Export Rebates Increase

China raises export rebate to spur growth

(Xinhua)
Updated: 2009-03-28 00:04

BEIJING - China raised the export rebate on 3,800 items to maintain growth, the Ministry of Finance and the State Administration of Taxation (SAT) said Friday.

It was the sixth increase since last August when the government decided to raise refunds in an attempt to tackle slumping exports amid the global financial crisis.

The export rebate for the textile and garment, iron and steel, non-ferrous metal and petrochemical items will be effective April 1, according to the departments.

The tax rebate for textile and garment items would be 16 percent.

A special item, CRT televisions, would have a 17 percent of tax refund.

"It was an extraordinary measure taken under extraordinary conditions," said Zhao Yumin, a researcher with the Ministry of Commerce.

He said slumping exports presented the Chinese government with unprecedented challenges. The refund increase underscored the government's resolution to maintain economic growth and secure employment.

China's exports plummeted 25.7 percent year-on-year in February, the worst decline in more than a decade, as global demand deteriorated amid the deepening recession.

Although previous data showed some signs of economic recovery, the economic outlook remained uncertain as profits of China's major industrial enterprises contracted 37.3 percent year-on-year during the first two months of 2009, the National Bureau of Statistics (NBS) said Friday.

Bai Jingming, economist with the Ministry of Finance said more refunds meant enterprises could retain more cash in hand and they could use that money to restructure their business and improve production technology.

The SAT said last week that the actual export tax rebate in the first two months increased 20.8 percent year-on-year to 66.7 billion yuan (US$9.77 billion).

Experts said nearly all Chinese exports had a 17 percent export rebate during the Asian financial crisis. Compared to that, China still has room for further rebate increases.

State Owned vs Privately Owned

A privately owned enterprise in China is revered when the economy is going great guns because of their "contribution" to the growth in China. They receive praise and awards and are set on a pedestal as great entrepreneurs and social leaders.

When the economy falters - as it has recently - then private enterprise CEOs are faced with limited ability to borrom capital to maintain cash reserves. They struggle with holding on to their employees and have begun to seek investors to resolve their capital problems.

Private enterprises in China are still second class citizens as their access to capital is limited and their recent experience - over the past 10/15 years - has not provided an experience base to raise capital or seek investment partners.

Many are increasingly stuck in the middle with no good options.

Paradoxes remain.

Enterprises Seeking Investors/Buyers

A sampling of the projects I have come across in the last month:

1. High end specialty baby furniture and clothing web site and specialty store.

2. High end electric transformers for Railways.

3. PVC wrapped industrial cables

4. Wood Flooring factory

All are seeking capital to expand to meet increased demand !

Teachers and Students

Everyone knows that teachers are revered in Chinese society. This tradition is thousands of years old and continues today.

In search of investors and consulting clients I have been teaching at Shanghai JiaoTong University's mid-career executive training programs for the past six months. The classes are organized around different themes ranging from Real Estate to Finance to Private Equity to Innovation. I have been teaching a 2 day section once a month for a number of different programs.

Once I become the teacher of these executives in the 30s and 40s the teacher-student relationship is "fixed" for life. It is a very strong bond complete with respect and deference. Within this relationship nearly anything becomes possible.

Some of my students have become investors. Some have become clients and of course most have become friends.

The majority of these students are mid-career private enterprise entrepreneurs. They are seeking information on developing their companies - particularly for financing.

It's a great prospecting tool 1

Think About This....

The US government needs Japan and China to continue to buy US Treasuries.

The US Treasury has decided to purchase a record number of Treasuries themselves in order to try and stimulate the US economy.

The US Congress is approving a higher budget and likely will approve even higher budgets.

The borrowing and government spending will weaken the value of the US dollar.

The weakening US dollar could impact the value of Japan's and China's investment in the US economy.

This could then drive a reduction in future purchase of US Treasuries.

Such a pull back will likely translate into a future loss of confidence which could further weaken the economy globally.

So what is the right path for China's central bank to take ? Continue to purchase US Treasuries ? Reduce these purchases ? Find a third way ?

Regardless this interlinking and cyclical argument demonstrates the intensity of the interrelated nature of the global economy.

Governments must find ways to work together and find global solutions which are not cause for conflict but are cause for cooperation.

Cyclical Technology Transfer

There is a brewing challenge in China's continued development from a rural economy to an industrial economy to an Information-based economy and finally to an Ecologically-friendly economy.

China has been on the receiving end of technology transfer for many years since 1980. It has used this new technology to build a rapidly developing economy. This technology has driven China's export engine.

Unfortunately the export engine has stalled and may stall completely. The companies who have built businesses and wealth on the back of this momentum now must face the reality that they must shift their focus from quick "easy" rapid growth to the next new thing - environmental technology.

The US on the other hand has begun to put environmental technology as their next new focus. The US is now embrassing this as the new standard to measure businesses and technology.

If China does not make the shift to the next new thing rapidly enough it will end up in the same position it has been in for the last 20 years - importing technology.

So China's challenge is not to "wait" but rather to invest in R&D to develop its own next new thing technology and solutions so it is not faced with the same challenge of importing technology.

This is not a small challenge but one that Chinese private enterprises must face squarely head on.

Dunkin Donuts in Shanghai GuBei

Dunkin Donuts has arrived in my neighborhood in Shanghai. The coffee is authentic and the donuts are pretty close.

For those who know me well you can imagine that this is an exciting day !

Imports/Exports

The latest figures on China's imports and exports now show very clearly the impact of the global recession on China's growth. The export sector will continue to see dramatic reductions. predictions are for a 15% drop in 2009 over 2008.

Imports are also dropping. Most of China's imports are raw materials necessary for industrial expansion. With growth slowing imports are also slowing.

The solution remains stimulating domestic growth in China's consumer and industrial sectors. This will take time to gain momentum. 2009 and 2010 are likely to be the transition years. The economy is undergoing a major shift from seeking external growth engines to relying on internal growth engines.

This shift was always going to be necessary but now it has become an imperative. China's ability to grow is now in its own hands rather than in the hands of western consumers buying inexpensive goods at Walmart !

Exports dropped 25.7 percent year-on-year to $64.9 billion in February, the largest fall in more than a decade and the fourth monthly decline in a row. Imports fell 24.1 percent to $60.05 billion.

The Train

As many of you know I prefer to ride the rails in China over flying. Perhaps it is because of the years I spent in south China in the 1980s as a teacher in the Railway Ministry.

I have just arrived in Beijing after an overnight train ride from Shanghai. Departure at 7:30 pm and arrive at 7:00 am. The beds are comfortable and the service is great.

If China continues to build new rail lines as planned this country will be the most interconnected country in the world !

I highly recommend it !

The growing US-China Conflict

This blog has focused quite a bit on the issues involving the US and China. The short term and long term relationship between the US and China is likely to determine the nature international relations for the next few years.

The US has become even more reliant on the Chinese government to purchase treasury bills and yet it continues to "demand" currency reform at the same time. There is a significant conflict between these two perspectives.

I feel that the root of the issue lies in American's limited understanding of China and a fear that China will become a future rival for the US. of course there is some truth in this possibility but at the same time there is also an opportunity to build a partnership between the US and China that could ield considerable mutual benefits for all parties.

The US should consider changing its view of China as a backward country rife with all manner of social and economic problems. Why not take an approach of creating a partnership with China to assist in resolving problems. Why not put aside the prejudices of history and consider forging a new path based on solving problems and creating a better future ?

I am not naive enough to think that things are easy to solve or that being a "nice guy" will resolve difficult issues, however the Chinese view of the US remains extremely positive...why not take up this mantle ?

There is no other country in the world that Chinese have more respect for than the US. This is a powerful opportunity that the US could grab and use as a base for building a partnership based on the future rather than the past.

The cartoon below from The Economist describes the current impasse but also suggests that the answer is just to open the flood gates...The US has to be responsible for the financial problems which originated in the US but the Chinese side needs to use its new financial "power" (read US Treasuries) in a productive manner.

Regardless of how governments act the essential thing is for the peoples of both countries to continue to find ways to partner together. We need each other in this critical time.





http://media.economist.com/images/20070811/D3207WW0.jpg

Inflation with Chinese Characteristics

The former leader Deng Xiaoping famously stated that China's modernization drive as "Socialism with Chinese Characteristics." This has become the code word for Capitalism in China.

This week and next week the Chinese parliament is meeting in Beijing to discuss the future direction of the country with a particular focus on the economy.

The initial reports suggest that there is considerable debate going on within the sub-committees regarding the potential for rapid inflation based on the government's large stimulus program and its aggressive prodding of banks to rapidly lend capital to major state owned enterprises.

The stimulus package is not well understood but it is known that the focus is on stimulating job creation for infrastructure projects to employ migrant workers laid off from export industries in China's southern provinces.

In China when a directive comes from the central government to take action action is taken. banks will lend and state owned enterprises will expand.

The difficulty is knowing when enough is enough. How much is too much ? How much is too little ?

China is not one economy but rather several regional economies. The coastal cities and the south have been the fastest growing economic centers over the past few years. This is now shifting to more inland provinces (which is where much of the infrastructure spending is being allocated). If the growth and capital availability is excessive these provinces could experience a rapid spike in inflation by year end or early 2010. This is not the result the government is seeking.

A period of inflation seems inevitable however. One can not pump such a large amount of new capital into the economy without suffering from a certain level of inflation. The government's credibility will be decided by when it turns OFF the flow of capital rather than the actual GDP growth figure.

An additional problem problem is to what extent the rapid rise in lending will cause bad debts to accumulate again in the large national banks. China has largely solved the bad debt problem but could be faced with another round of balance sheet adjustments as a result of stimulating the economy to thwart a further reduction in GDP growth.

The perils are great but if manged appropriately or at least modestly reducing the risk China could emerge from this global recession as a beacon rather than a backward semi-public, semi-private economy.

Time will tell.

Shanghai Spring

Spring in Shanghai seems far away after nearly two weeks of constant rain and cold weather !

Usually by now warm weather has arrived and the trees are blossoming ! This year we seem to be locked in a perpetual cold front which won't break.

There are sporadic signs of spring including birds in the trees and random blossoms but the mood remains grim after so much rain and so many cloudy days !

Air quality seems to be improved over last year although it is hard to measure.

The city continues to be undergoing a major face lift in preparation for next year's World Fair which will open in the late spring in PuDong along the Huang Pu River. It seems that city districts have been given a clear directive to upgrade the facades of as many buildings as possible. new construction continues but more effort seems to be focused on renovation and upgrades.

Tickets went on sale this week for the World's Fair which is a sign that the final push is on to complete the construction and landscaping at the Fair location. The landmark building for the Fair is nearing completion. Transportation lines - subways and light rail are in their final months of construction.

This should really bring Shanghai on to the world stage as China's pre-eminent international city.

In the meantime we wait for warm dry weather !

Direct From China Daily on 8% GDP Growth in 2009

The media always has an angle...below is the full text from an article today on China's ability to meet the 8% GDP growth target for 2009....It is impossible to predict what will happen but this is the current line.

China may attain its targeted 8 percent economic growth, or even higher,
this year, prominent Chinese economist Li Yining said Tuesday.

The Chinese economy is also very likely to recover before other major economies, even though the world economy is still shrouded in
uncertainty, said Li, a member of the 11th National Committee of the
Chinese People's Political Consultative Conference (CPPCC), the nation's
top political advisory body.

"The economic slowdown is beginning to bottom out, and the economy is bound to rebound on huge government investment," said Li,

According to a survey of factories issued Monday by the brokerage CLSA, China's manufacturing activity contracted for a seventh consecutive
month in February, but at a slower rate than previous months.

"The growth may not be very high, but won't stay around six percent,"
Li said, "this year's growth could reach eight percent or even higher."

China's economic growth slowed to 6.8 percent in the fourth

quarter of 2008, dragging down the annual rate to a seven-year low of 9 percent, as the unfolding global financial crisis takes a toll on the national economy.

Since last October, the government has announced several aggressive measures to bolster domestic demand and increase investment,
including a 4 trillion yuan ($585.5 billion) stimulus plan, a plan to
expand rural consumption of home appliances and support plans for
key industries.

Li, who has been a political advisor for more than 20 years, said the attainment of a 8-percent growth would be decided by two factors:
a boost in domestic demand and changes in the global economy.

The 8-percent growth was entirely within reach if domestic investment
and consumption could be spurred to support the growth, he said.

"However, the developments of the global economy is not up to our country," he added.

The economist who had proposed the ongoing shareholding system
reform in China also said the country should be able to see an early
recovery.

"Our problems is not as complicated as in other countries," he said, "
and China's focus on expanding domestic demand could foster future growth, although our exports may have to depend on overseas demands."

However, the country needed to enhance agricultural productivity so as to increase farmers' income and to put both rural and urban residents
under the umbrella of the social security network before the domestic
demand could take off, Li said.

"Farmers' contribution to the economy could be huge if their income are raised to a higher level, given the large number of farmers," he said.

Of China's total 1.3 billion population, more than 900 million are farmers.

"Reforms of the pension system, education and medical insurance should keep up with the economic growth to increase people's willingness to
spend," Li added.

He said the public should have faith in the government's ability to
stimulate the economy. "There is no doubt about that."

The 79-year-old economist said the fundamentals of the economy
remained unchanged, and difficulties of exporters are results of a crisis originated outside the country.

"The country needed to promote innovation, industrial upgrade and economic restructuring in its efforts to bolstering the economy, and
these measures could not only ensure the economic growth, but
also improve the growth quality." he advised.

The professor with the Peking University said employment should be the country's top priority. The recovery of job creation is usually behind
that of economic growth, he warned.

China said it aimed to create jobs for nine million people this year. "It
is not an easy target, but the country is actively finding ways to make it happen," he said.

About 20 million of China's migrant workers have returned home after
losing their jobs as the global financial crisis takes its toll on the economy.

National People's Congress

Today China's national congress opens its session. We will see a surge of reports and new policies over the coming two weeks emerge from this year's session. The focus will be on the economy.

A comment from Today's China Daily signals the primary economic policy:

"National Committee members from the non-public sector of the economy should be encouraged to shoulder their share of social responsibilities," according to the Report on the Work of the Standing Committee of the CPPCC National Committee.

This is code for asking the private sector NOT to pay off workers and staff in the current downturn. The problem with this "request" is that private industries are not being given government subsidies or incentives to retain their workforce. They are not being given bank loans under the new looser lending policies.

The result of this policy could be a new round of friction between government-backed enterprises and private enterprises. When the tide is helping all boats rise private industry is the hero. When the tide recedes private industry is asked to be socially responsible. The friction is obvious.

In the US the government is bailing out the private sector - Autos, Banks, Wall Street...

In China the government is backing state owned enterprises with ready capital and cash and asking private industry to tighten its belt and "help out."

The result in a few years could be a stronger government controlled economy in both China AND the US. This could mean that both the US and China economies will under go dramatic change...For private businesses this means that working wth government stakeholders will become much more important than in the past !

What's Going on with the Chinese Economy ?

The Chinese economy continues to slow due to the global recession. What is different here is that China is not battling a structural problem but rather a slow down. China's financial system remains the same as before the recession started. This is the primary difference between China and the rest of the world.

In the 1920s and 1930s the US depression did not have the benefit (or the challenge) of a gloabl interconected media. News was not as ubiquitous as it is today. The Media did not have a strangle hold on setting people's expectations about recovery or the depth of the problem.

Today the Media is a critical player in people's expectations. The Media can raise or dampen people's expectations or hopes very easily if they do not have direct knowledge and experience of a given situation.

China's current economic situation is a good example.

When times were good from 2002 - 2008 the Media questioned China's rapid economic advancement stating that it was not a rapid nor as thorough as stated. There is of course some truth to this, however now the Media is pressing the point that China's economy is also not as rosy as stated. Regardless of the perspective the Media is terribly under informed.

My view is that China is experiencing a slow down. This is a fact. China is however NOT experiencing a structural economic problem. The US and the West are going through a major change in the structure of the economy. The preponderance of debt-driven growth is now coming home to roost. The West is faced with a goliath of a problem of considering how to reignite growth.

Taking a 36% stake in CITI bank is a good example of the revolutionary changes at work in the US. One year ago this would have been unheard of. The media in particular would have launched at such a suggestion. Today it is a reality that is being welcomed by the stock market as a necessary action.

China on the other hand is not changing its structure in reaction to the current crisis. it is using its existing financial system and government policy ability to manage throught the slow down. it is not changing its structure.

As a student of Chinese history I am aware that major events and major shifts in China are often a result of outside influences rather than internal manifestations. China's entrance into the WTO was the major catalyst for the lat 8 years of rapid expansion. Today's global problems will also give China the opportunity to reform and refine its policies and system to meet the challenges of the next 10 years.

On this point China can be praised as being open to identifying these major outside influences and reacting to them. The reaction is not always correct but at a minimum it causes change and change creates progress.

So my bottom line is that China's slow down is not a systemic problem. It is a shift rather than a revolution. It is not the crash and burn situation often described in the West.

A final note...China's problems remain as before. The difference is that these problems are turning into advantages rather than shortcomings !

Wait long enough and everything comes back into fashion !