China

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<p><img src="https://counter.theconversation.edu.au/content/66921/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1"></p>
<p>GUEST OBSERVER</p>
<p>There has been significant suspicion in Australia and elsewhere on the wealth of particular business people, investors and companies from China.</p>
<p>There’s always the suggestion that there is something unacceptable about it, whether it be tax evasion, corruption money, stolen money and illegitimate or illegal business ventures. </p>
<p>However this is because we’re looking at the situation with Western goggles on. When you consider the way things run in China, corruption starts to look very different.</p>
<p>There is a lot of academic, anecdotal and official material to support the suspicions about China. The problem of corruption is now notorious not least because of the Chinese government’s current anti-corruption campaign. </p>
<p>The diversion of state assets is one form of corruption of major concern in China. This is when resources that belong to the state are diverted into private hands. It takes many forms, from direct cash or asset diversion to the selling of land to developers when there is ostensibly no right to sell.</p>
<p>Pirated goods and fake products as a result of illegitimate businesses is another side of many corrupt practices.</p>
<p>Developed rule of law has simply not existed in China since the economy changed at the end of the 1970s. Although arguably changing, the system in China has been that, those who entrepreneurially take advantage of available state resources and generate wealth for themselves and the country are usually allowed to do so. Many of these people are themselves public officials or closely connected to them.</p>
<p>In addition, the evolving system of government has encouraged local state entrepreneurship through vague laws and localised administrative decision-making and competitiveness. Local officials are meant to adapt laws to fit competitive local economic development and they do. </p>
<p>A large section of the new wealthy middle class has become rich on the exploitation of housing allocations. They got these from connections in particular governmental and state owned enterprise posts, in the previous era. This may appear illegitimate but the state is now actively fostering this middle class for political and economic goals. </p>
<p>China generally supports those who took advantage of state assets in the earlier economic era and successfully generated economic activity because of the role they played in the country’s economic transformation.</p>
<p>This means the government doesn’t really see these people as corrupt or tax avoiders. In fact, tight definitions of legitimacy have little to do with China’s current and past reality. </p>
<p>Notably, a large part of the story of China’s successful economic transformation is the story of individuals and officials who violated restrictive regulations and laws on economic activity to positive economic outcomes for the country. </p>
<p>However, this also means an official can be accused of corruption as part of a politically motivated initiative to remove them. A business person can be accused of breaking a business law or tax evasion for a similar purpose.</p>
<p>For example, there are cases where businesses that local officials view as desirable to the local economy are given tax treatment that is far more generous than the law allows. If the relevant local leaders are subsequently the target of a political campaign, this tax deal can be presented as evidence of corruption. The business concerned, on the other hand, may be accused of tax evasion. </p>
<p>That said, there is no doubt that there are true ill-gotten gains in China and truly corrupt people. It’s just that this truth needs to be understood through a more complex and murky institutional prism of legitimacy. </p>
<p>This all raises some significant problems for other countries that seek to attract Chinese capital and business but do not like the idea that this money may not be legitimate. </p>
<p>It would be unfair to argue that it is illegitimate simply because it does not accord with the standards applicable in Western countries. Likewise, it may be unfair not to protect a person accused of corruption, if the truth is that they are actually the target of a politically motivated persecution.</p>
<p><em><span class="fn author-name">Nolan Sharkey is </span>Winthrop Professor of Law, University of Western Australia and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/nolan-sharkey-64745" target="_blank">here</a>.</em></p>
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jchancellor-FAypfDUnLy

Corruption looks different in China

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<p>GUEST OBSERVER</p>
<p>In April, Chinese house prices data showed a further broadening of momentum across the 70 major cities that report.</p>
<p>For new housing, 65 cities reported price gains in April relative to March; that compares to 62, 47, and 38 respectively in March, February and January.</p>
<p>In contrast, momentum in the existing market failed to improve: at 51, the number of cities reporting gains was marginally down on March’s 54, but up from around 35 in January and February.</p>
<p>Relative to a year ago, new and existing housing price growth improved in April, albeit only at the margin. For tier-1 cities, prices for new and existing houses are up 31.5 percent yr (from 29.4 percent yr in March) and 36.1 percent yr (from 35.6 percentyr). Within tier-1, Shenzhen remains the clear leader, with new house prices there up 62.5 percentyr versus the next-best (Shanghai) at 28.6 percent yr. Shenzhen also has the strongest performing existing market, although the divergence is less obvious: 56.2 percent yr against 37.3 percent yr in Beijing and 30.1 percent yr for Shanghai.</p>
<p>Price growth in tier-2 and tier-3 cities remains a striking contrast against tier-1. For tier-2, new and existing house prices have risen 5.0 percent yr and 5.5 percent yr respectively (up from 3.6 percent yr and 4.4 percent yr). And in tier-3, prices are up just 1.6 percent yr and 1.3 percent yr (0.5 percent yr and 0.8 percent yr).</p>
<p>It is certainly a positive that prices are growing in tier-2 and tier-3 cities, but the uptrend is hardly robust. The divergence across the three tiers continues to suggest that, while established wealth is being put to use in the most-developed cities, conditions remain quite subdued elsewhere, with easier policy only having an impact at the margin.</p>
<p>So as to give longevity to the burgeoning upturn in residential activity, there is a need to limit speculative excess at the top while maintaining accommodation to other regional markets.</p>
<p>Clearly there is more work to do in this area.</p>
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<p><em>‎Elliot Clarke is director and Senior Economist, Westpac, and can be contacted <a href="https://www.westpac.com.au" target="_blank">here</a>.</em></p>
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Chinese 70-city property prices: Westpac's Elliot Clarke 

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<p><img src="https://counter.theconversation.edu.au/content/57114/count.gif" alt="The Conversation" width="1" height="1"></p>
<p>GUEST OBSERVER</p>
<p>In making a preliminary decision on the sale of S. Kidman &amp; Co to a Chinese consortium, the Treasurer Scott Morrison has shed some light on what the government defines as being in the “national interest”.</p>
<p>He describes the Chinese bid as being contrary to Australia’s national interes<a href="https://sjm.ministers.treasury.gov.au/media-release/050-2016/?utm_source=wysija&amp;utm_medium=email&amp;utm_campaign=Media+Release+-+Preliminary+decision+of+foreign+investment+application+for+purchase+of+S.+Kidman+%26+Co+Limited">t</a>, because:</p>
<p><span style="line-height: 1.3em;">“the form in which the Kidman portfolio has been offered as a single aggregated asset, has rendered it difficult for Australian bidders to be able to make a competitive bid.”</span></p>
<p>The decision was rationalised not on any of the pre-existing national interest test provisions, but rather the fact that Australian companies had struggled to make a competitive bid.</p>
<p>By doing this, the Treasurer has articulated a new policy objective, not previously part of the national interest test: that an Australian firm should have a substantial stake in the bidding process.</p>
<h2>How is national interest defined?</h2>
<p>The consortium bid for Kidman, the largest private land holding in Australia, was subject to approval by the Treasurer and the Foreign Investment Review Board (FIRB). All investments which are screened by the FIRB are subject to a “national interest test”.</p>
<p>The specific content of this test is not legislatively defined, and is decided on a case-by-case basis according to the judgement of the Treasurer. However, the FIRB does provide investors a set of ‘guidelines’, which outline five factors that are usually considered. These include: national security, competition policy, other Australian government policies and regulations (including environment and tax), the impact on the economy and community as a whole and the character of the investor.</p>
<p>There are also an additional set of six guidelines for the agricultural sector, which cover issues relevant for this industry such as land access, biodiversity, productivity and employment.</p>
<p>These guidelines were most recently re-issued in December 2015. However, they have remained relatively unchanged since the last major revision by the Rudd government in 2008, which was made in the wake of Chinalco’s intervention into a proposed BHP-Rio Tinto takeover. Significantly, none of these provisions express a requirement for local ownership in the agricultural sector.</p>
<p>In recent years, the overwhelming majority of investment applications assessed by the FIRB have passed the national interest test. In the relatively rare cases of rejection, it has consistently been for one of the above reasons. Examples include the ADM bid for GrainCorp <a href="https://jbh.ministers.treasury.gov.au/media-release/026-2013/">(</a>rejected in 2013 on competition policy grounds<a href="https://jbh.ministers.treasury.gov.au/media-release/026-2013/">)</a>, and the Singapore Stock Exchange’s attempted merger with the ASX (rejected in 2011 on financial regulatory grounds).</p>
<p>However, Scott Morrison’s preliminary decision to oppose Dakang Australia’s bid for S. Kidman and Co. fundamentally reinterprets these guidelines. Despite the fact the sale process was found to be open and commercially sound, it has been rejected.</p>
<p>The clear message is that sale process now needs to be re-run – with the assets disaggregated – to ensure less-competitive local companies can win at least some of the assets.</p>
<p>This is akin to moving the goalposts when the outcome is not what you desired. It is also inherently protectionist. It rewards Australian firms who will now get a second chance to pick up a part of the Kidman portfolio.</p>
<p>In essence, the Kidman decision is a de facto introduction of a local ownership policy for agricultural land. Outside of sensitive sectors (such as media), Australia has not maintained any formal local ownership rules since 1992. This makes the Kidman rejection was of the most significant foreign investment decisions made in several decades.</p>
<p>It is clear that the Treasurer sees Australian bidders as crucial to ensuring national interests are looked after, what is still not clear is definition of “foreign interest.”</p>
<h2>How is foreign interest defined?</h2>
<p>The Kidman decision comes as a senate inquiry examining the effectiveness of the Foreign Investment Review Framework finishes. The <a href="https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Foreign_Investment_Review/Report">final</a> and supplementary reports from the inquiry point to a lack of consistency and transparency of foreign investment decision making between the states and the commonwealth, particularly regarding sales of agricultural land to foreign interest.</p>
<p>At the moment the Foreign Acquisition and Takeovers Act 1975 deals with any foreign people or corporations that are seeking to acquire or to merge with a whole or a part of an Australian business. If a transaction exceeds a certain limit (different limits are applied to different industries) it’s reviewed by the Foreign Investment Review Board(FIRB).</p>
<p>However this Act doesn’t have a definition of foreign interest. This is crucial because since 1975, the picture of the world has dramatically changed.</p>
<p>According to ABS, until late 1980s, Australia’s investing partners were mostly persons and companies from developed market economies. Therefore, there could be little concern that Australia’s foreign counterparts were different to investing domestic entities.</p>
<p>These companies were either seeking profit or also seeking company control as direct investors and usually didn’t report to or take directives from any government on commercial decisions.</p>
<p>In late 1980s, new market economies emerged in place of both former communist countries, and reforming and rapidly growing third world nations. In some of those nations, such as most counties that replaced the former USSR, as well as in China, different forms of mixed private and public ownership in companies have been established with different roles and powers of governments in companies' decision making.</p>
<p>Despite of large scale privatisation, state and mixed ownership is still important and increasingly so in Russia. By 2014 China has become the 7th largest foreign investor in Australia, ahead of such countries as Germany, New Zealand, France. Meanwhile, ownership is rarely straight forward in China; and the countries' 500 global companies are mostly state-owned.</p>
<p>However, the 1975 Act does not require that the FIRB to look into the proportion of foreign government’s ownership in a company; involvement of a foreign government in company’s decision making (particularly, through government’s representation on the board of directors); government’s orders that limit company’s commercial independence; or compliance with legislation beyond that which normally regulates commercial activities.</p>
<p>This issue could be addressed by including foreign interest independence test into the FIRB process. Such a test needs to deal with the magnitude of sovereign ownership and sovereign involvement in foreign company’s decision making.</p>
<p>The idea of such a test was suggested on one of the submissions to the review, but did not find it’s way to the report.</p>
<p><em><span class="fn author-name">Gennadi Kazakevitch is d</span><span style="line-height: 1.3em;">eputy head, Department of Economics, Monash University and can be </span>contacted<span style="line-height: 1.3em;"> <a href="https://theconversation.com/profiles/gennadi-kazakevitch-90201" target="_blank">here</a>.</span></em></p>
<p><em><span style="line-height: 1.3em;"><span class="fn author-name">Jeffrey Wilson is f</span></span><span style="line-height: 1.3em;">ellow of the Asia Research Centre, Murdoch University and can be contacted <a href="https://theconversation.com/profiles/jeffrey-wilson-12717" target="_blank">here</a>.</span></em></p>
<p><em><span style="line-height: 1.3em;">Both are authors for The Conversation.</span></em></p>
<p><span style="line-height: 1.3em;"> </span></p>
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Morrison’s ruling on Kidman & Co sale redefines the national interest test

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<div class="column">The China tourist boom continues to pay dividends.</div>
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<div class="column">The number of tourists to Australia from China and Hong Kong combined is now heading towards 1.4 million in the past year – and the gap is widening on the visitors from New Zealand.</div>
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<div class="column">In fact 52,000 more tourists visited our shores from Greater China than compared with NZ over the past year. A remarkable change when you consider that even up to three months prior annual tourists from NZ exceeded Greater China by almost 7,000.<br><br>And with China and Hong Kong tourist numbers continuing to grow at a 21 percent plus annual rate, there are more landmark results likely to be recorded over the next year. It is even more astonishing when you consider that just over four years ago Chinese tourist numbers were around half those of New Zealand.</div>
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<br>Clearly our number one tourist group is has shifted and the new winners from the China boom are tourist operators and retailers rather than mining companies that benefitted in the first stage of the China boom.</div>
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<br>Tourists from mainland China is fast closing in on 1.1 million in the past year, up 23 percent over the past year. While some may fret about the slowdown in the Chinese industrial sector, the more forward-thinking analysts are focussing on the boost to Australian retailers from increased spending by Chinese consumers and the growing number of Chinese tourists.</div>
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<div class="column">The rebalancing continues to be taking place across the economy. No doubt the weaker Aussie dollar is helping to alleviate some of the pressures for the weaker investment story. And from the Reserve Bank’s standpoint, policymakers will continue to monitor the transition, and debate if further stimulus is necessary to support growth.</div>
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<br>What do the figures show?</div>
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<br>Overseas arrivals &amp; departures</div>
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<div class="column">Tourist arrivals rose by 0.2 percent in May. And departures rose by 1.5 percent. Arrivals are up 11.7 percent on the year with departures up 4.5 percent.</div>
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<div class="column">In May, tourists from greater China (China and Hong Kong) totalled 120,700 (mainland China 100,800, Hong Kong, 19,900), ahead of New Zealand (109,900). Greater China passed NZ for the first time in September 2015.</div>
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<br>Over the past year a record 1,133,700 tourists came to Australia from China, up 22.7 per cent over the year. Tourists from China and Hong Kong rose to a record 1,366,500 over the past year, up 21 percent over the year. Tourists from New Zealand totalled 1,314,300 visitors over the past year, but were up just 3.9 percent. <br><p>Over the past year, net permanent and long-term arrivals to Australia totalled 263,920 – the lowest level in nine years (March 2007).</p>
<p>What is the importance of the economic data?</p>
<p>The Australian Bureau of Statistics releases data on overseas arrivals and departures is produced monthly and is an indicator of the health of the tourism sector. The figures are also useful in understanding spending trends and tracking migrant numbers – an indicator with widespread implications for employment, housing and spending.</p>
What are the implications for interest rates and investors?</div>
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<div class="column">Looking forward, not only will the weaker Aussie dollar should drive further tourism inflows, but it should provide an additional degree of support to the domestic tourism sector. Over time, the cheaper currency should make it more attractive to travel within Australia rather than overseas. Tourism has potential to join housing as a key driver of the Australian economy over the coming year, especially if the Aussie dollar falls further.</div>
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<div class="column">In-bound migration is holding at the lowest levels in nine years, meaning that there is greater scope for unemployment to fall in the short-term before businesses have to start looking abroad for suitable staff.<br><p>The Reserve Bank is likely to debate the merits of another rate cut at the August Board meeting.</p>
<p> <em>Savanth Sebastian is an economist for <a href="https://www.commsec.com.au/" target="_blank">CommSec</a></em></p>
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Migration at 9-year lows; Chinese tourism boom: Commsec's Savanth Sebastian

Australia’s links to China set to broaden: HSBC's Paul Bloxham

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<p><img src="https://counter.theconversation.edu.au/content/69863/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1"></p>
<p>GUEST OBSERVER</p>
<p>When it comes to discussions about Chinese real estate investors, we tend to focus on the idea that they are buying up property in places like Australia, pushing up prices – even if that is somewhat questionable.</p>
<p>But it also ignores the other side of the equation. The number of properties built by Chinese developers outside of China has grown significantly, even as residential construction within China slows. </p>
<p>The expansion of Chinese residential development outside China has impacts on a number of levels, from property prices through to regional diplomacy.</p>
<h2>The shift to Asia</h2>
<p>Country Garden, a property development company based in Guangdong, China, is constructing apartment buildings that would add more than half-a-million homes and house 700,000 people in Johor Bahru, in southern Malaysia. This project goes far beyond constructing apartment buildings, however. It is part of an even bigger project named “Forest City” that Country Garden plans to build on four artificial islands. </p>
<p>The idea is that Forest City will be equipped with schools, shopping malls, parks, hotels, office buildings and banks. All ensconced in rich greenery, clean water and a quiet transportation system. </p>
<p>This grand project is just one example of the recent surge of overseas investment by Chinese property developers. Total investment in the Chinese real estate sector was growing at a rate above 10% until 2014, then dropped to less than 1% in 2015. This indicates a significant shift in Chinese real estate investment.</p>
<p>All the while, Chinese investment in the real estate sector overseas has picked up strongly. It has grown from $US0.6 billion in 2009 to US$30 billion in 2015. Several Chinese property developers have identified overseas investment as their main business growth strategy.</p>
<h2>Two reasons for the pivot</h2>
<p>Chinese investors have begun looking offshore for a couple of reasons. </p>
<p>Chinese buyer demand for overseas properties is growing. Since China reformed its economy and started growing at a fantastic rate, households have accumulated significant wealth. They now want to diversify their investment portfolios, and so are seeking property elsewhere. </p>
<p>Volatility in domestic housing prices has intensified this trend, despite various government policies aimed at smoothing out price fluctuations. An oversupply of properties in third and fourth-tier cities such as Ordos and Qinhuangdao created “ghost towns” where property isn’t desirable. In first and second-tier cities, however, prices have skyrocketed. House price-to-income ratios of these cities are ranked highest in the world, making it difficult to invest in properties in China.</p>
<p>In recent years there has been a huge expansion of production capacity. In 2015, China produced 51.3% of the cement and 49.5% of the crude steel in the world. As production capacity grows beyond the demand from the domestic market and runs into overcapacity, it is natural that firms will seek returns overseas. </p>
<h2>The impact of it all</h2>
<p>Taking Country Garden as an example, it is worth noting that the developer is not just building residential property, but designing and constructing the entire infrastructure for a city. Transport, greenery, water and noise control are all being put in place. These are beyond the scope of a conventional property developer. </p>
<p>Therefore, one potential positive impact of this project is to help boost the quality of infrastructure in Johor Bahru and so nurture more business activities in the future. The economic and geographic relationships between Johor Bahru and neighbouring Singapore may develop into one similar to that between Shenzhen and Hong Kong. </p>
<p>It is, however, critical that the local government monitors and enforces strict environmental protection and regulation to ensure the project won’t damage the natural environment or disrupt the local market. </p>
<p>The huge influx of newly built apartments has resulted in the value of residential sales dropping by almost one-third in in Johor Bahru last year. Whether this is a short-run phenomenon and housing prices will rally in the long run depends on whether more business activities and job opportunities can attract population inflow to the city and hence create higher demand for housing. In the short run, the fall in housing prices may lower the cost of living and attract firms and workers into the city.</p>
<p>For the Chinese government, it will be important to nurture more talent with legal and financial expertise to help Chinese property developers go out and invest overseas. This expansion by developers is just one, early facet of China’s new diplomatic efforts to develop infrastructure overseas.</p>
<p><em><span class="fn author-name">Yixiao Zhou is l</span>ecturer in Economics, Curtin University and author for The Conversation. She can be contacted <a href="https://theconversation.com/profiles/yixiao-zhou-320417" target="_blank">here</a>.</em></p>
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As its economy changes, China is starting to export its real estate ideas too

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<p>GUEST OBSERVER</p>
<p>In March, China (including Hong Kong) passed New Zealand as Australia’s largest source of tourists. And that gap widened in April. Over the past year 1.35 million Chinese visited our shores. This is the new boom – the tourism boom – and again it is driven by China. </p>
<p>Tourism Research Australia found that international visitors spent $36.6 billion in 2015 with China spending $8.3 billion or almost $8,000 per person. Spending was up by 18 per cent on a year earlier – the strongest growth in 14 years. And the latest data on tourist arrivals suggests that the spending by international visitors continues to lift, providing valuable momentum for the economy.</p>
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<p> It has been a stellar week for the economy. Data has showed the economy growing at the fastest pace in 31⁄2 years; building approvals hit fresh record highs; car sales are at record highs; and tourist arrivals hit fresh record highs. The economy is firing on all cylinders. Clearly any suggestion that rate cuts are needed to lift a sagging economy is very much misplaced. The Reserve Bank cut rates in May – and still may cut rates again – on the premise that the economy can record even faster growth without sparking higher inflation.</p>
<p><strong>What do the figures show?</strong></p>
<p><strong>Overseas arrivals &amp; departures</strong></p>
<p><strong>Tourist arrivals </strong>rose by 1.2 percent to record highs in April. <strong>Tourist departures </strong>fell 3.4 percent in April from record highs. Arrivals are up 11.6 percent on the year with departures up 2.2 percent.  </p>
<p><strong>Tourists from greater China </strong>(China and Hong Kong) totalled 119,800 in April (mainland China 100,900, Hong Kong, 18,900), ahead of New Zealand (110,300).  </p>
<p><strong>Tourist arrivals from mainland China and Hong Kong </strong>rose to a record 1,350,000 over the past year (up 21.6 per cent over the year) ahead of tourists from New Zealand (1,313,400 visitors over the past year).  </p>
<p>Over the past year, <strong>net permanent and long-term arrivals </strong>to Australia totalled 270,230 – the lowest level in nine years (May 2007).  </p>
<p>Over the year to April, 33,500 Aussies visited Pakistan, up 33.5 per cent on the 25,200 visitors in the year to April 2015. Also 329,000 Aussies visited Japan over the past year, up 26.6 per cent over the year.  </p>
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<p><strong>New Car Sales</strong></p>
<p>According to the Federal Chamber of Automotive Industries there were 96,672 new cars sold in May. Over the year to May a record 1,172,402 new cars were sold. Annual growth of 4.3 percent is the strongest in 31 months.  </p>
<p>In May alone, passenger car sales fell by 5.8 per cent on a year ago to 38,222; sports utility vehicles (SUV) sales rose 11.4 per cent to 36,230; light truck sales rose 10.6 per cent to 19,373 and heavy truck sales rose 5.9 per cent to 2,847.    </p>
<p>Sales across states in May 2016 on May 2015: NSW (+6.0 per cent); Victoria (+3.5 per cent), Queensland (+1.3 percent), South Australia (+9.6 percent), Western Australia (-5.0 percent), Tasmania (+4.3 percent), ACT (+8.9 percent) and Northern Territory (+3.1 percent).  </p>
<p><strong>Car affordability </strong> </p>
<p>New vehicle sales are rising because car affordability stands at record highs. The CommSec car affordability measure shows that someone on the average wage has to work 23.8 weeks to buy a new Ford Falcon auto sedan. That is around 2 weeks fewer than two years ago. And five years ago, the same worker would have had to work an extra seven weeks to buy the same car.</p>
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<p><strong>Performance of Services</strong></p>
<p>The Performance of Services index rose by 1.8 points to 51.5 in May. A reading above 50 suggests expansion of the services sector.  </p>
<p>The Australian Industry Group noted: “Of the five activity sub-indexes in the Australian PSI®, sales (51.7 points) and stocks (51.2 points) lifted into positive territory in May while new orders (55.3 points) continued its expansion. Deliveries (49.1 points) and employment (49.1 points) were both stable to slightly negative.”  </p>
<p>Four of the nine services sub sectors were stable or expanded in May. <strong>What is the importance of the economic data? </strong> </p>
<p>The Australian Bureau of Statistics releases data on <strong>overseas arrivals and departures </strong>each month – an indicator of the health of the tourism sector. The figures are also useful in understanding spending trends and tracking migrant numbers – an indicator with widespread implications for employment, housing and spending.  </p>
<p>The <strong>Federal Chamber of Automotive Industries </strong>releases estimates of <strong>car sales </strong>on the third business day of the month. The figures highlight the strength of consumer spending as well as conditions facing auto &amp; components companies.  </p>
<p>The Australian Industry Group compile the <strong>Performance of Services Index (PMI) </strong>each month. The Australian PSI is the Australian equivalent of the US ISM services gauge. The PSI is one of the timeliest economic indicators released in Australia. The PSI is useful not just in showing how the services sector is performing but in providing some sense about where it is heading. The key ‘forward looking’ components are orders and employment.  </p>
<p><strong>What are the implications for interest rates and investors?</strong></p>
<p>In 2015 an estimated 120 million Chinese travelled overseas. Australia’s share was just over a million tourists. So there is scope for significant growth but it will require more transport and accommodation capacity being put in place.  </p>
<p>Another month, another record high for the car industry. New vehicle sales hit new highs in the year to May and it is clear that a key reason for the strength is the fact that cars have never been more affordable.  </p>
<p>The Reserve Bank policymakers will find it harder to cut rates in coming months. That doesn’t mean that it’s impossible, rather the Reserve Bank will need to be more active explaining the change.</p>
<p><em>Craig James is the chief economist at <a href="https://www.comsec.com.au/default.aspx" target="_blank">CommSec</a>.</em></p>
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Chinese tourism boom, record car sales: CommSec's Craig James

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<p>GUEST OBSERVER </p>
<p>In July, China tier-1 property prices saw a further moderation in the pace of annual price growth; in tier-2 and tier-3, growth (again) inched higher, remaining at a much lower level than tier-1.</p>
<p>For new housing, 51 cities reported price gains in the month of July, down from 55 in June and a peak of 65 in April. But that is still well up on the number of cities reporting monthly gains a year ago (30 in July 2015). 16 cities reported monthly price declines, although that is also better than July 2015’s 29 cities.</p>
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<p> </p>
<p><span>The secondary market has not seen as strong an improvement over the past year, a net 51 cities reporting monthly gains in July versus 41 a year ago and a peak of 54 four months ago (in March). 12 cities are currently experiencing price declines, compared to 17 a year ago. </span></p>
<p><span>Splitting the 70 cities into the three development tiers, tier-1 continues to experience a robust pace of price growth, an average of 27.0 percent/yr for new housing and 29.3 percent/yr for the secondary market. </span><span>Versus April’s </span><span>peaks of 31.5%yr and 36.1%yr, that is still best characterised as a modest deceleration. </span></p>
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<p><span>Within this tier, a normalisation is continuing: </span></p>
<p><span>Shenzhen new property price growth has slowed from 62.5 percent/yr in April to (a still very strong) 40.9 percent/yr; meanwhile, Shanghai price growth has plateaued circa 28 percent/yr, as has Beijing and Guangzhou (albeit nearer 20 percent/yr). </span></p>
<p><span>Similar trends are apparent in the established or secondary markets: Shenzhen slowing from 60.6 percent/yr in March to 33.9 percent/yr currently, and Beijing from 37.3 percent/yr in April to 32.1 percent/yr; Shanghai and Guangzhou price growth has been broadly unchanged in recent months, respectively 30 percent/yr and 20 percent/yr.</span></p>
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<p><span><img src="/images/2016/08/19/Screen%20Shot%202016-08-19%20at%202.13.46%20PM.png" alt=""></span></p>
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<p><span>Moving on to the less developed and wealthy tier-2 cities, new and established housing saw annual price growth of 7.8 percent/yr and 6.7 percent/yr in July. Both markets still remain in an uptrend, albeit a very modest one. </span></p>
<p><span>This is even more the case in tier-3, where new and secondary house prices have risen just 3.8 percent/yr and 2.4 percent/yr over the past year. </span></p>
<p><span>Clearly activity is concentrated in the most established and wealthy markets, where there is likely to be a greater speculative element. The problem is that these are not the cities with the greatest growth potential. </span></p>
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<p><span>Further on aggregate activity, we note finally that momentum in housing sales and starts has already turned down. </span></p>
<p><span>The outlook for real estate investment in late-2016 and into 2017 is fragile and unlikely to provide a significant contribution to aggregate growth.</span></p>
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<div class="section">Elliot Clarke is senior economist, Westpac and can be contacted <a href="https://www.westpac.com.au" target="_blank">here</a>.</div>
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China property update: Westpac's Elliot Clarke

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<p><img src="https://counter.theconversation.edu.au/content/82763/count.gif?distributor=republish-lightbox-advanced" alt="The Conversation" width="1" height="1"></p>
<p>GUEST OBSERVER</p>
<p>Big Chinese companies have been on an overseas buying spree in recent years, spending more than US$1.6 trillion scooping up businesses, property and “trophy assets” like football clubs.</p>
<p>But a directive from the Central Committee of the Chinese Communist Party puts some of this investment in Australia at risk. The directive specifically restricts outbound investments in real estate, hotels, entertainment, and football clubs. </p>
<p>One of the big reasons for the crackdown is how these investments are funded. China’s financial system is dominated by banks and bank loans are the major source of corporate funding. But this is also risky - if one of these projects fails it risks the entire banking system.</p>
<p>The changes won’t affect large Chinese holdings in the Australian agriculture and metals sector, or personal investments in Australian property. But there will be an impact on the Australian property market - Chinese developers bought 38% of all residential property development sites in Australia last year. </p>
<p>As Chinese investment in the Australian property sector will now be curtailed, we should expect money to be diverted elsewhere - into sectors that are still looked on favourably by the Chinese government. Most notably resources, agriculture, and possibly new energy technologies.</p>
<p><a href="https://www.propertyobserver.com.au/images/2017/08/24/Screen%20Shot%202017-08-24%20at%208.43.36%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="https://www.urban.com.au/images/2017/08/24/Screen%20Shot%202017-08-24%20at%208.43.36%20AM.png" alt=""></p>
<p>Chinese companies have also been active in the Australian hotel and entertainment industries - Fuwah Group recently purchased the Park Hyatt in Melbourne (among others), and Dalian Wanda bought the Hoyts cinema chain. </p>
<p>Over the past few years, Chinese companies have splashed out on many prominent properties - China Investment Corporation bought several office buildings in Sydney and Brisbane, and Aqualand purchased waterfront property in Sydney. Dalian Wanda currently has billion dollar developments underway in Sydney and the Gold Coast.</p>
<p>The motivations for these large investments in Australia and elsewhere are mixed. Earning a profit and other commercial goals are undoubtedly behind some of the moves, but others are strategically important for China - such as investing in agricultural land. But we shouldn’t overlook that many of these investments are “trophy assets”, and are about bringing prestige to the companies themselves.</p>
<h2>Why is China cracking down?</h2>
<p>In China, according to People’s Bank of China’s data, bank lending constitutes the vast majority of total financing. Therefore, it is more than likely the bulk of these recent overseas purchases by Chinese companies is bankrolled by Chinese banks. This compares to countries like Australia, where bond markets and sharemarkets play a larger role in financing big projects and investments.</p>
<p>The reliance on bank loans adds risk to the financial system. Should these projects fail, or the Chinese companies be unable to repay their debts, it could destabilise the entire banking system. And as Chinese banks remain state-controlled entities, the state has effective power to direct bank lending.</p>
<p><a href="https://www.propertyobserver.com.au/images/2017/08/24/Screen%20Shot%202017-08-24%20at%208.44.53%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="https://www.urban.com.au/images/2017/08/24/Screen%20Shot%202017-08-24%20at%208.44.53%20AM.png" alt=""></p>
<p>The Chinese government’s directive doesn’t just restrict investment in real estate, hotels, entertainment and football. It also encourages investment in other areas - new energy, technology, resources and agriculture. The stated purpose is to ensure that investment aligns with China’s national interest and to set up procedures for monitoring and supervision of the investments.</p>
<p>The Chinese banking regulator, the China Banking Regulatory Commission has also started investigating five huge conglomerates - Anbang, Dalian Wanda, HNA, Fosun, and Zhejiang Rossoneri Investment which have been very active overseas. The Chinese banking regulator has askedmajor banks to provide details of the borrowing position of these companies and the risk associated with their loans.</p>
<p>On paper, all five conglomerates are apparently predominantly privately owned, with the possible exception of Zhejiang Rossoner Investment which was only incorporated in June 2016. Although directly or indirectly, the Chinese government will have some stake and it is hard to trace the ownership structure of large Chinese companies. </p>
<h2>What comes next?</h2>
<p>There will definitely be an impact as Chinese investment dollars move away from property and prohibited other sectors. This investment currently constitutes a large proportion of Australian property development.</p>
<p>However, it also remains to be seen how else the Chinese government will try to achieve the “national interest”. Whether through regulatory control or through its direct control of the Chinese banking system, the Chinese government might try to influence or direct the operations of the overseas assets of these conglomerates. </p>
<p>The Australian government has previously shown nervousness about enterprises in areas of national “strategic” importance, passing into the hands of Chinese businesses with connections to the Chinese government, with some acquisitions being blocked by the Foreign Investment Review Board. Increased Chinese interest is only likely to provoke increased Australian apprehension.</p>
<p><span class="fn author-name"><a href="https://theconversation.com/profiles/he-weiping-163918" target="_blank">He Weiping</a> is l</span>ecturer in Law, Monash University and author for <a href="https://theconversation.com/au" target="_blank">The Conversation</a>.</p>
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Why China is cracking down on overseas investment

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<p class="x_MsoBodyText"><span>China’s policy makers met at the National People’s Congress in early March, announcing an economic growth target range of 6.5-7 percent. </span></p>
<p class="x_MsoBodyText"><span>In addition, they released a target growth rate for total social financing of ‘around 13 percent’ – which would result in a further deterioration of debt-to-GDP.</span></p>
<p class="x_MsoBodyText"><span style="line-height: 1.3em;">As noted in this month’s China Economic Update, a broader estimate of China’s debt puts this figure at around 308% of GDP – a level comparable to many advanced economies and particularly high for a still developing country. Chinese authorities are now facing a debt dilemma – they can no longer allow debt to grow unchecked, however controlling debt growth would mean accepting a slower rate of economic growth. At least for 2016, they appear content to allow the former to happen.</span></p>
<p class="x_MsoBodyText"><span>Industrial production growth slowed to a seven year low in January-February, while fixed asset investment accelerated slightly, on the back of stronger investment in real estate. New construction starts were stronger over this period, but it is too early to know if this is a trend that can be sustained.</span></p>
<p class="x_MsoBodyText"><span>Retail sales were a little softer – with real retail sales growth likely dipping below 10 percent yoy, slightly weaker than the levels recorded across most of 2015 but still robust. </span></p>
<p class="x_MsoBodyText"><span>At the end of February, the People’s Bank of China (PBoC) cut the Required Reserve Ratio for the fifth time in a year – down to 17 percent for large institutions – potentially adding RMB 690 billion in liquidity to financial markets. As we have previously noted, these policy changes are not necessarily stimulatory, as RRR cuts have been necessary to maintain liquidity in the finance sector, given the capital outflow in recent years.</span></p>
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<p>China’s policy makers met at the National People’s Congress in early March, releasing a range of targets for key economic indicators. The most closely watched is the economic growth target, which was slightly reduced for 2016 – to a range of 6.5 percent to 7.0 percent – compared with last year’s ‘around 7.0 percent’. </p>
<p>Our forecast for growth is unchanged at 6.7 percent in 2016 and 6.5 percent in 2017, although we consider the risks to be weighted to the downside. </p>
<p>Authorities also set a target for growth in total social financing, at around 13 percent for 2016 – which would mean a further deterioration in the country’s debt-to-GDP ratio. </p>
<p>As noted in this month’s China Economic Update, a broader estimate of China’s debt puts this figure at around 308 percent of GDP – a level comparable to many advanced economies and particularly high for a still developing country. </p>
<p>Under the newly commenced 13<span>th </span>Five Year Plan, also released at the National People’s Congress, China is targeting an average rate of growth of 6.5 percent in the period to 2020 – which would result in a doubling of GDP over 2010 levels. </p>
<p>Chinese policy makers are facing a significant dilemma regarding the country’s debt. They can no longer afford to allow debt to grow unchecked – as this would increase the likelihood of a major financial crisis and the potential for a hard landing. On the other side, real economic growth is unlikely to be sustainable at the five year target without stronger growth in debt – bringing down the ratio would mean tolerating a considerably lower potential rate for economic growth (something that policy makers are unlikely to tolerate). </p>
<p>China’s industrial production slowed across January and February – down to 5.4 percent yoy (compared with 5.9 percent in December 2014). This rate of growth was below expectations and the slowest rate of growth since the same period in 2009. </p>
<p>Key heavy industrial sectors remained weak – with crude steel output falling by 5.7 percent yoy, cement production down 8.2 percent yoy – reflecting weakness in the construction sector, while the motor vehicle sector recorded growth of 5.3 percent yoy. Electricity generation was marginally stronger – up 0.3 percent yoy. </p>
<p>•China’s industrial surveys have remained negative in early 2016, with the official NBS survey falling to 49.0 points in February (from 49.4 points previously), the weakest level since January 2009. In contrast, the Caixin Markit PMI also fell, down to 48.0 points (from 48.4 in January), but this measure is less negative than late 2015. </p>
<p><a href="/images/2016/03/14/Screen%20Shot%202016-03-14%20at%208.38.37%20AM.png" target="_blank"> Click to enlarge</a></p>
<p><img src="/images/2016/03/14/Screen%20Shot%202016-03-14%20at%208.38.37%20AM.png" alt=""></p>
<p>Fixed asset investment recorded an acceleration in early 2016, with growth at 10.2 percent yoy across January and February, up from 8.2 percent yoy in December. It is worth noting that this was around the rate of growth recorded in November 2015, which was well below the trend levels of recent years. </p>
<p>Investment in the manufacturing sector has continued to slow – reflecting tough industrial conditions and excess production capacity – down to 6.7 percent yoy (on a three month moving average basis), compared with 7.6 percent in December. In contrast, there has been a slight improvement in real estate investment, recording growth of 1.7 percent yoy (3mma) in February, up from -3.3 percent in December. Combined, these two sectors accounted for almost 56 percent of total investment in 2015. </p>
<p>In contrast, strong investment growth has been sustained in water conservation and environmental management (27 percent yoy across January-February) and public utilities (19 percent yoy) – with these sectors comprising around 15 percent of the total in 2015. </p>
<p>Residential construction activity was stronger in January-February, however it is too soon to know whether this is a trend that can be sustained. New construction starts were up around 9.7 percent yoy over this period, and up 1.5 percent yoy on our preferred three month moving average basis (reflecting very weak growth in late 2015). </p>
<p>House price trends have improved in recent months, however the majority of gains have been in China’s tier 1 cities (Beijing, Shanghai, Shenzhen and Guangzhou) – where prices rose by 17% yoy. In contrast, tier 2 cities rose by just 0.3% yoy and tier 3 and below by 1.1% yoy. A more sustained recovery outside tier 1 cities may be required to support sustained stronger construction activity. </p>
<p><a href="/images/2016/03/14/Screen%20Shot%202016-03-14%20at%208.39.56%20AM.png" target="_blank"> Click to enlarge</a></p>
<p><img src="/images/2016/03/14/Screen%20Shot%202016-03-14%20at%208.39.56%20AM.png" alt=""></p>
<p>China’s trade activity pulled back sharply over the first two months of the year, with substantial falls in both imports and exports – both from the levels of late 2015 and from levels a year ago. China’s trade surplus only narrowed marginally – averaging US$47.9 billion a month across January and February (compared with US$59.4 billion in December 2015).</p>
<p>Across January and February, China’s imports totalled US$207.5 billion, a year on year fall of 17%. In part, this reflects the continued falls in commodity prices, with the RBA Index of Commodity Prices falling by almost 25% yoy in the first two months of the year.</p>
<p>In contrast, the volume of imports has declined less significantly, down by only around 2.8% in 2015, and around 6.8% in January (although the earlier timing of Chinese new year may have distorted the latter result).</p>
<p>In terms of major commodities, there were noticeable increases in imports of copper (up 23% yoy in January-February), crude oil (up 9.3% yoy) and iron ore (up 6.3% yoy). In contrast, the declining trend for coal continued, down by 10% yoy over the first two months.</p>
<p><a href="/images/2016/03/14/Screen%20Shot%202016-03-14%20at%208.51.56%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/03/14/Screen%20Shot%202016-03-14%20at%208.51.56%20AM.png" alt="" width="913" height="357"></p>
<p>China’s exports totalled US$303.3 billion across January and February, a fall of 18% yoy. China’s exporters remain relatively negative, with the new export orders measure in the NBS PMI survey at 47.4 points in February (albeit improved from 46.9 points in January).</p>
<p>The key driver of the fall in export values over the first two months was a decline in exports to Asia – which fell by over 18 percent yoy, to US$90 billion. Exports to Europe and the United States fell less significantly – with both down by around 16 percent yoy.</p>
<p>Exports to Hong Kong declined less sharply than other markets – down by around 13 percent yoy across January and February. In contrast, non-Hong Kong Asia saw declines of almost 22 percent yoy – led by falling export values to Malaysia, South Korea and Vietnam.</p>
<p>Trade data between China and Hong Kong continues to have considerable distortions, in part due to false invoicing used to hide unapproved capital flows – providing considerable uncertainty around the true level of trade.</p>
<p><a href="/images/2016/03/14/Screen%20Shot%202016-03-14%20at%208.54.00%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/03/14/Screen%20Shot%202016-03-14%20at%208.54.00%20AM.png" alt="" width="787" height="294"></p>
<p> </p>
<p>At the end of February, the People’s Bank of China (PBoC) cut the Required Reserve Ratio for the fifth time in a year – down to 17 percent for large institutions – potentially adding RMB 690 billion in liquidity to financial markets. As we have previously noted, these policy changes are not necessarily stimulatory, as RRR cuts have been necessary to maintain liquidity in the finance sector, given the capital outflow in recent years. </p>
<p>We continue to expect two cuts to interest rates in early 2016 – bringing the benchmark one year lending rate to 3.85 percent by mid-year. Similarly further cuts to the Required Reserve Ratio are likely to maintain liquidity in the finance sector, with capital outflows likely to continue in the short term. </p>
<p>After a sharp increase in January (ahead of Chinese new year), new credit slowed significantly in February. Over the two month period, aggregate financing totalled RMB 4.2 trillion, an increase of 23 percent yoy. </p>
<p>Bank loans recorded slightly slower growth, 19 percent yoy, to total RMB 3.1 trillion. Efforts to tightened regulation around the shadow banking sector has seen a strong increase in bank loans across the past two years. </p>
<p>The key driver of other credit was corporate bonds, with net issuance totalling RMB 541 billion in January and February, an increase of 110 percent. </p>
<p>Key components of the shadow banking sector largely cancelled each other out – with growth in trust and entrusted loans (at 111 percent yoy) offset by a sharp fall in banker acceptances (-275 percent yoy). </p>
<p><a href="/images/2016/03/14/Screen%20Shot%202016-03-14%20at%208.55.28%20AM.png" target="_blank"> Click to enlarge</a></p>
<p><img src="/images/2016/03/14/Screen%20Shot%202016-03-14%20at%208.55.28%20AM.png" alt=""></p>
<p><em><span>Alan Oster is group chief economist, National Australia Bank, and </span>can<span> be contacted <a href="https://business.nab.com.au/author/alan-oster/" target="_blank">here</a>.</span></em></p>
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