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Cool Blue





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PostPosted: Mon Jan 15, 2007 8:26 pm    Post subject: Chinese Economy a Paper Tiger? Reply with quote

January 15, 2007
GLOBE AND MAIL

Grey wall of China spells pension woes for next generation One-child policy sets country on course for major worker shortage by mid-century
GEOFFREY YORK

Li Xia is envious of her elderly parents. Their pensions are modest, only about $160 a month, yet they are more financially secure than she ever expects to be when she retires. Ms. Li, a 29-year-old accountant in Beijing, has little faith in her future. By the time she retires, China will be mired in one of the most extraordinary periods of rapid aging in world history, and its pension system could be headed for a massive crisis.

"My parents are much luckier than my generation," she says. "What we receive when we retire will definitely be a lot less. I expect to get only a few hundred yuan [perhaps $50] a month. And I'm worried the government won't be able to pay our full pensions. I don't even dare to think about it."

For three decades, China's economic boom has been bolstered by a little-known asset: its huge population of young working-age people. When the boom began in the early 1980s, China was one of the most youthful countries in the world, with an average of six children for each family. Even today there are six workers for every retiree. It's a demographic "sweet spot" that has kept wages low and factories full, with a seemingly endless supply of millions of new workers every year.

But today that asset is disappearing. China is feeling the pinch of the one-child policy, which limits urban couples to just one offspring. Less than a decade from now, China's working-age population will begin to decline. And by the middle of the century, China's work force could shrink by as much as 35 per cent, while its retired population will soar from today's 140 million to a projected 430 million, almost a third of the total population.

Within the space of a single generation, China has become a greying society. And unlike the aging societies of North America and Europe, this is still a relatively poor country, without the resources to support a massive rise in its elderly population.

In a report this month, a Chinese state agency warns that the rapid aging of China's population could strain the social welfare system, sparking tensions between the generations and damaging social harmony.

Because of the one-child policy and rising life expectancy, a family's sole child will often be responsible for looking after two parents and four grandparents, the report says.

In the affluent West, countries have taken a century to become aging societies. China is doing it in less than 40 years.

"Other countries became rich before they became old, but China is going to become old before it becomes rich, and this is something the world has never seen before," said Stuart Leckie, a pension consultant based in Hong Kong who has advised the Chinese government on pension reform.

"The demographics are deteriorating very rapidly, and I don't think anything can stop that now," he said. "This is going to become a real burden for China."

While the average pensioner is supported by six workers today, this "dependency ratio" is swiftly eroding. By 2040, there will be only two workers to support every retired person. This spells a huge challenge for China's fragile pension system. The World Bank has estimated that China's current pension liabilities are somewhere between $1.5-trillion and $3-trillion (U.S.). Its pension assets are so minimal that they cover only 4 per cent of its future pension obligations.

Moreover, about three-quarters of Chinese workers have no formal retirement provision at all. Faced with a tattered social-safety net and an increasingly unaffordable health system, their futures will be shaky.

Private companies, meanwhile, are reluctant to join the pension system. And corruption scandals have cast doubt on the trustworthiness of local pension systems.

Chinese officials are studying a range of changes to strengthen the pension system and ease the demographic crisis, including a possible increase in the retirement age and even perhaps the abolition of the one-child policy. Those would be radical steps that could spark controversy and social instability, yet they might become necessary.

Unwilling to put their faith in the authorities, most Chinese prefer to seek their own solutions to the pension crisis. For those who can afford it, a favourite ambition is to emigrate to an affluent Western country with a stronger pension system. For many, the most popular target is Canada, a country with a generous pension program and an attractive immigration system.

There are frequent reports in the Chinese media about middle-class Chinese who decide to emigrate to Canada to guarantee themselves a better pension after retirement.

"And if we don't want to stay in Canada after we retire, we can enjoy the Canadian pension in China," a woman named Ms. Zhang told a Chinese newspaper after emigrating to Canada.

"The Canadian pension system will mail us our pension, on time, to any place where we decide to live," she boasted.
Cool Blue





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PostPosted: Mon Jan 15, 2007 8:28 pm    Post subject: Reply with quote

I forget where I read a similar opinion, it may have been Mark Steyn's "America Alone" , but it looks like more and more people are beginning to doubt the hype of the coming "Chinese Economic Superpower".
Joahob





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PostPosted: Tue Jan 16, 2007 12:35 am    Post subject: Reply with quote

China has other problems too. Not just demographic.

The Chinese have adopted mercantilist economic policies that fundamentally disrupt the normal exchange of goods and service. China's central bank is printing billions and billions of dollars worth of yuan and is using those yuan to buy dollars. This keeps the dollar stronger and China's currency weaker.

Hence the US is able to run massive deficits without suffering exorbitant deterioration of the country's capital stock. This is, truly, a pretty damn good deal. The Chinese, however, are stuck with rapidly rising prices. All those yuan that they printed eventually find their way back to China in the hands of American consumers demanding payment of their claim on the real pool of goods and services in China. More money chasing fewer goods equals inflation. Not only does this inflation make life difficult for the average Chinese worker, but also it has disastrous consequences for the economy as a whole. Businesses are mistakenly led to believe by false indicators that certain long-term projects will prove to be profitable endeavors when in fact they will not. In short, the economy is plagued by malinvestment, i.e. the misallocation of resources. This is most easily seen in the real-estate market. In China there are many building projects that were uncompleted because money-dried up. In some major cities, there are whole skyscrapers that stand empty and unused, and sometimes unfinished. It is truly remarkable, but you wont here about it from the MSM. The media is in a frenzy over China’s supposed rise to superpower status.
Craig
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PostPosted: Tue Jan 16, 2007 12:37 am    Post subject: Reply with quote

Joahob wrote:
More money chasing fewer goods equals inflation.


Only if you are near industrial capacity. And with 1.3 billion people China is far from industrial capacity. Inflation is still tame there while growth is triple the US rate.
Joahob





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PostPosted: Tue Jan 16, 2007 12:51 am    Post subject: Reply with quote

Craig wrote:
Joahob wrote:
More money chasing fewer goods equals inflation.


Only if you are near industrial capacity. And with 1.3 billion people China is far from industrial capacity. Inflation is still tame there while growth is triple the US rate.


I understand what you mean, but inflation is properly defined as the increase in the money supply. Prices may not be rising too fast. But if the money supply were frozen then prices would be falling by a great deal. This is especially true in China because, as you alluded to, the growth of their industry is phenomenal.

So to rephrase my statement: Much more money chasing a rapidly increasing production of goods equals relatively stable prices or a slow rise in prices. But, a constant supply of money chasing a rapidly increasing production capacity equals escalating price declines.

When accounting for inflation we must realize that prices would normally be falling in an expanding economy with a constant money supply. To borrow from the broken window fallacy, we must see what is unseen. The difference between steady price decline and stable prices or moderately rising prices is quite great. This is especially so for China.
PostPosted: Tue Jan 16, 2007 9:40 am    Post subject: Reply with quote

Cool Blue wrote:
I forget where I read a similar opinion, it may have been Mark Steyn's "America Alone" , but it looks like more and more people are beginning to doubt the hype of the coming "Chinese Economic Superpower".


I have been to China and parts of it is so poor you begin to think you are in a 5th world country.

What super power?
FF_Canuck





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PostPosted: Tue Jan 16, 2007 8:20 pm    Post subject: Reply with quote

China cheerleaders also tend to ignore the hundreds of millions of rural Chinese living under totalitarian fuedal rule in the interior, working the mines, farms, and mills that feed the much freer urban populace.
Cool Blue





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PostPosted: Tue Jan 16, 2007 8:42 pm    Post subject: Reply with quote

Quote:
And with 1.3 billion people China is far from industrial capacity.


Yes but it is also the quality not the quantity :lol:

They might have a lot of cheap labour but how many of those 1.3 billion has a decent education? How many are malnourished?
PostPosted: Thu Jan 18, 2007 12:21 am    Post subject: Reply with quote

Cool Blue wrote:
Quote:
And with 1.3 billion people China is far from industrial capacity.


Yes but it is also the quality not the quantity :lol:

They might have a lot of cheap labour but how many of those 1.3 billion has a decent education? How many are malnourished?


Their labor force are being paid worse than Mexican work force are being paid. Some workers live on some thing like $20 a month.
Joahob





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PostPosted: Thu Jan 18, 2007 2:19 am    Post subject: Reply with quote

Here's an article from last year that gives a frightening picture of China's banking practices.

Quote:
Don't Bank on China

A Flawed Audit, or All Too Accurate?
By Gary J. Schmitt, Jared Feiger
Posted: Monday, June 12, 2006

ARTICLES
The Weekly Standard
Publication Date: June 19, 2006

Early last month, the accounting firm of Ernst and Young released a report concluding that the "nonperforming" loans of China's banks totaled $911 billion (40 percent of China's GDP)--a figure that far exceeds the Chinese government's own estimate of $164 billion. Beijing's response to the report was not subtle: "The report not only seriously distorts the actual assets quality of the Chinese banking sector," but "its conclusions are absurd and incomprehensible." Ernst and Young withdrew the report the next day, citing fundamental errors in the analysis.


Resident Scholar Gary J. Schmitt
But was the report really that flawed? Or was the firm's report more right than wrong, and retracted only because doing business in China these days requires pulling one's punches?

Certainly, Ernst and Young's position as auditor for the state-owned Industrial and Commercial Bank of China, the country's largest bank, would give it insight into China's banking problems--and also the incentive to think twice about making the Chinese government angry. The report's timing could not have been worse, as several Chinese banks are gearing up this year for initial public offerings on the Hong Kong exchange that should bring in tens of billions of dollars in new capital. (Ernst and Young will earn millions when, as expected, the Industrial and Commercial Bank launches its IPO effort this coming September.) The last thing China's banks wanted to see was a sour report on their great volume of bad loans and their underlying financial condition.

Of course, China's problem with nonperforming loans (NPLs) is not new. In 1999, according to the "official" tally, NPLs accounted for 25 percent of the total amount of money loaned--a huge amount by international banking standards. The pace at which new loans increased was so great that even after the government moved many of the worst loans off the books to "asset management companies"--created expressly to deal with this mounting problem--and infused the banks with hundreds of billions in new capital, the official ratio still remained at 25 percent.

Moreover, NPL totals are expected to rise as a result of a flood of new lending by Chinese banks between 2002 and 2004 and "another credit surge" recently reported in the Economist. In the first four months of this year, Chinese banks lent 60 percent of the amount of credit they issued for the whole of 2005. This is bound to give rise to future bad loans.

In fact, the Ernst and Young report was not unique. Very few financial analysts believe China's "official" figure for NPLs. Most think the ratio of bad loans is considerably higher, maybe as high as 50 percent, according to Frank Song, director of Hong Kong University's China Financial Research Center. When suspected NPL figures are combined with prospective NPL estimates, the Ernst and Young report's figure of $900 billion is probably not wildly off the mark. In fact, previous estimates by Standard and Poor's and PricewaterhouseCoopers indicated that Chinese NPLs could very well top $800 billion; and Fitch Ratings has just put the number at close to $700 billion. Like any such assessment, it's possible that the Ernst and Young report was based on assumptions and analysis that could be called into question. But it's just as likely that the report's inconvenient timing was the reason it was retracted.

The reality is that China's leaders simply haven't been that interested in telling banks to stop throwing good money after bad. Loose credit has become a way of life not only for China's bankers but also for its bureaucrats and party officials. China's banks have an immense amount of cash to play with. The savings rate of Chinese citizens is extraordinarily high: Pensions are uncertain and demographic trends indicate that China's aging population of parents and grandparents can increasingly expect less and less help from their children. The largest banks are also state-controlled and have personal and institutional incentives to give loans to state-owned enterprises, which still make up a surprisingly large segment of the Chinese economy and typically bleed money. With party officials and their relatives sitting on corporate bank boards or managing one of the tens of thousands of largely independent local branches, the banks have become the world's largest ATMs for China's political and business elite. Add to this the fact that China's banks have, at best, rudimentary internal audit systems.

So, the question is, will the banks be fixed? Those in China who want it fixed are hoping that, by bringing in Western financial partners, they can raise additional funds and, through a coupling of management techniques, begin to bring better practices to mainland banks. But they are running headlong against a well-established and well-connected system of elite corruption. And to protect that system, the Chinese are only allowing their non-Chinese partners minority ownership positions which, in turn, only give them a limited say over banking practices.

Moreover, the nearly 170,000 state-owned enterprises being supported by the banks cannot, Beijing believes, be allowed to go out of business. China's leaders are increasingly worried about rising unemployment and the social unrest that might follow. In addition, Beijing rightly suspects that allowing Chinese citizens to place more savings and profits in markets outside of China would result in a run on deposits that the state banks could not survive.

The buildup in domestic liquidity--savings, plus massive foreign investment--has led to an inflated domestic real estate market and massive spending on infrastructure and manufacturing capacity, investments that now account for nearly half of China's economic output. The bubble in real estate may, of course, burst, and it's an open question whether the world's consumers will, against rising protectionist sentiments in industrial nations, continue to support the ever expanding capacity of Chinese manufacturing or, for that matter, buy all its products.

Plenty of analysts have seen these problems and have predicted China's economic downfall for some years now--and it hasn't happened. At least, not yet. The laws of economics may be complex, but they do, in the end, punish those who ignore their most rudimentary precepts.

However, that's the point. Western financial experts keep looking at China as though it simply wants to be another Western-style, economic force. And while undoubtedly some in China do, others don't. The Communist party sees the banks as too important, in allocating resources and ensuring political support, to turn them over to independent actors. As Minxin Pei notes in his fine new book China's Trapped Transition, "Few authoritarian regimes can rely on coercion to maintain power. Most autocracies mix coercion with patronage to secure support from key constituencies, such as the bureaucracy, the military, and business groups."

China is no different, and its banks remain a critical element in the regime's strategy for self-preservation.

Gary J. Schmitt is a resident scholar at AEI. Jared Feiger is a research assistant at AEI.

http://www.aei.org/publication.....detail.asp
PostPosted: Thu Jan 18, 2007 2:36 am    Post subject: Reply with quote

Joahob

That was a scary post, but an informative one. Thnx
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