When China released its GDP growth figures earlier this week, all eyes were on the hard economic data, such as the rate of growth and retail sales figures.

Most reports, however, have overlooked one of the most important datasets, which was buried at the end of a lengthy press release: the country’s shrinking labour force.

China’s working age population (between 16 and 60) declined by 3.7 million, the third consecutive year of continuous decline. The number of new urban workers also decreased from 11.88 million in 2012 to 10.70 million last year.

What is interesting is that China’s National Bureau of Statistics just changed its definition of working age from 15 to 59 to 16 to 60 in 2013 in an attempt to shore up the alarming numbers.

The trend is unmistakable: China is losing able-bodied workers at an ever faster rate. Who would have thought that China, the most populous country in the world, would eventually run out of surplus workers!

The contraction in the workforce is likely to get worse. The Chinese Academy of Social Sciences estimates the labour force will decline by 1.55 million people every year before 2020, 7.9 million between 2020 and 2030 and a staggering 8.35 million between 2030 and 2050.  

The country’s population decline is also made worse by China’s notorious one-child policy, which was relaxed considerably last year and the long-standing culture of preference for men over women. Thanks to the one-child policy, China has one of the lowest birth rates in the world. In 2011, the fertility rate was 1.04 and 1.18 the year before, according to data from the National Bureau of Statistics.

The birth rate in China is less than half of the world’s average and significantly below the fertility replacement rate of 2.2, which the country needs to maintain its current level of population. Models tell us if the current trend persists -- which is likely -- China’s population could shrink by as much as one third between 2030 and 2070. 

In addition, China also has one of the worst sex ratio imbalances in the world. There were 100 female babies born to 115 male babies in 2014. By comparison, a healthy sex ratio should be between 102 and 107.  

After years of foot-dragging, data fabrication and resistance, Beijing finally relaxed its one-child policy, allowing eligible young couples to have a second child. The county’s Family Planning Commission estimates there are up 20 million eligible young people who could have a second child, yet the take-up rate has been extremely disappointing.

In Sichuan, one of the country’s most populous provinces with more than 80 million inhabitants, only 28,646 couples applied -- and only 5,530 of these applications were approved. Figures for major metropolises like Beijing and Shanghai are much worse. In Beijing, only 2,300 couples applied to have a second child in a megacity of more than 20 million people.

Instead of a mini baby boom after relaxing the one-child policy, the country will continue to face first a gradual and then sharp decline in the working age population, which will put more and more pressure on China’s fragile and inadequate social security system.

China needs to do couple of things quickly. First, it must eliminate or at least significantly cut back on the regressive and harmful one-child policy. It goes to the heart of China’s economic future as well as its social stability. Beijing only needs to look at Japan to have a glimpse of its potential future.

China’s leading economists and demographers have argued that the government needs not only to get rid of the one-child policy, but it must also introduce measures to entice more young people to have babies. Maybe the government needs to come up with a slogan like former Treasurer Peter Costello’s “One for mum, one for dad and one for Australia.”

One of the leading advocates is Liang Jiangzhang, a successful entrepreneur and a Stanford-trained economist taught by the late Gary Becker, one of the world’s most influential population economists. He says it is possible that China would face another collapse in the birth rate, similar to the one experienced in 1990.

“The government should not only completely free up its birth policy, it must also seriously think about introducing a range of incentives to boost birth rates and launch a campaign to promote young people to have more babies,” he told Caixin, a leading business publication.

The power of the Family Planning Commission must be curtailed. The irresponsible bureaucracy has been consistently understating the country’s demographic crisis and fabricating the fertility rate in the face of mounting evidence to contrary. There are also question marks over the billions that the commission collected from citizens that breached the one-child policy.

Japan’s current woes should be a wake-up call for Beijing. There is every possibility that China might end up in a worse position than its neighbour. At least Japan got rich before it turned grey, whereas China may end up with a lot of wrinkles before it becomes prosperous. 

China’s ‘war on pollution’ is facing an uphill battle despite the government’s much–vaunted efforts. Authorities launched their first salvo as soon as the new year began. A new, tougher environmental protection law was announced almost as the first order of business. Steel production will be slashed and coal consumption caps are on their way too.

But it only took a couple of weeks into 2015 for Beijing’s municipal environment authority to put out its first smog warning for the year. Last week, the Air Quality Index reading from the U.S. embassy went as high as 545 -- over 20 times the World Health Organisation’s level of ‘unhealthy’.

The problem doesn’t look like it’s going away any time soon. 171 out 190 cities exceeded China’s own limit on annual emission of particulars (PM2.5) in 2014, according to Greenpeace. PM2.5 particulate matter is the most dangerous because its small particles can penetrate deep into the lungs.

According to statistics from China’s Ministry of Environmental Protection, cities in China’s Yangtze River Delta, Pearl River Delta, and Beijing-Tianjin-Hebei region suffer over 100 haze days every year, with PM2.5 concentration two to four times above the World Health Organization guidelines. In 2010 in Beijing alone, PM2.5 pollution could be attributed to 2,349 deaths.

That such data is now publically available is a sign of enormous progress from only a few years ago. Faced with a government with its head in the sand over the issue, citizens took matters into their own hands in 2012 and purchased their own air quality monitors and posted the readings online.

The ever-increasing public pressure from a fed-up citizenry has seen the issue sky-rocket to the top of the government’s list of priorities. Even Premier Li Keqiang is a convert. When asked about the issue, he freely admits to checking the AQI on his smartphone every day.

But the problem is not going away any time soon and in the meantime, awareness is becoming more and more widespread. After prominent citizens like real-estate mogul Pan Shiyi started blasting AQI readings out to his now 17-million plus Weibo followers every morning, the train was well and truly set in motion.

In November last year, internationally renowned director Jia Zhangke joined up with Pan to make a promotional video about the smog issue and SOHO’s attempts to make buildings that keep the bad air out and the water clean.

Now, Jia is continuing his campaign with the environmental activists at Greenpeace. A short-film by Jia, ‘Smog Journey’, was released onto Chinese social media today. The hard-hitting film features babies breathing through respirators in hospitals and smog-covered cityscapes filled with crowds of people wearing the now ubiquitous facemasks.

The film traces the lives of two families in Hebei Province and Beijing – one a mining family and the other a fashion designer in the capital. Coal consumption in Hebei province, which borders Beijing, reached 313 million tons in 2012, and is a major contributor to smog: of the 10 cities with the worst PM2.5 air pollution, seven of them were in Hebei.

The creator of the 2006 feature Still Life, which won the coveted Golden Lion at the 63rd Venice International Film Festival, is not exactly a household name in China. While his films have garnered plaudits on the world stage, they are often banned from distribution domestically. Nonetheless, Jia boasts over 1.5 million followers on Weibo.

“I wanted to make a film that enlightens people, not frightens them. The issue of smog is something that all the citizens of the country need to face, understand, and solve in the upcoming few years,” Jia said in an interview with Greenpeace.

The film points to positive signs of progress as a schoolchild marks the morning’s PM2.5 reading on a blackboard and it ends with an ominous call to action — “Clean air doesn’t come to those who wait”. It seems Jia might not want to frighten his fellow citizens, but the people who lead them.

"One thing that fascinated and shocked me the most was the fact that even on smoggy days, people still lived their lives as usual," says Jia.

"When the Air Quality Index hit 200 or 300, and the air turned opaque or grey, I still saw people dancing their square dances, young people still hanging out. Everyone was doing what they would normally be doing."

While government has being making the right sounds, China’s new leaders have overseen a tightening of restrictions social media and other avenues civil society have used to push the issue this far.

In September 2013, Pan Shiyi himself appeared on state-run TV to warned of the dangers of “casual” online posts and arguing that users should be “more disciplined” and have a sense of “social responsibility”.

The window for ordinary citizens to have a say on how the problem is dealt with may already be closing. On his own Weibo account, Jia Zhangke has taken an enigmatic approach. He’s staying off the platform for a while, he posted yesterday, while he focuses on opening up a noodle shop in his hometown in Shanxi.

Curiously, the noodle shop hasn’t been found, despite the best efforts of his fans. They suspect he’s working on a new film.

China's luxury market shrank last year, a global consultancy says, attributing the decline - the first it has detected - to a national anti-corruption campaign, slowing economic growth and changing consumer tastes.

Sales of luxury goods in mainland China fell one per cent to 115 billion yuan ($A22.86 billion) in 2014 compared with a year earlier, Bain & Company said in an annual report.

The consulting firm, which has been surveying the market since 2000, said it was the first time the industry had contracted.

China has become an ever more important destination for luxury goods manufacturers as the ranks of its wealthy have been swelled by a decades-long boom.

Swiss giant Richemont, the world's second-largest maker of luxury products, said in November that its 2014/2015 first half net profit dropped 23 per cent because of weaker demand in China.

Bain's China Luxury Market Study said the overall decline last year was because of the "continued impact of anti-corruption and frugality campaigns undermining 'luxury gifting'".

Slowing sales of high-end watches, menswear and leather goods contributed the most to the decline, the consultancy added.

Chinese Communist Party chief Xi Jinping has overseen a much-publicised anti-corruption drive since taking power in late 2012, targeting high-level "tigers" and low-level "flies".

A parallel austerity campaign has also has sought to curtail extravagant gift-giving, banquets and other excesses in the ruling party and government.

Bain added that China's slowing economic growth was "exacerbating the issue".

China's economy expanded 7.4 per cent in 2014, its weakest pace in 24 years, official data showed on Tuesday, and authorities are emphasising a "new normal" as they retool the country's growth model to one they hope will be more sustainable.

The consulting firm also stressed that China's luxury market is becoming more diverse.

"The field of luxury brands in China is breaking wide open," Bruno Lannes, the Bain partner who wrote the report, said in a statement.

"Brands' future positioning and popularity within the luxury market hinges on their willingness to revamp concepts to serve the needs of the increasingly sophisticated and well-informed Chinese consumers, while managing the growing diversity of sales channels, such as daigou," Lannes said.

Daigou is a Chinese word for personal shoppers abroad who purchase luxury goods and send them to customers in China.

Bain said that the daigou market increased in 2014 to an estimated 55 to 75 billion yuan, led by cosmetics, leather goods, watches and jewellery.

The consultancy said that Chinese now purchase 70 per cent of luxury brands either overseas or through daigou agencies.

The government has reached a deal to almost triple the intake of Chinese tourists over the next two years boosting Australia’s share of a rapidly increasing and lucrative Chinese tourist market.

The tripling of air capacity is part of the government's broader strategy to attract more Chinese tourists, who make up nearly 20 per cent of total incoming tourists. 

“Making it possible for Asian markets to grow has been a key priority for the Abbott Government, and this new deal with China will allow Chinese airlines to almost triple their services to Australia over the next two years,” Mr Truss said.

The new deal will mean an increase of 4000 weekly seats between Australia’s major gateway cities and Beijing and Shanghai Guangzhou — an 18 per cent increase of up to 26,500 seats.  The capacity will be boosted by 7000 seats over the next two years to a total of 33,500 weekly seats.

Trade and Investment Minister Andrew Robb, who is responsible for tourism, said tripling aviation capacity from China into Australia over the next two years will ensure Australia can capture a share of China’s booming overseas tourism market.

Last year, Chinese tourists made more than 100 million  trips over seas.  Australia  accounting for 789,300  in the year to September 2014.

Chinese tourists added $5.3 billion to the Australian economy in the last 12 months, up 10.5 per cent from the previous year, according to Tourism Australia. That figure is expected to exceed $13 billion by 2020.

An online visa application trial which began in December is expected to further boost tourist numbers. The U.S. and China have also signed a deal allowing 10 year visas for those travelling from China to the US or vice versa.

International traffic for Chinese carriers is expected to grow over 15 per cent this year on the back of these visa changes  according to a new report by Citi.

"The US recently loosened visa requirements for Chinese visitors. The UK, Japan and South Korea also promised to relax the visa application process. We expect more countries to follow this trend in the near future, which should significantly boost international traffic,” the Citi report said.

Mr Truss said China's agreement to remove any requirements for government approval of airfares in China would make it easier for Australian airlines to do business there.

“The Australian Government is committed to ensuring that we have the aviation capacity necessary to meet future demand into and out of foreign markets and recognises the potential of Australia as a prime tourism destination within the Asia-Pacific region.”

Activity in China’s manufacturing sector has contracted for a second consecutive month in January, HSBC has confirmed.

French regulators have cleared the way for Chinese conglomerate Fosun to buy the holiday resorts group Club Med and have set February 9 as the closing date for the offer.

The Financial Markets Authority (AMF) said on Thursday that stock market operator Euronext Paris "will make known, in an announcement, the conditions for completing (the deal) and a detailed calendar."

Fosun is offering 24.60 euros per share, which values the famous French vacation villages group at around 939 million euros ($A1.35 billion).

Fosun - which has worked with Club Med in expanding its activities in China - fought a long bidding war against Italian businessman Andrea Bonomi's Global Resorts.

The takeover battle, which began in May 2013, is the longest in the history of the Paris Bourse.

After weathering a rough business climate over the past decade, Club Med has improved its financial health by targeting higher-end clients, particularly among wealthier sections of emerging economies.

According to Club Med figures released in December, 80 per cent of the 25,000 new clients the group attracted in 2013 were Chinese or Brazilian.

The Fosun deal is 91 per cent Chinese investment with the balance including the French investment firm Ardian and the management of Club Med.

PARIS— Rémy Cointreau said Thursday that sales fell less sharply in its latest quarter as the French drinks maker is slowly emerging from a dramatic demand slump in China.

The maker of Rémy Martin cognac said third-quarter sales fell to €269.1 million ($311.83 million) from €287.6 million a year ago, marking another improvement that began to crystallize in the first six months. Rémy Cointreau’s financial year runs from April through the end of March.

Stripping out currency moves, acquisitions and disposals, sales fell 1 per cent in the quarter, compared with drops of 5.5 per cent in the second and 5.7 per cent in the first quarter and double-digit drops last year.

Sales of expensive liquor declined in China when the government banned extravagant gift-giving among officials more than a year ago.

Rémy Cointreau has been among the hardest hit from the anticorruption campaign by the Chinese government. The company relies for more than half of its sales and margins on its flagship Rémy Martin cognac, for which China was one of the biggest markets.

Convinced that ultrarich Chinese will ultimately return to sipping from the world’s most expensive bottles of cognac, Rémy Cointreau has stuck to its strategy throughout the Chinese demand slump, refusing to launch cheaper drinks or cut prices.

Drinks makers have signs of improvement lately. Rémy Cointreau said shipments to the greater China region for its Rémy Martin cognac increased in the latest quarter compared with the same period last year.

Rémy Cointreau said that it still targets organic growth both in sales and operating profit in the full year. This target excludes the loss of a distribution contract in the U.S., which would have weighed on sales further.

SHANGHAI—China’s central bank injected cash into the money markets Thursday using short-term instruments it hasn’t used in a year, spurring speculation that further loosening of monetary policy may be on the way as the economy grows at its slowest rate in more than two decades.

The People’s Bank of China offered 50 billion yuan ($8 billion) of seven-day reverse repos, a short-term lending facility to commercial banks, in its open-market operation Thursday. It last used these in January of 2014, and it was the first net addition of funds since mid-December.

The move to keep the banks flush with cash comes ahead of the Lunar New Year holiday next month when demand for funds normally increases substantially as people spend on gifts and dining. It may also help calm markets after stocks tumbled the most in six years Monday following moves by the regulator to clamp down on borrowing by individual investors.

Liu Dongliang, a senior analyst with China Merchants Bank said he expects the liquidity injections to continue and says the central bank may also take even more aggressive measures to spur growth like cutting benchmark interest rates.

“The PBOC is publicly offering liquidity to the market by resuming open-market operations, to better guide expectations in the market,” said Xu Hanfei, an analyst with Guotai Junan Securities, adding investors may read the money injection as a prelude to another interest rate cut.

The injection of funds into the country’s money markets came after the central bank said Wednesday that it rolled over three-month loans of 269.5 billion yuan ($43.5 billion) and offered 50 billion yuan of medium-term loans to designated commercial banks. The PBOC said on its official Weibo microblog account that it extended its medium-term lending facility to banks, a new monetary instrument used to extend liquidity into the nation’s financial system, at an interest rate of 3.5 per cent.

The world’s second-largest economy reported economic growth of 7.4 per cent in 2014, the slowest pace since 1990, weighed by a slumping property market and a slow recovery for global demand.

The central bank offered the reverse repos at 3.85 per cent, compared with the 4.08 per cent seven-day repo rate in the interbank bond market.

The benchmark seven-year government bond yield fell to around 3.40 per cent from 3.43 per cent after the PBOC move.

The largest law firm in mainland China has struck a deal to combine forces with Dentons, an expansion-minded global law firm, a novel tie-up that could signal a growing desire by Chinese officials to give their fast-growing companies easier access to Western markets.

But it comes at a time when other ventures by Western firms in China have often proved unprofitable, partly because China places strict restrictions on Western lawyers working in the country. This week, New York-based international firm Fried, Frank, Harris, Shriver & Jacobson LLP said it would effectively shut down its Hong Kong and Shanghai offices after about a little less than a decade in Asia.

In the deal, which has been approved by the partnerships of both firms, Dentons has agreed to combine with Dacheng, a firm of approximately 4,000 lawyers spread mostly throughout China.

Dentons, a firm known for its bankruptcy and mergers-and-acquisitions practices, among others, is itself the product of several mergers in recent years. It was formed in 2013 by the three-way merger of Canada-based Fraser Milner Casgrain LLP; Salans, a firm founded in Paris with offices throughout Europe; and SNR Denton, the product of a 2010 cross-Atlantic merger.

The combined firm, with over 6,500 lawyers spread across more than 50 countries, would be the largest law firm in the world, by lawyer head count. The deal proposal awaits approval from Chinese regulators, which management teams from both firms expect as soon as early next week.

Dentons, which represents a roster of large multinational companies, including Coca-Cola Co. , Total SA and HSBC Holdings PLC, had revenue of about $1.3 billion in 2013, the last year for which figures are available.

In recent years, Dacheng has represented a host of big Chinese companies, including China Railway Construction Corp. , China Development Bank and Sunshine Insurance Group Corp. Revenue figures for the firm weren’t available.

For decades, Western lawyers in China have generally been barred from appearing in court or from appearing in front of the government—restrictions that often lead Western firms to hire “local” Chinese counsel to handle issues inside the country.

“It’s an extremely difficult place for Western firms to practice and to practice profitably,” said legal consultant Brad Hildebrandt.

But the Dentons-Dacheng deal, if approved, will allow Dentons clients access to a stable of lawyers cleared to practice in China without hiring another firm, according to Joseph Andrew, the global chair of Dentons.

The firm involves an increasingly common structure known as a verein, an association between partnerships that share a common name, but remain financially independent. The only other combination between a Chinese and a Western firm—the 2012 deal between King & Wood, based in Beijing, and Australia’s Mallesons Stephen Jaques—was also structured as a verein.

Law-firm mergers, even those following the looser verein structure, sometimes suffer from insurmountable cultural differences or other problems—such as approaches to partner pay. Deals that span time zones and involve language barriers can be especially tricky to pull off. Another possible issue, according to some law-firm experts: worry by some clients that sensitive information passed to firm lawyers may fall into the hands of Chinese competitors, or even the Chinese government.

A spokeswoman for Dentons said that the firm has developed a “comprehensive” cyber security approach, and that “only lawyers and professionals who need to know the client’s business…will be able to access client information necessary to collaborate in serving the client.” The firm will be known as Dentons outside China and Dacheng inside China. The firm’s logo will include the Chinese characters for Dacheng, followed by the Dentons name.

Mr. Andrew said the deal would give the firm’s clients “unparalleled access” into an economy that has witnessed explosive growth over the past decade—and stands poised to keep growing.

The president of Dacheng, Peng Xuefeng, said that the deal would bring the firm’s clients in much closer touch with the rest of the world. “Now is the time for Chinese enterprises to go outbound, to invest in the rest of the world,” he said.

Central bankers have assumed an air of omnipotence during and after the global financial crisis because of their awesome power to create and destroy money.

Their decisions and influence extend beyond financial markets. Their power to withdraw funds has not only the potential sink banks, but elected national governments.

Neil Irwin, the author of The Alchemists: Inside the Secret World of Central Bankers, dubs the trio of Ben Bernanke, Mario Draghi and Mervyn King the committee of three that saved the world from another great depression.

In his seminal book, Irwin devoted one of his final chapters to a less well-known central bank chief: Zhou Xiaochuan, the governor of the People’s Bank of China. The Chinese central bank has become a lot more technocratic and reformist under his guardianship.

Though the Chinese central bank is not independent like other major central banks like the Fed and European Central Bank, what Zhou says and thinks matters for the world’s second largest economy.

Zhou recently took part in a panel discussion at the World Economic Forum at Davos, where he outlined his take on global financial volatility and, more importantly, the Chinese economy.  

1. On the housing market

The housing market is arguably the Achilles heel of the Chinese economy. So what does Zhou think of the state of real estate sector, which is a major contributor to GDP growth?

The short answer: he is not too concerned.

Zhou maintains the economy is still in reasonable shape despite some cyclical turbulence. His diagnosis of the housing market problem is that it is reasonably benign.

He says China is very big with many cities, and the performances of the housing markets across these cities are quite different. “There are problems of oversupply in some places, and in some cities the demand is still very strong,” he said.

Essentially he does not think the housing downturn is a very serious problem across the entire country. The central bank’s view is that the housing market is just going through a period of cyclical adjustment. Some reports lend support to the view, but there seems to a problem of oversupply in a lot of third tier and fourth tier cities where demand is not as strong as in major cities.

The central message is China’s housing market is too varied to make sweeping generalisations. It is also interesting to note that when he asked about what tools would the central bank use to boost the housing market if the situation got worse.

His answer is that it is difficult for the central bank to form a policy that is specifically designed to counter a downturn in the housing market when all other economic indices such as GDP growth are relatively robust.

He says the central bank monitors the housing market through macroprudential policies such as watching over loan-to-value ratios and the bank’s special lending facility to build low-cost housing. “There is not much we can actually do,” he said.

2. On global commodity prices

As the world’s largest importer of many commodities from oil to iron ore, China is an important price-setter. So what does the central bank chief think about the recent slump in commodities prices, especially the falling oil price?

Zhou thinks the falling oil price is a plus for the economy, and it makes his job easier to fulfil mandates to maintain employment and economic growth. However, the central banker is concerned that the declining oil and gas prices could send the wrong price signal to people who want to invest in renewable energy projects.

He says the Chinese economy is trying to readjust its energy consumption structure by reducing its reliance on fossil fuel consumption. Zhou is worried that the price signal could distort people’s incentives to invest in renewable energy and it could have the potential to slow down investment in renewable energy.

3. On central bank forward guidance

Central bankers have the magical power (up to a point) to get what they want without actually doing what they promise to do. For example, Mario Draghi, the president of European Central Bank, managed to pull off an amazing bluff in 2012 when the eurozone was teetering on the edge of an imminent collapse.

 “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough,” he said.  His words calmed down the market even though there was a big question mark about whether the ECB could actually deliver on that “whatever it takes” promise.

More recently, central bankers have pulled off a string of surprises that raise questions about how they communicate to market about important policy changes. The Chinese central bank is quite notorious for its Friday evening surprises on important decisions such as rate changes.

When he was asked about how central banks should communicate their decisions to the market, he offered the following observations. Zhou says it is important for central banks to offer verbal guidance to the market when the official interest rate is in the range of the zero lower bound. The Fed, the ECB and the Bank of Japan fall into this category.

However, he says, when normal monetary policy levers such as cutting interest rates are still effective, it is not necessary to offer verbal guidance to the market. 

China's bank authorities have conducted another stress test on the nation's banks to examine risks from the slumping property market and mounting local government debt, a senior banking official said on Friday. 

The stress test was aimed at strengthening risk controls and assessing the banking system's ability to adjust to pressure, said Wang Zhaoxing, vice chairman of the China Banking Regulatory Commission. 

He didn't give details on how the stress test was conducted or give their relative performance, though he said the test had been conducted in recent months. 

"We have tested banks from top to bottom," he told a news briefing. 

"This will have a varying impact on financial stability and the asset quality of banks," he said. 

He said China had been continually raising the ability of the nation's banks to adapt to pressures as the economy loses steam, by boosting capital requirements and moving banks to maintain adequate provisions for loan losses. 

"As the economy faces downward pressure there will be a certain extent of problems in the property sector and with local government debt. This will have varying impact on financial stability and asset quality of banks," he said. 

China's financial regulators have conducted stress tests on the nation's banks in the past. In early 2014 regulators said that they conducted stress tests on 17 banks, covering liquidity and credit risks. 

More recently the property sector, a key driver of economic growth and a major borrower from the banking system, has seen slumping sales and sporadic problems with repayment. 

On a month-over-month basis, home prices in December slipped 0.4 per cent, compared with a 0.6 per cent fall in November. On a year-over-year basis, the average price of new homes declined 4.3 per cent in December compared with a 3.6 per cent fall in November and 2.5 per cent drop in October.

Chinese banks stepped up lending to the nation's property developers as Beijing moved to ease policy to support the cooling home market. 

Outstanding loans for property development totaled 5.63 trillion yuan ($US907 billion) at the end of last year, up 22.6 per cent from a year earlier, said the People's Bank of China on Friday. The growth rate was 7.9 percentage points higher than that of end-2013, the central bank said. 

Outstanding mortgage loans to individuals rose 17.5 per cent from a year earlier to 11.52 trillion yuan at the end of 2014 , said the central bank. 

Total loans made by Chinese banks to the nation's property sector totaled 17.37 trillion yuan at the end of last year, according to PBOC data. 

China's home market witnessed a sharper-than-expected downturn last year, which is believed to be the biggest threat to growth in the world's second-largest economy. 

In a bid to support the real-estate market, China's central bank cut interest rates in December while loosening its mortgage rules to spur home sales.

China Financial Markets

On Tuesday the National Bureau of Statistics released China’s 2014 GDP growth numbers and reported growth consistent with what the government has been widely promoting as the ‘new normal’.

According to the preliminary estimation, the gross domestic product (GDP) of China was 63,646.3 billion yuan in 2014, an increase of 7.4 percent at comparable prices. Specifically, the year-on-year growth of the first quarter was 7.4 percent, the second quarter 7.5 percent, the third quarter 7.3 percent, and the fourth quarter 7.3 percent.

As nearly every news article has pointed out, GDP growth of 7.4 per cent slightly exceeded consensus expectations of around 7.3 per cent, setting off a flutter in the Shanghai Stock Exchange that reversed nearly a quarter of Monday’s disastrous drop of almost 8 per cent. But although it exceeded expectations, 2014 still turned in the lowest reported GDP growth since 1990, presenting only the second time since growth targeting began in 1985 that the reported number came in below the official target (the first time was in 1989). We will undoubtedly be swamped in the coming days with analyses of the implications, but I read the data as telling us more about the state of politics than about the economic health of the country.

Over the medium term I have little doubt that growth will continue to slow, and, that at best, we have only completed about one third of the journey from peak GDP growth to the trough. As long as it has debt capacity Beijing, or indeed any other government, can pretty much get as much growth as it wants, in China’s case simply by making banks fund local government infrastructure spending.

Most economic analyses of the Chinese economy tend to base their forecasts on the sequence and pace of economic reforms aimed at rebalancing the economy, and on the impact these reforms are likely to have on productivity growth. It may seem contrarian, then, that I forecast Chinese near term growth largely in terms of balance sheet constraints. I am not implying that the reforms do not matter to the Chinese economy. The extent to which the reforms Beijing proposes to implement reduce legal and institutional distortions in business efficiency, eliminate implicit subsidies for non-productive behaviour, reorient incentives in the capital allocation process, undermine the ability of powerful groups to extract rent and otherwise liberalise the economy, will unquestionably affect China’s long-term growth prospects.

But I expect that any significant impact of these reforms on short-term growth will largely be the consequence of two things. The first is how reforms will affect the amount, structure, and growth of credit. The second is how successfully Beijing can create sustainable sources of demand that do not force up the debt burden -- the most obvious being to increase the household income share of GDP and to increase the share of credit allocated to small and medium enterprises relative to SOEs.

To put it a little abstractly, and using a corporate finance model to understand macroeconomics, I would say that most economists believe that China’s growth in the near term is a function of changes in the way the asset side of the economy is managed. If Beijing can implement reforms that are aimed at making workers and businesses utilize assets more productively, then productivity will rise and, with it, GDP.

This sounds reasonable, even almost true by definition, but in fact it is an incomplete explanation of what drives growth. In corporate finance theory we understand that although growth can often, or even usually, be explained as a direct consequence of how productively assets are managed, it is not always the case that policies or exogenous variables that normally change the productivity of operations will have the expected impact on productivity growth. When debt levels are low or when the liability structure of an economic entity is stable, then it is indeed the case that growth is largely an asset-side affair. In that case, for GDP growth to improve (or for operating earnings to rise), managers should focus on policies aimed at improving productivity.

But when debt levels are high enough to affect credibility, or when liabilities are structured in ways that distort incentives or magnify exogenous shocks, growth can be as much a consequence of changes in the liability side of an economy as it is on changes in the asset side. At the extreme, for example when a company or a country has a debt burden that might be considered ‘crisis-level’, almost all growth, or lack of growth, is a consequence of changes in the liability structure. For a country facing a debt crisis, for example, policymakers may work ferociously on implementing productivity-enhancing reforms aimed at helping the country ‘grow’ its way out of the debt crisis, but none of these reforms will succeed.

…

My main point is that orthodox economists have traditionally ignored the impact of balance sheet structure on rapid growth, but liability structures can explain both very rapid growth and very rapid growth deceleration. It is unclear to what extent balance sheet inversion explains part of the Chinese growth miracle of the past decade, but it would be unreasonable to discount its impact altogether, and I suspect it’s impact may actually be quite high. To the extent that it has boosted underlying growth in the past, for exactly the same reason it must depress underlying growth in the future.

What is more, because we are in the late stages of China’s growth miracle, we should recognise that historical precedents suggest that balance sheet inversion will have increased in the past few years, and may continue to do so for the next few years, which implies that a greater share of growth than ever is explained not by fundamental improvements in the underlying economy but rather by what are effectively speculative bets embedded into the national balance sheet. Besides commodity stockpiling and real estate purchases by local governments, we have clearly seen an increase in speculative financial transactions by large Chinese companies (the so called ‘arbitrage’, for example, in which SOEs have borrowed money in the Hong Kong markets and lent the money domestically to pick up the interest rate differential as well as any currency appreciation), which is the Chinese version of what in the late stages of the Japanese growth bubble of the 1980s was referred to as zaitech.

We have also seen growth in external financing, which is the classic form of inverted debt for developing countries. The main thing to watch for, I think, is one of the most dangerous kinds of balance sheet inversion, and is especially common when growth has been driven by leverage, and that is the tendency for borrowers to respond to credit and liquidity strains by effectively doubling up the bet and shortening maturities. I don’t know if this is happening to any worrying extent, but when we start to see a dramatic shortening of real maturities, it should be a warning signal.

This is an abridged version of an essay posted to China Financial Markets and is reproduced here with permission.

We missed it.

China’s growth numbers for 2014 were released on Tuesday. But so far all the talk has been about the figures showing the economy expanding at its slowest pace in 24 years.

Yet here’s another way of looking at the same data -- we’ve just found out that US dollar terms, China’s economy grew by more than in any year previously. Let me repeat that -- in any year, ever. 

It has a different ring to it, doesn’t it?

Two things are happening here: the first is that China’s economy gets bigger each year. So even if growth slows in percentage terms, the volume of renminbi surging into action can continue to increase. The second is that since 2005, the renminbi has been appreciating against the US dollar. So each one of those renminbi can buy more US dollars than before.  

The combination delivers a thick wad of new Chinese purchasing power overseas.  

Take any starting point you like.

China began 2013 with an $US8.3 trillion economy. During the year it grew by 7.7 percent in local currency terms. At the same time, the renminbi appreciated by nearly 2 per cent. This meant that by the time 2014 rolled around, the economy had added $US643 billion.

Last year the pace of growth eased to 7.4 percent. But the economy started out bigger. That alone was enough to see more renminbi pressed into service than in the year before. On top of that the renminbi appreciated by another 1 per cent. The result was that China’s economy swelled by $US673bn in 2014.

For Australia and the rest of the world, this increasing trend in buying clout in US dollar terms matters a great deal.  

BHP Billiton and Rio Tinto have never sold a single kilogram of iron ore to China for a percentage sign.

Last year, Rio sold a shipment of iron ore to China denominated in renminbi for the first time. It was described as a “one off”.

The rest is in US dollars. According to its customs bureau, China paid $US55.7bn for the Australian iron ore it imported in the year to November.

In a similar vein, the Department of Education and Training says that the 112,536 Chinese students studying in Australia in 2013-2014 paid $4.1bn for the privilege.  

Nothing looks set to change.

The IMF just downgraded China’s growth prospects for 2015 from 7.1 per cent to 6.8 per cent. Yet after crunching the numbers it’s clear that for the increase in local currency purchasing power to match that of last year, China only needs to grow this year by 6.9 per cent. It’s right on target then.

What will happen on the currency front is harder to guess.  

But we do know that China just recorded a whopping $US383 billion trade surplus in 2014. That was up 47 per cent on 2013.

And the European Central Bank and the Bank of Japan continue to print money with all the enthusiasm of a Chinese banquet welcoming in the Year of the Goat.

This makes any depreciation of the renminbi look unlikely.

For Australia, there’s another big bonus from the new spending that China will unleash. It wants what we produce.  

Last year, Hillary Clinton warned that it would be a mistake for Australia to put all its eggs in the China basket. Communications Minister, Malcolm Turnbull, responded, “I’m sure that we’d love to export vast quantities of iron ore to the US but they’ve never shown any enthusiasm in buying them.

That’s it in a nutshell. Between 2008-9 and 2013-14, the value of Australia’s exports to China leapt by $63.3bn. The value to the US and Japan fell.

Keeping track of the boost China that is giving our economy isn’t hard. Just follow the dollar signs.

Professor James Laurenceson is deputy director of the Australia-China Relations Institute at the University of Technology, Sydney.

Chinese officials feasted on a critically endangered giant salamander and turned violent when journalists photographed the luxury banquet, at an event which flouted Beijing's austerity campaign.

The 28 diners included senior police officials from the southern city of Shenzhen, the Global Times said.

"In my territory, it is my treat," it quoted a man in the room as saying.

The giant salamander is believed by some Chinese to have anti-ageing properties, but there is no orthodox evidence to back the claim.

The species is classed as "critically endangered" on the International Union for Conservation of Nature's (IUCN) Red List of threatened species, which says the population has "declined catastrophically over the last 30 years".

"Commercial over-exploitation for human consumption is the main threat to this species," the IUCN said.

The Global Times cited the Guangzhou-based Southern Metropolis Daily, which said its journalists were beaten up when their identities were discovered by the diners.

One was kicked and slapped, another had his mobile phone forcibly taken, while the photographer was choked, beaten up and had his camera smashed, the reports said.

A total of 14 police have been suspended and an investigation launched into the incident, added the Global Times.

One of the Shenzhen diners provided the salamander and said it had been captive-bred, according to the report.

Chinese President Xi Jinping has launched a much-publicised austerity drive for the ruling classes, including a campaign for simple meals with the catchphrase "four dishes and one soup".

The ruling Communist Party also says it is cracking down on the consumption of endangered species, including shark's fin.

China's legislature last April approved a law including prison sentences for people caught eating rare wild animals.

More than 10,000 people are suing Japan's leading liberal newspaper over stories on Tokyo's system of wartime sex slavery, which they say have stained their reputation as Japanese nationals.

The move is the latest salvo in the battle over Japan's history, which pits an increasingly aggressive revisionist right wing against an ever-more cowed mainstream that accepts the country's guilt over World War II atrocities.

The group of plaintiffs, led by Sophia University professor emeritus Shoichi Watanabe, is demanding 10,000 yen ($A107) in apparently symbolic compensation each, describing themselves as "Japanese citizens whose honour and credibility were damaged by the false reports made by the Asahi Shimbun", according to court documents.

They argue that Asahi reports on the so-called "comfort women" system "have imposed indescribable humiliation not only on former soldiers but also on honourable Japanese citizens ... who are labelled as descendants of gang rapists."

Despite a dearth of official records, mainstream historians say up to 200,000 women, many from Korea but also from China, Indonesia, the Philippines and Taiwan, served Japanese soldiers in military brothels called "comfort stations".

Most agree that these women were not willing participants and that the Imperial Japanese Army and wartime government were involved in their enslavement, tacitly or explicitly.

Right-wingers, however, say the women were common prostitutes engaged in a commercial exchange, and are fighting a vigorous rear-guard battle to alter the narrative.

The Asahi has become the focus of their ire because it published a series of articles in the 1980s based on the now-discredited testimony of a Japanese man who said he had rounded up Korean women to work in military brothels.

After years of pressure, the paper retracted the articles, and apologised. The company's president also resigned.

Revisionists typically do not believe the well-documented "Rape of Nanking", in which tens of thousands of Chinese died in a six-week orgy of rape and violence when the Japanese Imperial Army over-ran China's then-capital in 1937.

Nor do they accept that their military carried out experiments, including vivisection, on live prisoners in China.

The Asahi said it would study the court document before responding.

Freedom of navigation must be upheld in the Asia Pacific, US President Barack Obama says, as rival China asserts its power in the region.

"The United States welcomes a greater role for India in the Asia Pacific, where the freedom of navigation must be upheld and disputes must be resolved peacefully," Obama said in a speech in New Delhi on Tuesday.

The US president made the comments after holding talks in New Delhi with India's Prime Minister Narendra Modi, who has taken a more assertive stance on China than his predecessor.

The United States is looking to reinvigorate alliances in the Asia-Pacific as part of Obama's "pivot" east, and sees India as a key potential balance to rising Chinese power.

Beijing claims sovereignty over large swathes of the South China Sea, home to maritime lanes that are vital to global trade, and is engaged in territorial disputes with a host of nations in the region.

Apple has posted its biggest profit in corporate history on the back of record iPhones sales in China.

Apple's quarterly profit soared to a record $US18 billion ($A22.68 billion) after selling 74.5 million iPhones in the last three months — a rise of 37 per cent.

Apple's China sales soared 70 per cent last quarter with iPhone sales in the country surpassing sales in the U.S. for the first time ever.

Revenue in Greater China in the fiscal first quarter reached US$16.1 billion with sales more than doubling from the previous year. The rapid growth follows a deal with China's biggest mobile provider, China Mobile, which went into effect in the first quarter of 2014.

"I was there right after the launch in October, and the excitement around the iPhone 6 and 6 Plus [was] absolutely phenomenal,” said Apple chief executive Tim Cook in a call to analysts. "You can tell that we're a big believer in China."

Mr Cook said the company plans to double its number of stores in Greater China to 40 by mid-2016. About 65 per cent of Apple's revenue came from sales outside the United States.

Apple also set new records in the quarter for sales of Macintosh computers and revenue from digital goods on the shelves of its Apple Store. Apple reported profit of $US13.1 billion on $US57.6 billion in revenue in the same three-month period at the end of 2013.

"We'd like to thank our customers for an incredible quarter which saw demand for Apple products soar to an all-time high,” Cook said. "The execution by our teams to achieve these results was simply phenomenal."

Apple's board of directors declared a cash dividend of 47 US cents per share to be paid on February 12. Apple shares rose more than five per cent to $US115.04 in after-market trades that followed release of the earnings figures.

Your daily digest of the biggest business news in China, translated and summarized every day.

SOE reform policies to be rolled out over coming months

Today's China Securities Journal features a front-page story which quotes the deputy head of the research centre at China's state-owned assets regulator as saying that a swathe of reforms will soon be announced in quick succession.

According to the report, SASAC might trial reforms involving employee share holding schemes at some SOEs.

State-backed companies operating in a commercial environment will be the main 'battle ground' for ‘mixed-ownership reforms’, which involve attracting private capital to invest in state-owned firms.

The article also notes that classification of SOEs will be one of the key tasks of the reforms and that reforms could be announced before Spring Festival which begins February 19.

(China Securities Journal)

Xi Jinping delivers his report card on China's economic reforms

Many of today's party papers led with a long Xinhua News Agency piece which reviewed the progress that has been made with economic reforms over the past year. The piece trumpets the official line that 2015 will be a crucial year for pushing ahead with reforms.

Tuesday’s CCTV evening news bulletin also broadcast an item on the Xinhua article .

The report emphasised Xi Jinping's role in leading reforms through his position as general-secretary of the Communist Party and comes just as major new reforms to China's state-owned enterprises sector are to be announced. 

(CCTV)

(Xinhua News Agency)

China is building an unprecedented number of shopping centres

China is home to 13 out 20 cities in the world with the most shopping centre floor space under construction. Shanghai, Chengdu and Shenzhen each boast 3.3 million square metres, 3.2 million square metres and 2.6 million square metres of floor space under construction respectively.

China has 3,500 shopping centres at the moment and the country is expected to build another 7,500 by 2025. Industry experts and legislators have warned about the danger of building too many shopping centres.

They point out that floor space per person in Shanghai is about 2.8 square metres -- 2 to 3 times larger than other cities such as Hong Kong, London, New York and Tokyo. They are worried that many shopping centres will become ghost malls in the future.

(The Paper) 

China UnionPay cardholders spent 41 trillion yuan last year

UnionPay cardholders spent 41 trillion yuan last year or the combined GDP of France, Britain and South Korea, and an increase of 27.3 per cent from the previous year.

China UnionPay is the third largest card payment system in the world after Visa and Masters Card.  The company has 30 million merchants worldwide and 1.8 million ATM machines.  There are 13 million overseas merchants and 1.2 million ATM machines which accept UnionPay cards.

(The Paper) 

Chinese luxury hotels suffer under austerity measures

Chinese luxury hotel profits have plunged since the start of Beijing’s harsh anti-corruption campaign. The country has 13,500 hotels, which include 850 five star hotels.

In 2012, luxury hotels earned more than five billion yuan in profits. However, their profits took a nosedive in 2013 when the government started to crack down on public spending. Profits for the sector went into the red with the luxury hotel sector losing 2.1 billion yuan.

The head of China’s Hotel Association said hotels that relied on high-end government business suffered the most and that profits for the whole sector had fallen off a cliff.

Chinese hotels have asked to be downgraded in order to avoid further unwanted media attention.

(The Paper) 

Chinese banks lose depositors’ money

Chinese depositors, both retail and corporate, have seen their money disappear under mysterious circumstances from Chinese banks.

42 retail depositors lost 95 million yuan in Hangzhou and a well known Chinese liquor company also lost 100 million in deposits from its corporate account at the Agricultural Bank of China, one of the big four state-owned commercial banks.

Outright fraud is reportedly responsible for the lost deposits.

(The Paper) 

China's target for new loans will remain unchanged in 2015: report

China's central bank will leave the target for the total amount of new loans to be released by Chinese banks in 2015 unchanged from the previous year, according to 

unnamed sources quoted in a story by Tencent Finance.

Last year Chinese banks lent 9.78 trillion yuan in new RMB-denominated loans, surpassing the previous record set in 2009.

(Tencent Finance)

China is expected to build an additional 7,500 shopping centres by 2025 according to Deloitte and the Chinese Franchise Association.

The extra 7,500 shopping centres will be in addition to the 3,500 already existing in the country.

China is home to 13 out 20 cities in the world with the most shopping centre floor space under construction. Shanghai, Chengdu and Shenzhen each boast 3.3 million square metres, 3.2 million square metres and 2.6 million square metres of floor space under construction respectively.

Industry experts and legislators have warned about the danger of building too many shopping centres.

They point out that floor space per person in Shanghai is about 2.8 square metres -- 2 to 3 times larger than other cities such as Hong Kong, London, New York and Tokyo. They are worried that many shopping centres will become ghost malls in the future.