26 March, 2011

Rail or road: China's parallel tracks of transport network (originally published on EJ Insight)

Mar 24, 2011 08:16

Rail or road: China's parallel tracks of transport network
By L K Shiu

I recently attended a talk hosted by the Asia Society on a topic that is sure to catch the imagination of any western investor: “Can China save the world?”

Answers to this question will no doubt fill countless volumes to come, but the speaker, an American academic from Oxford, rightly points out that most of us are not quite sure which world(s) we’re talking about.

So let’s assume the real question is: “Can Chinese consumers save the western corporate world?” The speaker uses the automobile industry as an illustration, highlighting how the strong demand in China has made it the world's largest car market, replacing the United States. There is even natter that General Motors should consider relocating its headquarters to China, which has become its biggest market.

I, too, agree that the car industry offers a very good perspective on the consumer sector as a whole. Behind the automobile story lurks an assumption, unquestioned, regarding how the western (chiefly American) consumption model will be replicated in China. Revenue forecast models built on such assumption can be straightforwardly attractive. Get the per-capita ownership data of iPhones, cars, shoes, or whatever you can imagine, and multiply them by the mega population of China. Bang! You get a terrific result that no investors can resist.

But this method deserves a closer scrutiny. In America, rail is relatively underdeveloped compared with car ownership (two per capita). But this is surely not the picture envisaged by the Chinese leadership. Chapter 12 of the 12th Five-Year Plan, which deals with the construction of an integrated transport system, points to a multi-modal development model. Emphasis is on both the national high-speed rail network and the highway network. China aims to strengthen regional rail connections for passengers and freight, especially with regard to high-speed rail, fast passenger movement and coal-specific carriage.

Statistics show that in the peak season for passenger movement during the Lunar New Year (in Chinese, “chunyun”, the smooth operation of which is a mammoth logistical task for officials every year), rail carried approximately 220 million passenger-trips (2011 figure). The load carried by public roads was about 10 times bigger. On first sight, this appears to confirm the priority of road over rail. However, this has to be read, firstly, in the context of rail transport in carrying not only passengers but also freight. And for reasons I shall discuss later, rail plays an important role here.

Secondly, the Chinese government assigns different roles to rail and road, serving different layers of customers. According to the New China News Agency, the operating mileage of fast-track rail has reached 45,000 km, covering nearly all major cities with a population of more than 500,000 people. In contrast, the national highway web runs nearly 83,000 km, basically weaving up cities with a population of over 200,000. A cursory glance over the nationwide transport map reveals that highways cover the country more densely than high-speed rails, especially in the populous and more prosperous southeastern area. (Incidentally, on these maps openly accessible from official agencies, there are invariably lines linking Taiwan to Fujian, which are routes presumably not yet in existence.)

Thirdly, at the intra-city level, rail is seen as playing an even more pivotal role. It is far more economically efficient and is the best way to avoid traffic congestion and the accompanying environmental and social costs associated with car traffic. The National Development and Reform Commission’s (NDRC) website contains a study looking at the Japanese experience during its economic take-off. Commuters of the greater Tokyo area are predominantly served by various kinds of rail. To replace the carriage-load of 24 rail tracks, for instance, one has to build 200 motorways. In fact, the 12th Five-Year Plan promotes a track-based urban transport network comprising light-rails, subways and trams. It also points to the regulation of the taxi industry, rationalizing private motor car use and optimizing transfer facilities.

It is thus clear that China is more likely to go on parallel tracks of road and rail. Indeed, a more relevant issue is how to optimize the transport system by making use of the comparative advantages of road and rail under different circumstances, as well as achieving better coordination between the two. For this reason, although rail and road are administered by two different ministries, the national development is overseen by the NDRC.

L K Shiu is a part-time lecturer at Chinese University and a public affairs consultant. He worked as an administrative officer in the Hong Kong Government.

This is the first of a two-part article on China's rail and road development strategy

-- Contact the reporter at utopia1848@gmail.com


23 March, 2011

NOW TV on Budget

Some video clips on the earlier budget debate. I was joining a discussion forum with Ms Emily Lau, Legislator from Democratic Party (劉慧卿), and Mr. HW Chua of Hong Kong Council of Social Services(蔡海偉) on NOW TV.






17 March, 2011

Premier "directive" (originally published in EJ Insight)

Mar 16, 2011 17:32

Premier Wen's 'directive' to Hong Kong
By L K Shiu

Premier Wen Jiabao’s “directive” to Hong Kong during a press conference at the close of the National People’s Congress was neither surprising nor unprecedented. But it did reveal some deep-rooted “contradictions” that even Beijing is reluctant to acknowledge.

It was not unprecedented because it had followed a gradual trend since 2003 when half a million people took to the streets in Hong Kong to protest against a national security bill. That event fundamentally changed the Chinese government’s perception of Hong Kong's ability to administer its own affairs. Top Chinese officials were put in charge of Hong Kong matters and had grown more vigilant, if not more interventionist, in the city's political situation. As a matter of fact, Hong Kong was included in the 11th Five-Year Plan.

The Premier's “directive” and the Hong Kong-Macau section in the 12th Five-Year Plan were not surprising either; they simply reflect the long-established thinking of the Chinese government towards Hong Kong ever since it signed the Joint Declaration with Britain back in the 1980s. Beijing's thinking can be summarized into two notions: economic prosperity and socio-political stability. The latter deserves, of course, yet greater emphasis this year given the political unrest in other parts of the world and the mounting social discontent in China itself.

Thus, the 12th Five-Year Plan underscores the need for Hong Kong to promote the “coordinated development of the economy and society.” That isn’t just for the city but constitutes a coherent part of the national strategy.

The top leadership’s counsel on “long-term scientific development” appears to have downplayed the underlying problems besetting the city to the point that Hong Kong is left to figure out a long-term development plan and resolve deep-rooted social conflicts. The city has already lost a golden decade on many long-term economic development projects, from harbor reclamation to another airport runway. The problem is that such procrastination is deeply entrenched in the city's chronic systemic failure.

It would not be possible to give a full analysis of such failure here but suffice it to say that it is the inability of the system to consolidate community consensus on any issue. And such failure is closely associated with the staggering constitutional development of the city in which Beijing itself plays a large role.

The second hidden obstacle which the Premier’s good advice seems to have downplayed is the constitutional barriers imposed by the Basic Law of Hong Kong.

Take two examples. First, the Premier appeared to have drawn a logical link between Hong Kong’s ample fiscal strength and foreign exchange reserves and improving the city’s social security network. Although well intended, the Basic Law clearly stipulates that the city’s Exchange Fund should be managed “primarily for regulating the exchange value of the Hong Kong dollar.”

Second, the Premier was careful enough to dispel rumors of Hong Kong coming under Beijing’s economic planning. Even if it had wished so, the Hong Kong government is bound by the Basic Law to formulate, “on its own, monetary and financial policies” and “safeguard the free operation of financial business and financial markets,” etc. Any deviation from the above, even for judicious reasons, might invite a constitutional challenge at courts and bring about even more unsettling political crises.

The ex-colony is still by far the most competitive and wealthiest city in China and plays a critical role (though declining) that no other mainland city can replace at the moment. But it would be unfair to ascribe all the administrative difficulties to the city’s government alone. Much of it originated from the sheer novelty of the idea “one country, two systems.”

L K Shiu is a part-time lecturer at the Chinese University and a public affairs consultant. He worked as an administrative officer in the Hong Kong Government.

-- Contact the writer at utopia1848@gmail.com


First posted: 8:52 a.m.

16 March, 2011





10 March, 2011

Change of economic direction is no easy task

China's leadership is seeking a more inclusive and balanced growth of the economy for the next five years at the "two sessions" of the National People's Congress and the Chinese People's Political Consultative Conference, which began in Beijing last week. But if one looks back at history just five years ago, it is not difficult to see similar wording in the 11th Five-Year Plan.

Back in 2006, the then head of China's National Development and Reform Commission highlighted the 11th Five-Year Plan as following two strategic lines, namely "the scientific concept of development" and the goal of "building a harmonious society". The goals covered not only economic areas but also those concerning "people's life, social development and the environment".

Five years had elapsed and apparently progress or changes had been limited thus far. We still see ample evidence which suggest brewing social unrest. The recent Jasmine Revolution in the Middle East only serves to heighten the concerns over the lack of progress in issues related to the livelihood of ordinary folks.

Perhaps no one is more acutely aware of the flimsy ground on which the government stands than the government itself. Premier Wen Jiabao went on television for the third consecutive year answering questions from "netizens" (a Chinese term that literally means "people using the internet", but subtly referring to those unrepresented ordinary folks with populist and at times radical demands).

The word "reform" has never been easy in human history, in particular in a country like China. Chinese political and intellectual history is loaded with examples of failed reformist heroes that belong to the finest of the country's elites. They lived in fame in posterity but during their lifetime, they were often loathed because their reforms threatened deeply-vested interests.

These vested interests have amassed amazingly huge wealth in the wake of China's open-door policy during the last two or three decades, partly through personal endeavor but arguably more through connection, or guanxi, and privileges. A fundamental change in the direction of future national or economic development would no doubt affect their interests.

Consider simply the change from an export-driven economy to one tilted towards imports and consumption (or merely a little more balanced). If the government is to maintain its fiscal position intact by lowering export subsidies and import taxes at the same time, export interests would be hurt. To see the political ramification, western observers only need to recall the lesson of the English Corn Laws in the 19th century.

The Corn Laws were essentially import tariffs introduced by the English Parliament at the end of the Napoleonic War. It served to protect the commercial profits and political power of the landed interests, viz. the traditional English aristocracy, at a time when England was going through rapid industrialization. The Laws were deeply resented because they raised corn prices and were eventually repealed after long drawn-out political protests and debates which lasted nearly thirty years. In retrospect, the repeal was a timely move for an industrial power that needed overseas markets for exports more than an uncompetitive domestic agricultural sector. It boosted consumer welfare in the long term and benefited the economy as a whole, but no doubt harmed the vested landed interests.

The English political system by that time was able to resolve the conflicts and sustain the internal political rift. The English were after all famed for their conservatism or reformist approach. Whether Chinese people would have the same luck is a matter only time can tell. Like Britain in the 19th century, China is undergoing rapid industrialization and urbanization. But arguably, the country does not have the same well-developed legal system and transparent rules of game that can command the respect of all classes of the population.

And while the industrialization in Britain had created a new class of merchants and capitalists who emerged to replace the traditional landed interest, it appears that China's economic success has by and large benefited and strengthened those already in power. It is well known that many state enterprises are transfiguration of former state bureaus or departments. Many highly-successful business elites have close government connections. What's more, these vested interests are carefully intertwined in implicit alliances.

On the other hand, the Chinese elites might not have the same luxury of time as enjoyed by the English aristocracy. The top leadership understands that reform is much needed, perhaps all the more so on the eve of the 100th anniversary of the 1911 Revolution. (One doesn't have to superstitious or prophetic to understand the modern implication or relevance of this event.)

But the dilemma is this: a long drawn-out reform process similar to the Corn Laws might not withstand mounting social pressure, whereas a quick abrupt recipe might as well bring them into the category of those failed heroes of the past.

L K Shiu is a part-time lecturer at the Chinese University of Hong Kong and a public affairs consultant. He worked as an administrative officer with the Hong Kong Government.

Contact the writer at utopia1848@gmail.com

(originally published on EJ insight, 7 March 2011)

01 March, 2011

The "China Premium"

After all, who isn’t eyeing or flirting with China these days? It seems the earth would stop orbiting without China.
Despite Hong Kong’s official branding as “Asia’s world city,” its Financial Secretary appears to have written his budget overwhelmingly on the prospect of a strong Chinese economy. Much less reference is made to wider development of the outside world. Such mentality is not unusual. Against the international trend of mergers of stock bourses, the Hong Kong stock exchange, for instance, stands alone and lukewarm, convinced that Hong Kong’s link with the mainland is the “silver spoon” to keep it well fed. The city’s chief executive, Donald Tsang Yam-kuen, said years ago that it’s difficult for Hong Kong to get poor with a rising China.

Putting all the eggs in one basket may defy conventional wisdom. But many would think there is nothing wrong with such one-sided optimism which appears to be even demanded by economic reality. After all, who isn’t eyeing or flirting with China these days? It seems the earth would stop orbiting without China. Even the most educated elites in China are carried away by the lavish compliments of western observers, policy-makers and businessmen. In 2009, a liberal intellectual publication held a conference on “The Socialist Market Economy in the midst of Global Financial Crisis” in Beijing. Many well-informed attendees believed that the crisis of 2008 revealed the inherent shortcomings of western capitalism and the resilience of the socialist market model – with Chinese characteristics.

These changes in the intellectual circles are noteworthy for they may be indicative of changing perceptions among the elites that may shape policy directions for years to come. Until very recently China was keen on learning or even copying many of the regulatory features of western economic models, primarily those of the U.S. Now it is becoming more self-assured. It is ready to assert that not only is the socialist model not impracticable but rather it complements the inadequacies, or addresses the excesses, of western capitalism.

But is such “cultural ascendancy” warranted by facts? To begin with, everyone knows that the Chinese financial system emerged relatively unscathed after 2008, owing not to its soundness but its insulation. The real test is yet to come; hence the Chinese regulators' apprehension of overseas hot money.

Secondly, rules and regulations are easy to copy but difficult to integrate or assimilate into one’s unique system particularly in a country that puts much emphasis on its “national characteristics” or guoqing. Auditors with experience in Chinese book-keeping well understand that figures in annual reports are strongly affected by accounting policies. While international financial reporting standards (IFRS) are followed in setting these policies for listed companies, the exact implementation or interpretation unavoidably has to be taken with some Chinese characteristics.

Since eventually all stock valuation models are based on a set of assumptions that reflect human perceptions and numbers reported on books, how rigorously these international accounting standards are followed has a significant bearing on the comparability of corporate financial data across jurisdictions. An investor may well doubt whether a dollar on a Chinese account weighs the same as a dollar on an American or British account.

The market seems to believe that it does, if not more. Many of the mainland corporations are trading at much higher valuation ratios than traditional industry leaders. We have PetroChina’s price-to-earnings ratio (P/E) beating many of its western competitors, taking it occasionally ahead of Exxon Mobil by market capitalization. BYD is still trading at above world-average P/E in spite of its sluggish sales. These imply that the market has firm convictions in both the numbers and the outlook of mainland companies.

Whether this is justifiable or not is a matter of judgment, but one may call this the "China premium", attached to anything that has to do with China right now. But such stock market logic (which sounds like an oxymoron in itself) does seem to contradict our common sense: we usually ask for a discount when shopping for goods or services made by developing countries (incidentally, according to official definition, China is a still a developing economy). And if you believe ultimately it’s the real products or services that count, then anyone who has personal experience with a Chinese bank and foreign banks would know the real difference.

(originally published on EJ Insight)