Govt moves to cut small business taxes, help exporters as growth slows.
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The unknown effects of a Chinese slowdown

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Graph for The unknown effects of a Chinese slowdown

ChinaFile.com

Barry Naughton

Paul Krugman in a recent post (How Much Should We Worry About a China Shock?The New York Times, July 20) tells us NOT to worry about the impact of a slowing China on global exports, but to be worried, very worried about the indirect and unanticipated effects of a Chinese hard landing. Using the scenario of a five percentage point decline in growth rate – which I suppose means growth at 5 per cent next year – Krugman warns of unpredictable, scarcely conceivable, effects on “politics and international stability.” In fact, you don’t need to stray from the realm of economics to see that the unpredictable side of a Chinese slowdown is what is most worrisome.

Krugman takes strong positions on the most important issues of our day: he is sometimes wrong, sometimes right, but always full of insights and is worth reading. In this case, Krugman is right, but for an uncharacteristic reason: his conclusion is one of breath-taking banality. If China crashes, it will not be the direct and predictable effect on export demand that will be most important, it will be the indirect effects.

Yes, indeed. And if you needed Paul Krugman to tell you that, you haven’t been paying attention for the last, oh, seven years, since during that time period the unanticipated and indirect effects of virtually every major economic event have outweighed the direct and predictable effects. China is certainly no exception. Indeed, at least three crucial facts mean that the aftershocks of major problems in China will be extremely hard to predict.

First, China has not experienced a recession in more than twenty years. Most of the economically active people in China today are young people who have never personally experienced an ordinary recession. Every other economy in the history of planet experiences occasional recessions (at least), and China is unlikely to be an exception. This means that when millions of economic actors in China adjust their expectations to encompass, say, eighteen months of economic contraction, the change in behaviour will be massive and intrinsically hard to predict.

Second, China has massive capacity in virtually every industrial sector. If domestic demand in China falters, businesses with excessive capacity will be in severe distress, and will seek to cut their losses by dumping goods on the global market. This creates the potential for enormous downward pressure on goods prices in many global markets, with unknown consequences.

Third, nobody knows how many bankruptcies will appear in a major Chinese downturn, who will end up being implicated, or what the consequences will be for payment and collateral relations. Defaults and missed payments will ripple out through – at a minimum – the East Asian trading economy. Sudden flows of hot money out of – and perhaps into – China will destabilise financial markets in ways that are hard to predict. Indeed, one of the big lessons of the 2008 Lehman bankruptcy is that the entire global economy requires stable collateral and payments to operate (At least we are a bit better prepared for this one than we used to be).

Now, here’s where Krugman is wrong: he conflates two different problems: slowing down an economy that is overly dependent on investment, but now faces new constraints (very difficult); and unwinding a Ponzi scheme (impossible). China is not a ‘Ponzi bicycle’ economy; it is a real economic miracle, with multiple serious and debilitating Ponzi schemes woven deeply into the fabric, especially in the financial sector. There’s no room for complacency; but caricatures don’t help much, even if they’re painted in the brightest of colours.

RESPONSES

Arthur R Kroeber

Krugman, in my opinion, has never had much of interest to say about China, or for that matter about any developing economy. His most famous foray outside the rich economies was his Foreign Affairs essay of 20 years ago, The Myth of the Asian Miracle”, where he argued that the success of east Asian economies owed far more to factor accumulation than to efficiency gains. While this was broadly true it was also stating the obvious: that’s what developing economies do – mobilise the factors of production. Efficiency-driven growth usually comes later. The more interesting question was why east Asian countries did so much better at this task than many other developing countries. China is just the latest and biggest example of this pattern: it has grown for the past fifteen years mainly by adding physical capital, and now it needs to grow by using its capital more efficiently. That’s a difficult transition. I agree with Barry that our understanding of the risks of this transition is not aided by simplistic caricatures such as Krugman’s.

For me, Barry’s first point – that most people in China have never experienced a recession – is the most interesting. It’s not entirely true – I think the 20 million or so industrial workers who got laid off in Northeast China in the great state enterprise shakeout of the late 1990s and early 2000s saw themselves as living through hard times, and some of them are still economically active. But it’s true enough, and we’ve seen a lot of evidence this year of businesses assuming that a big government stimulus was on its way to restore growth to its former heights. The problem now for the authorities is that they have to let growth slow enough so that businesses have to start focusing on efficiency, but they need to avoid torpedoing business and consumer confidence. That’s a tricky task.

Gordon G Chang

China is approaching the point of “free fall,” the moment when Beijing’s leaders have lost control of the economy.
 
The country is slowing fast. In 2010, China had at least the 10.4 percent growth claimed. Today, among other things, electricity statistics, manufacturing surveys, price indexes, and trade data indicate the country is growing in the very low single digits.
 
Chinese leaders say they will not resort to stimulus, but they are in fact pumping extra cash into the economy through the five largest commercial banks. Moreover, this week’s announcement of new rail construction is, of course, stimulus.
 
Yet state cash is not having the desired effect: these days Beijing gets only 17 cents of output for every dollar of stimulus, down from 83 cents of output in 2007. This means Beijing technocrats are quickly losing the ability to keep the economy going as they essentially have no other tools that can ensure GDP creation. Once this becomes apparent, the Chinese—and foreigners—will lose confidence.

Most analysts expect China to slow gracefully, but the rapid deterioration of growth, which is bound to accelerate, suggests the adjustment will be unexpected, sudden, and catastrophic.
 
So what does this mean for us? First, China’s stockpile of Treasuries in the middle of 2011 was larger than it is today, which means we can finance our deficits without the Chinese. 
 
Second, China is not an engine of global growth. To be such an engine, a country has to buy the products of other countries to stimulate growth elsewhere. Beijing, through predatory policies—intellectual property theft, hidden manufacturing subsidies, and arbitrary administrative actions, among others—has been taking growth from us.
 
Third, China needs us more than we need China. Last year, China’s merchandise trade surplus against the U.S.—a record $315.1 billion—was 136.3 percent of its overall merchandise trade surplus. The Chinese, unfortunately for them, cannot replace the American market, but we can buy goods elsewhere.
 
Fourth, the central government for more than a half decade has been undermining foreign businesses in China, trying through various means to close off opportunities. Foreign companies were never going to have much of a long-term future in the People’s Republic. As soon as a foreign business gets market share, Beijing tries to cut it down to size. Ask Google, for instance. In March, China turned on its propaganda machine against Apple. This month, Chinese regulators are using discriminatory prosecutions to go after international milk, packaging, and pharmaceutical companies.
 
Yes, there will undoubtedly be panic when China fails. But when the dust settles, we will be okay, especially if we understand our relationship with that country.

This article was first published at ChinaFile.com. To read the original click here.

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A Chinese hard landing will have very unpredictable effects on the world economy. China's 20 year growth story has taken place outside the usual scrutiny, so there's little understanding where, and when major disruptions will occur.
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China orders factory closures to fight overproduction

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AAP, with a staff reporter

China's government has ordered companies to close factories in 19 industries where overproduction has led to price-cutting wars, affirming its determination to push ahead with a painful economic restructuring despite slowing growth.

The industry ministry issued orders late Thursday to more than 1400 companies to cut excess capacity that has led to financial trouble for manufacturers.

It also applies to producers of copper and glass and requires some companies to close outright.

Communist leaders are trying to reduce reliance on investment and trade.

But a slowdown that pushed China's economic growth to a two-decade low of 7.5 per cent in the latest quarter prompted suggestions they might have to reverse course and stimulate the economy with more investment to reduce the threat of job losses and unrest.

Nomura economist Zhiwei Zhang that the the government was serious in its efforts to restructure the economy and prepared to tolerate the necessary pain. 

"This reinforces our view that aggressive policy stimulus is unlikely in 2012 and that growth should trend down."

An investment boom and government subsidies to industries such as solar panel manufacturing prompted producers to expand rapidly until supply exceeded demand. Companies have been forced to slash prices, often to below production cost.

The government's overall measure of prices charged by producers has fallen for the past 16 months, threatening a growing number with financial ruin. A major solar panel maker, Suntech, was forced into bankruptcy this year.

Forecasters have repeatedly trimmed their growth outlook for China amid a drumbeat of data showing weakening growth in retail sales, factory output and other economic segments.

This month, the International Monetary Fund last week cut its 2013 forecast to 7.8 per cent from an 8.1 per cent outlook announced just three months earlier. The Fund's chief economist, Olivier Blanchard, said China was the country at the greatest risk of a "large decrease in growth".

Private sector forecasters say growth could dip below 7 per cent in coming quarters.

The country's top economic official, Premier Li Keqiang, was quoted Tuesday by Chinese newspapers affirming the Communist Party's growth target of 7.5 per cent this year. He said the "bottom line" for growth was 7 per cent, prompting hopes among investors for at least a limited stimulus.

Also Tuesday, the cabinet announced a tax cut for small businesses, indicating Beijing is trying to target specific parts of the economy without a costly, across-the-board stimulus.

Thursday's order by the Ministry of Industry and Information Technology said it aims to eliminate "backward production capacity", indicating it also is meant to improve efficiency in energy and resource use.

Other industries targeted include coke, calcium carbide, aluminium, smelting of lead and zinc, paper, alcohol, monosodium glutamate, citric acid, leather, printing and dyeing, chemical fibre and batteries.

The production glut is in part a lingering cost of the multi-billion-dollar stimulus that helped China rebound quickly from the 2008 global crisis.

Beijing pumped money into the economy with a wave of spending, much of it financed by state banks, on building new subways, bridges and other public works.

Higher revenues for state-owned construction companies and suppliers of steel and other building materials propped up inefficient producers and encouraged some to expand.

In the cement industry, Thursday's order calls on companies to shut down facilities with annual production capacity of more than 92 million tonnes. Steel producers were ordered to eliminate 7 million tonnes of production capacity.

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Companies across 19 industries ordered to close where excess production has led to price-cutting wars.
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China to audit govt debt

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AAP

China has called for an audit of all government debt, the national auditor has announced, as concerns grow over official liabilities in the world's second-largest economy.

"In line with a demand by the State Council in recent days, the National Audit Office will organise auditing agencies nationwide to carry out an audit of government debt," the office said in a one-sentence statement on its website.

The powerful State Council, China's cabinet, is headed by Premier Li Keqiang.

The demand for the audit was "urgently" issued Friday afternoon, the People's Daily, newspaper of the ruling Communist Party, said on its website citing a source.

It said the audit office suspended all other projects to prepare for the undertaking and would dispatch personnel to provinces and cities in coming days.

China's debt problem is considered to be a serious potential drag on its economy unless steps are taken to rein it in.

The International Monetary Fund earlier this month estimated that the combined obligations of both central and local governments stood at 45 per cent of China's gross domestic product.

Concerns about the debt burden centre on trillions of dollars of government borrowing, especially by local authorities.

While such debt has helped the investment-based economy expand strongly, economists and the government itself believe it is unsustainable and the growth model should be rebalanced towards consumer demand.

The National Audit Office said it had no more information to announce on the planned audit at present, according to the People's Daily.

Japan, the world's third-largest economy, suffers from an even worse problem. Public debt stands at more than twice the size of the economy, the worst figure among industrialised nations.

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National auditor announces probe as fears over official liability grow.
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China's solar future

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Graph for China's solar future

A weekend deal between Beijing and Brussels to regulate trade in solar panels will limit Chinese firms' growth prospects in the European Union, the world's largest solar market, and force them to step up sales to 'emerging' markets at home and in the United States and Japan.

News of a deal – which had threatened to boil over into a wider trade war covering wine and steel – helped push up shares in Shanghai-listed solar panel makers Hareon Solar and Shanghai Chaori on Monday, outperforming a 1.7 per cent drop on the Shanghai Composite Index.

"It's good news they finally found a solution," said Haiyan Sun, a senior executive at panel manufacturer Trina Solar, which competes against Yingli Green Energy, LDK Solar, Suntech Power, JA Solar and Canadian Solar. "The focus for us is to rapidly develop other markets, like China, Japan and the United States."

Globally, Chinese manufacturers are on track to ship a total of 22-23 gigawatts (GW) of solar modules this year. Total estimated global demand is 35 GW, according to industry analysts.

For Chinese firms, future growth is likely to be in their domestic market, Japan, the United States, the Middle East and South Africa, analysts said.

China's solar panel demand should reach 7-8 GW this year, said Glenn Gu, senior analyst at IHS consultancy in Shanghai, while shipments to Japan and the United States could reach 3-3.5 GW and 2 GW, respectively.

While the small print of the EU deal has yet to be announced, one EU source said it had been agreed that Chinese firms could sell into Europe at a minimum price of 0.56 euro cents per watt, with a total ceiling of 7 GW a year – around half of the EU's 2012 demand of about 15 GW.

Chinese solar panel production quadrupled in 2009-11 to 55 GW as it took advantage of renewable energy market growth amid concerns about climate change. But the global financial crisis and eurozone paralysis forced EU governments to withdraw generous industry subsidies. That, along with cut-price Chinese imports, pushed many European solar firms into bankruptcy.

Anticipating EU restrictions, Chinese solar panel makers revved up sales to Europe in the first half of this year, with exports already reaching 6.5 GW, analysts said. Chinese solar panel sales to the EU reached €21 billion ($A30 billion) last year.

It's unclear if any annual EU quota on Chinese panels covers first-half shipments, but exports to Europe are expected to ease in the current quarter after a surge in April-June, which has left an inventory build-up of about 2 GW.

China capacity

China said earlier this month it aimed to more than quadruple solar power generating capacity to 35 GW by 2015 in an apparent bid to ease a massive glut in its panel industry – which employs thousands and is staggering under heavy debts – and trim its reliance on coal.

But Gu and other analysts question how Beijing can crank up domestic demand given the uncertainties over subsidies to the industry, the country's geographical energy imbalance and a lack of infrastructure needed to harness intermittent renewable energy.

As part of an ongoing restructuring of China's solar panel sector, some of the more than 100 panel makers are likely to go out of business, Gu said, with industry leaders – most of which are US-listed and supply high-quality panels and better warranties – emerging as the winners.

Globally, the solar industry has made significant gains in driving down costs over the last five years, but it has yet to be weaned off big subsidies. Solar power remains expensive – installing 35 GW of solar capacity would cost around $50 billion, plus the subsidies needed for solar producers under long-term power purchase agreements with the government, analysts said.

"Solar power has good development prospects but its cost must come down further," said Bai Jianhua, deputy chief engineer at the research institute overseen by State Grid Corp, China's dominant utility and buyer of renewable power.

"It's not time to embark on large-scale development of solar power. Now it's only time to carry out some development while pushing for technological upgrades," he told Reuters recently, adding this was his personal view.

-- Reuters.

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China may have reached a compromise with the EU over solar, but its growth prospects rest outside Europe.
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China injects funds into banks

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China's central bank says it has injected 17 billion yuan ($A3.06 billion) into the domestic banking system after a liquidity squeeze rocked financial markets in the world's second-largest economy last month.

The People's Bank of China on Tuesday injected the cash into the domestic interbank market by offering seven-day reverse repurchase agreements, it said in a statement. It was the first such move since February.

The bank regularly conducts open market operations, including offering bills and repurchase agreements, on Tuesdays and Thursdays to adjust liquidity levels in the interbank market.

It had not conducted any open market operations since late June, when it drained liquidity from the market in a crunch that sent the interest rates banks charge to lend to each other to record highs.

That increased worries that banks could tighten credit, which could hamper the ailing domestic economy, and caused days of turmoil in Chinese financial markets.

Analysts said the central bank's latest cash injection indicated its intention to ease liquidity conditions in the banking system.

"The central bank is paying attention to liquidity conditions, indicating its stance that it will try to fix any liquidity issues that might occur," Sinolink Securities analyst Tao Jinggang told AFP.

The news helped boost sentiment on mainland stock markets, with the benchmark Shanghai Composite Index up 0.7 per cent on Tuesday.

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Central bank hopes funds will help domestic banks' liquidity squeeze.
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Cochlear faces China competition

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Cochlear Ltd's strength in the Chinese market is under threat as Chinese bionic ear maker Nurotron Biotechnology has received approval allowing it to compete with Cochlear for lucrative Chinese government contracts, according to The Australian Financial Review.

Nurotron has been granted approval to provide implants to children, allowing it to participate in the Chinese government's five-year program, which launched last year, to provide underprivileged children with hearing implants.

Nurotron also said it plans over the next four years to build a new factory that will be 10 times the size of its existing facility.

The first test for both firms will come via a key government tender in August.

“We think we have a good chance of winning because the government likes to support Chinese technology and Chinese companies,” Nurotron chairman Li Fangping told the AFR.

“This is good news for poor families across China because we can offer good quality products at competitive prices.”

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Chinese rival given permission to compete for key govt contracts.
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China's new leaders crack down

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Graph for China's new leaders crack down

As the new leadership further consolidates its grip on power, three significant announcements have been made in the past week underscoring the leadership’s growing political confidence and willingness to tackle some of the big challenges facing China. These have been continuing to crack down on corruption and abuse of Party power and privilege, addressing municipal indebtedness, and correcting some of the imbalances created by state-owned enterprises’ easy access to credit (which has resulted in overcapacity in key industries).

On July 25, the trial was announced of former Chongqing Party Secretary and one-time leadership aspirant Bo Xilai. He is to be tried for fraud and abuse of official power. The “abuse of power” charge may be a reference to an alleged official cover up of the murder of Englishman Neil Heywood by Bo’s wife, Gu Kailai.  She was convicted for this crime in August last year. It may also refer to Bo’s so-called “anti-mafia” campaign in Chongqing where he is accused of arresting businessmen and confiscating their property for his own gain under the pretext of a crack down on crime. 

Once a defendant goes to trial, a guilty verdict is a given. The big unknown is whether Bo will plead guilty to any of the charges. As a proud ‘princeling’, who had been imprisoned and tortured during the Cultural Revolution, his pride may prevent him from pleading guilty and he may have the will to resist.  Refusal to go along with what is a political trial has likely delayed its start until now.  This is a real risk for the new leadership as a ‘not-guilty’ plea would be a rallying point for Bo’s supporters. That he has gone to trial now suggests a ‘guilty’ plea has been secured or that the leadership feels confident to manage the political fallout of a “not-guilty” plea.

Last week the government announced a five-year moratorium on the construction of government buildings that is supposed to be strictly enforced.  This is part of the broader anti-waste and extravagance campaign directed internally, in the Communist Party. While welcome, much of the construction and waste has already occurred. Across China in the remotest of locations bizarre government and Party buildings crowd the landscape.

In Yinchuan, capital of Ningxia Autonomous Region, for example, the Party and government buildings are small-scale replicas of Washington’s Capitol building and other buildings around the Washington Mall. Even if they lack the democracy that Washington symbolises and embodies, it is interesting that the good officials of Yinchuan want its buildings.

Then on Sunday in a tersely worded announcement the National Audit Office said that it was told by the State Council to stop its other work and conduct a national audit of municipal government debt. This attests to the concern at the central government over the level of build-up of municipal government debt and the attention being given to it by international and domestic markets.

This is the second time that such a national audit has been conducted, but this time it would seem the new government is determined to address growth of municipal debt. Considerable uncertainty surrounds government debt levels in China, but debt does not seem to be as scary as many commentators suggest.  As a share of GDP, measures of total government debt at all levels range from 40 to 50 per cent of GDP according to the IMF, much less than for many developed countries. Of this, municipal debt may be around half the total. 

The issue is more one of the share of municipal debt that is non-performing or at least doubtful. The moratorium on government office construction suggests that concern over non-performing debt is driving the national audit and whatever policy responses ensue. One plan is for the central government to issue bonds to pay for continuing infrastructure expenditure – a necessary element in keeping growth in the 7 per cent plus range – while putting pressure on local governments to repair their balance sheets.

The third important announcement in recent days suggests the government may also be preparing to take on the state-owned enterprise sector. It has ordered a cut in the excess production capacity of nineteen key industries, including steel, non-ferrous metals and construction materials. Again, this is not the first time excess capacity has been targeted by the government, but it just may be that on this occasion the new team is determined to do something about it.

All of these are difficult areas and the previous leadership had tried to tackle these problems without success, but also without evident enthusiasm for the task. That the new team has put these on the policy agenda early in its term points to their acceptance that these are pressing problems that need to be addressed. It also highlights the new leadership’s confidence in its position politically. Reigning in municipal debt and excess capacity in the state-owned enterprise sector will be a major test of the new leadership’s reformist credentials. With Bo Xilai out of the way, they should have the political authority to be bold.

Dr Geoff Raby is chairman and chief executive of Beijing-based advisory firm Geoff Raby & Associates, and a former Australian ambassador to China. He is a Vice Chancellor's Professorial Fellow at Monash University and a member of the Board of Directors of Fortescue Mining Group and Yancoal Australia.

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Decisions to send Bo Xilai to trial, audit local government debt and curb state-owned enterprise credit show China’s new leaders are getting serious about reform.
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Markets: Stevens shrugs off Chinese growth fears

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Graph for Markets: Stevens shrugs off Chinese growth fears

China sceptics beware – Glenn Stevens is not on your side.

In reply to a question yesterday as to whether he is concerned about a slowing Chinese economy, the Reserve Bank of Australia governor replied that such a concern was more problematic to forecasters.

Those at investment banks who are agonising over whether China’s economy will grow at the government’s official target of 7.5 per cent probably had previous forecasts that were “unrealistically large,” Stevens told his audience drawn largely from the financial community.

“We’re all still adjusting our expectations” toward the Chinese economy, the central bank chief says. Longer term, Stevens suggested, economists may have to accept Chinese growth rates of 5-6 per cent. That doesn’t mean that Australia’s economy is going to be damaged as a result, he says.

In his prepared remarks to the Anika Foundation luncheon yesterday, Stevens told his audience:  “there has been a large lift in the global demand for natural resources that our country happens to have in abundance”.

“Most people agree that the rate of growth of that demand will be lower in the future than it has been in recent years… but the lift in the level of demand we have already seen is permanent enough and large enough to have quite a persistent effect on our economy,” says Stevens. “Australian production is meeting much of the additional global demand for iron ore and, prospectively, natural gas.”

The spot price for iron ore imported through the northeast Chinese port city of Tianjin was $US130.90 a dry tonne yesterday, according to Bloomberg data. On March 27, 2009 it was $US59.10 and its average price since then has been $US136.593, according to Bloomberg. In the last 12 months the US natural gas futures contract traded on the New York Mercantile Exchange has gained 6.8 per cent, according to Bloomberg.

What is more concerning to Stevens is China’s shadow banking industry or the availability of credit financed through high-paying interest rate products outside the official financial system. How China manages the shadow banking system “back to earth gently,” says the Reserve Bank chief, “is the key question mark” for the world’s second-biggest economy.

Chinese state owned banks borrowing costs are the highest they’ve been in more than a year, Bloomberg News reports. Bad loans in the three months to March 31 increased for the sixth straight quarter. On July 28 Beijing announced an audit of local governments amid concerns some may struggle to repay debt.   

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The Reserve Bank governor is more interested in how China’s government will manage its shadow-banking sector than its slowing growth.
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Aust problems a 'luxury': economist

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A prominent economist has suggested Australian economic concerns should be seen within the broader context of problems elsewhere in the world, arguing that the country is well-equipped to manage a downturn, according to The Australian Financial Review.

Citi global chief economist Willem Buiter said the global economy is at a crucial point as it witnesses a slowing of emerging market economies, led by China, and the strengthening of a United States economic recovery.

He indicated that China's credit and infrastructure boom is a cause for concern, but stressed that Australia is not as troubled as some may be suggesting.

“Australia's problems are luxury problems compared to the rest of the world,” Mr Buiter told the AFR.

“If the economy were to get another unpleasant hit from China or elsewhere, you have monetary ammunition and fiscal ammunition in the tank which would be of considerable envy to a finance minister in Europe.”

He added that Australian banks' dependence on home lending is a “source of potential fragility”, the AFR added.

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Citi chief economist says Aust well-equipped to manage downturn.
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China manufacturing PMI lifts

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By a staff reporter, with AAP

Activity in China's manufacturing sector expanded more than expected in July, according to official figures.

China's manufacturing purchasing managers' index for July printed at 50.3, a slight lift from June's 50.1.

Bloomberg economists had expected a result of 49.8.

A reading above 50 indicates expansion in the sector, while below 50 points to contraction.

But HSBC's flash manufacturing purchasing manager's index printed at 47.7, lower than June's 48.3 read, showing contraction.

Worries over China's economy have intensified this year after an expected rebound failed to appear.

China's economy grew 7.8 per cent in 2012, its worst performance in 13 years.

The economy has weakened further this year, with growth in the April-June period dipping to 7.5 per cent, from 7.7 per cent in the first quarter and 7.9 per cent in the final three months of last year.

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Official data shows activity in the nation's manufacturing sector expands more than expected in month.
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HSBC manufacturing PMI falls in July

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By a staff reporter

China's manufacturing sector slowed in July as domestic demand and exports weakened, according to a private survey.

HSBC flash manufacturing purchasing manager' index printed at 47.7 in the month, in line with expectations and after a read of 48.3 in June.

The survey found a further contraction in new orders and said output has slowed for two consecutive months.

HSBC also noted the biggest shrinkage in employment levels since March 2009.

A reading above 50 indicates expansion in the sector, while below 50 points to contraction.

Prior to the release, official data showed activity expanded more than expected, printing at 50.3 compared with June's 50.1.

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Economy shrinks faster than in the previous month, according to a survey.
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China's Alibaba bans customers from using Tencent's WeChat

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China's Alibaba Group, whose expected IPO could value the e-commerce company as high as $100 billion, has banned its customers from using Tencent Holdings' popular WeChat mobile messaging app to do business on Alibaba sites like Tmall and Taobao.

Some merchants have been using WeChat to directly communicate with customers and encourage them to do business outside of Alibaba's transaction systems, Alibaba Group said in a statement.

"We have therefore decided to temporarily suspend the subscription of WeChat-related applications in the seller-side service app market and encourage our sellers to conduct their marketing activities in a safe and legitimate manner," the company said.

In some cases sellers had also harassed other users. Alibaba said there is no timeline for when the ban might end, but it would "monitor the situation closely."

Tencent officials declined to comment.

WeChat, which has more than 300 million users in China and 70 million overseas, has usurped Sina Corp's Weibo microblogging service to become China's most popular social messaging app.

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Stops customers from using the mobile messaging app while on its e-commerce platforms.
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Chinese homes sales climb in July

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AAP

The rise in home prices in major Chinese cities accelerated in July, a survey shows, as the government suggests it might not take further steps to tighten the market.

The average price of new homes in 100 major cities rose 7.94 per cent year on year last month, up from an increase of 7.4 per cent recorded in June, according to the independent China Index Academy (CIA).

That brought the average cost of new homes to 10,347 yuan ($A1870) per square metre, said the CIA, which is owned by Soufun Holdings, China's largest real estate website operator.

Month on month, the price increased 0.87 per cent, marking the 14th straight month of growth and accelerating from June's 0.77 per cent.

The academy said the pickup in prices last month was led by rising uncertainties about the economy, which eased concern about new measures aimed at tightening the property sector.

Worries over the world's second-largest economy have intensified this year after an expected rebound failed to appear.

China's gross domestic product grew 7.8 per cent in 2012, its worst performance in 13 years.

It has since weakened further, with growth in the April-June period dipping to 7.5 per cent, from 7.7 per cent in the first quarter and 7.9 per cent in October-December.

Beijing last week unveiled steps to boost growth, including reducing taxes on small companies as well as encouraging railway construction and foreign trade incentives.

It said on Tuesday it would promote the stable and healthy development of the domestic property sector, official media reported, in contrast to previous remarks about regulating the market.

The academy expected policies governing the sector to stay steady in the coming months, credit control to be "reasonable" and prices to continue to rise as a result.

"In the next half of the year or over an even longer period of time, the stabilising macro environment will help release further demand for homes and sales and prices will be in upward momentum," it said.

Property prices are a sensitive issue in China and authorities have sought for more than three years to control their rise.

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.

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Data comes as govt hints it may not move to tighten home market.
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