In Emerging . com

Northern China is suffering drought. China has around 120 million hectares of arable land, of which slightly less than 10% is currently suffering drought.

According to China Daily, 43% of winter wheat production is affected. The worst winter drought in 50 years.

By comparison 2006 also saw the worst drought in 50 years. That came in the summer season. Soon afterwards strong inflation was seen in food prices and some other related products, that inflation attributed to a mix of the effect of drought and excessive FDI - attribution varying according to analyst.

The weather will be watched closely, inflation could raise it's head again.

CCTV2, in connection with Sina, and other news/Internet agencies have run a survey over the Internet for the last several days on perceptions of the economy and what the government should concentrate on during 2009.  While the survey methodology is not made clear (an Internet survey is not an accurate survey methodology) the results are striking, and were just presented on domestic television.

There are several press conferences today discussing 2008, both
statistically and qualitively, which will surely have (are already
having) an impact on policy discussions next month.

What is stark:  Survey respondents' are extremely negative in their expectations for 2009, but are very split on their opinions of what the government should do, and what industries (aside from exporting taking a slight lead) should be protected/promoted.

Here's the survey:

In your opinion, what is the state of the current global economy:
Very Good: 2.0%
Relatively Good:  2.8%
Average:  13.2%
Relatively Bad: 48.1%
Very Poor: 34.0%

What do you think the trend during 2009 will be:
Further Deterioration: 46.0%
Smooth Adjustment: 41.7%
A Positive Trend: 12.%

What should the economic priorities of the government in 2009 be:
Maintain Rapid Economic Growth: 10.9%
Effectively Stimulate Domestic Demand: 14.0%
Increase Government Investment: 5.8%
Improve Social Protection: 20.9%
Effectively Tackle Employment Difficulties: 15.1%
Raise Income and Property Prices: 21.0%
Control Prices (CPI): 12.0%

What do you expect the greatest domestic challenges of 2009 will be:
Exports: 28.7%
Manufacturing: 11.2%
Real Estate: 28.3%
IT Industry: 5.3%
Iron and Steel Industry: 8.8%
Energy Industries: 9.4%
Retail Industries/Services: 4.7%
Entertainment Industry: 3.3%

Some decimal places may be askew, at this moment I cannot find any
online resources which aggregate the results of each survey together,
and the survey appears to still be running on some websites.  There's a version of the survey still live here.

So said a local banker last night.  He was rather annoyed about questions of China's economy increasing domestic demand.  Returning migrant workers... what would they do?  "A girl who can manufacture clothes, or a man who can build sky scrapers isn't going to be much use in a village on the verge of development."  He continued: with no meaningful social or medical insurance, the bank is the last refuge in social stability, a bank, and perceived safety of savings, must remain sacrosanct.  Should unemployment start affecting individuals and family units, he foresaw a definite increase in savings ratios, compounding the danger of perceived risk in the banking system.  This, he added, would have an impact on illegal banks and less formal credit collectives - institutions involved in banking activities would be targetted by public policy before public perceptions in the banking, or quasi-banking, sector could take hold.

A discussion of increasing domestic demand at the household level was largely moot.  It was indeed necessary, but without social reform - reducing the need for households to save, including developing medical and social insurance, would be a slow process.  In the intermediate period, it was not a question of structural changes in the economy, an immediate economic policy was needed to prevent domestic demand slumping further and unemployment increasing.  He added that perceptions and reality of a slowdown were significantly different, a point he felt was important and underappreciated.  A slump in economic activity by 10%, or even 15%, meant a return to 2007 standard of living for much of the country, still a great improvement over the turn of the decade.

Keeping people busy was important for reinforcing perceptions a slowdown was not having a severe impact on their lives.  Domestic policies of building hundreds of miles of bridges, motorways, millions of square feet of empty factory may have been good policies in the 1990s and earlier 2000s when infrastructure was less well developed.  They may be less beneficial now, but in a period of perhaps two years when the opportunity cost of such projects was low they would not necessarily be bad policies.  Here he echoed his earlier point:  the mis-match of required skills at the village level vs. returning workers' skill sets, a large policy dilemma.

While public spending could work out as inflationary, decreased expectations of wage earners could have a deflationary impact.  Withdrawal of funds from the banking sector could have a further deflationary impact if it were accompanied by a decrease in the velocity of money.  Fiscal policies could have definite monetary impact:  monetary policy could be erratic.

At this point a non-banker left the table complaining farting would lead to a more conclusive discussion.  Heeding this point we all ended in agreement - there is a lot of domestic and international discussion of, and pre-empting of, unfolding policies - it's unclear to many what will happen, but will become a lot clearer post further policy announcements mid-February.  For now many are waiting in expectation.

Two thousand and nine will mark the Year of the Ox in the Chinese lunar calendar.  Here's what Paranormality.com has to say about it:

[The Ox year] is one in which success will escape without a sustained, mindful effort.  The sort of problems that are encountered in the year of the Ox tend to be home front problems that seem to be never ending.  The Ox year needs discipline and it is not the time for unruly behaviour or taking short cuts.  In this year success is achieved solely through hard work.

In addition, 2009 will be a Wood Ox year:

The Earth Ox - resolute, enduring, motivated by patience, is focused and genuine.

This would indeed make a change from volatile stock markets, real estate bubbles, dodgy banks, natural disasters, political bickering and protectionist gesturing.  Will 2009 be any better?  Perhaps only if we are resolute, enduring, motivated by patience, focused and genuine, but how likely is that?

Psychology affects economies.  If the public expect inflation there's a good chance inflation will happen.  If the public feel a need to tighten the purse strings they will buy less - less products and services are transacted - people earn less.  For the Great Chinese Consumer to up their consumption levels, thus maintaining levels of employment, they'd probably have to feel quite financially secure.

It doesn't look like they're feeling financially secure.  Two indicators:

1.  A Tweet* by an executive in a large China-based Internet gaming site mentioned a fall in traffic in the daytimes, which he attributed to office workers cutting-back their time spent online between 11:30am and 4pm:  Office workers are worried about their jobs.

2.  A conversation with a director of a Dalian HR firm, mainly working with white-collared and skilled industrial workers.  While some companies are continuing to hire (and some have even stepped-up hiring to get talent they wouldn't usually have access to) he has seen a marked contraction of workers in already in employment seeking to move company:  loyalty has increased (and ambition squashed) as a result of the turmoil.
 
There are a host of other indicators, from the price of a massage to the amount of socks my local sock seller is going through (not many, down a lot on last year) to electricity consumption.  The above two are rather direct and stark suggestions that employees are keeping their head down and are more worried than several months ago about losing their job.

The issue of household consumption, a high savings rate, I feel, is more structural than cyclical. Government spending needs to go into policies that structurally reduce the aggregate savings rate: increased acceptability/accessibility of insurance (health and social), or increased socialism of the health and education systems - the public currently hoard money - such hoarding would be unnecessary if greater diversification of risk and expenses were possible.  If they're worried about their jobs they're just going to hoard more.  And then there's the falling share of wages as a proportion of GDP in general.

*Since he later deleted the Tweet I'll not name him.

With unemployment threatening to rise, and GDP growth softening, will the government intervene to protect employment as they have done in the past?  Two months ago Black and White Cat wrote about an assignment in Liaoning at the beginning of the decade.  One passage stood out:

"One conference room after another. In one of them, in another city, the factory boss told us he would have loved to show us round the workshops, but unfortunately he couldn’t because it was too hot. The law required that if the temperature rose above a certain level, the workers had to be given the day off. It had passed that level, so the factory was temporarily closed. Very enlightened. Perhaps.

"He said the Southeast Asian economic crisis had definitely affected the factory in terms of exports, but business was still good and this was certainly not the reason for the temporary closure. Since we didn’t meet any of the workers and we would soon be driven off to somewhere else, there was no way we could find out if this was true."

The same was true not just of Liaoning, though heavy industry SOEs are in higher concentration there.  While headline statistics suggested China was affected less than much of Southeast Asia, it was affected, and lots of rules and law that were previously unenforced became enforced, new laws were enacted, with the effect dampening the effects of the Asian Financial Crisis and cushioning local economies from vacuums left by the break-up of loss-generating state industry.

All Roads linked to Shanghai Daily articles: Chinese SOEs see double-digit decline in profits in 1st 11 months and More than 200 enterprises promise no job or salary cuts in Shanghai.

When sales fall, and don't look to rise for a while, required input in a business or manufacturing process usually falls too - but not jobs or salaries?  SOEs may remain under official policy direction, but this time it's a little different.  The state is less of an employer than it once was.  Yet the desire to maintain jobs and social stability remains the same.  How much intervention, and in what manner?  Unemployed garment manufacturers are unlikely to make good bridge builders.  It will certainly be tempting for local governments to ensure the new employment law will be upheld, and perhaps throw in a few by-laws.

China has just celebrated 30 years since Economic Reform and Opening were first carried out.  There's still a lot to do, but sometimes it's nice to reflect on just what has changed, and how far things really have come.

The Hairdresser.

Liaoning provincial TV network just aired a show on how the little things in life have changed over the past 30 years.  It was quite the summary of just how things have moved on from true, proper, Stalin-Maoist communist times.  Anaecdotes to bear in mind when beaucracy of developing countries seems unbearable: it used to be a lot more unbearable.

林理發 was a hairdresser with a hairdressing Danwei (work unit) since the 1970s.  In 1978 he earned 26 Yuan per month.

It cost 6.5 Yuan to get your haircut.  But you needed a certificate stamped and signed by your own Danwei stating you must have a haircut.

Now anyone can open a hairdressing salon, with any city street almost certainly lined with the rotating lollipop poles, it often seems everyone has.

The Mobile Phone.

Inequality isn't anything new.  On the same program a man showed off his mobile telephone.  He bought it in 1990 for 38,000 Yuan.  The price was around 20,000 Yuan, but being in short supply an extra fee (bribe) was necessary to actually buy it - the same money would have bought a couple of apartments.  Ten years prior all telephone calls were routed through operators.  Mobile telephones are affordable; China now has the most mobile telephone subscribers in the world.

Such observations are nothing new nor original.  But that doesn't make them the transition any less amazing.

Motley Fool recently ran a story: 'An Unprecedented Investment Opportunity'.

Alex was forwarded the story by a friend.  He rarely reads Motley Fool, but when he does he's invariably overpowered by the noise to signal ratio, either feeling sad that people actually waste their time reading it, or consoling himself that it usually better reading than a lot of 'propriety' broker research.

This article contained the phrase "If you're an American investor, you're lucky to have even 2% exposure to China -- and that makes you dangerously underexposed."  This is not an especially original or insightful thing to say.  More direct variants of the phrase have echoed around the financial world since the mid 90s, vaguer ones long before.

Why would an average North American, or European, investor, want or need exposure to China?

Investors and Investment Advisors, typically flit around the following strategies, depending on the state of the market or what everyone else is saying:
1. Preserve wealth.
2. Makes lots of money.
3. Match wealth against liabilities.

Investors also seek to invest money over the following time periods:
A. The space of a day.
B. A couple of decades.
C. Some space in-between.

3B/3C:  Matching assets against liabilities became fashionable speak when Alex was in Pension World in the middle of the noughties:

1.  Does China's rise mean it will impact your future liabilities?  Will China's rise affect your future spending commitments, and if how so?

It does and it will, likely through a variety of channels, these channels should determine your investment in 'China'.  An increase in global energy consumption, food consumption, possibly higher education fees, or even real estate prices in your home country could be affected by an increase in Chinese incomes, and therefore purchasing power.  None of these necessarily mean investing in China will offset that effectively, while investing in commodities, education, ways in which China will affect you more directly, may help.

2.  Even if you thought of investing in China, would it be a good idea, and how would it be done?

Anglo Saxon countries posses financial markets that are not representative of financial markets in other countries, let alone China.  The US, UK, Australia, etc tend to have have high stock market capitalisation:GDP ratios.  This means that over time (long term) the stock market will track the economy, as the stock market is representative of the economy, when it goes down, when it goes up*. [OK, plus Entrepreneurship not capitalised, which IIRC Schiller calculated as around half of real GDP growth for the US in the last century, hardly insignificant.]

Choosing a good time to buy is hard in foresight and rather or simple in hindsight (if you're case 3B/3C in the example above, try to use statistics that are 3 decades+ in length, this tends to add retrospective hindsight should one imagine previous 'unprecedented opportunities'**).

But to buy what in China?  The stock market does not represent the economy, or even come close to representing it.  Government owned companies which lose money/soak up subsidies like a US Auto-maker, are over represented.  Smaller, more innovative companies, especially in the case of China, make up a large amount of economic growth but are under-represented in Stock Markets, especially China's.  Companies in China rarely have access to Commercial Paper/Bond Markets, Private Equity effectively does not exist; a lot of China's innovators depend on funding from family, friends and illegal banks - it is simply hard to access 'growth' in China, especially small and medium sized firms.

3.  Active Management and 'Adding Alpha'.

Adding alpha (the proportion of growth attributable to a Fund Manager's skill, opposed to Beta, their exposure to their benchmark) is hard in any market.  Yet many active investors are good at it, especially in Emerging Markets.  This is because they choose a benchmark completely inappropriate for measuring their actual performance.  There's nothing like investing in companies with market caps of $30mn USD and comparing your performance against rust-bucket state monopolies slowly getting dismantled and shut down... over an inappropriate time period (i.e. whatever looks best).

And no, you're not going to invest independently and perform sufficient due diligence when annual reports are in Chinese, potentially cooked, and with a large invisible hand of government preferring some old school friends over others.  And the exchange data-rates are slow for stat traders.  You're not going to be 2A with any degree of ability or success.

1A?  Avoid China.  Buy Gold or something equally archaic.

3B again.  Move to China?   Your assets might not change much but watch those liabilities disappear.  Party like it's 1999.

A 2B or a 2C might be able to have a degree of success, but avoid threatening noises to invest in markets that are not driven by fundamentals, where even blatant government intervention fails to lift the market, where markets are unlikely to match GDP growth over the long term, and where an 'unprecedented opportunity'** happens every couple of years.

* Key in this thinking is that employers support (keep payments going
into) pension funds when the stock market goes up, they didn't do this
in the 1990s ('payment holiday')... and we still suffering underfunded
pension funds.

** The second of the article's three points.

/rant