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Issue 546 28-11-2011

Highlight's from This Week's Issue of The Economic Observer:
Nov 28, 2011
Translated by Zhu Na and Song Chunling


When Will China's Real Estate Market Hit Bottom?
News, cover
~ After Longfor Property (龙湖) took the lead in lowering prices on some of their properties in Shanghai by more than 20 percent this October, Vanke (万科) wasn't able to hold out either. In November, it announced that two projects in Shanghai would cut prices by between 20 and 30 percent. Vanke developments in Beijing, Nanjing and Shenzhen have also cut prices by various amounts.
~ Both Vanke and Longfor's presidents had changed their pricing strategy from one that guaranteed they covered their costs, to one that ensures they maintain their cash flow.
~ According to a recent report by World Union Properties, a well-known real estate consultancy company, the ratio of real estate developer funds that are self-financed has reached a historic high of 41 percent. The report also predicts that due to various pressures, price reduction and promotion will likely become the main theme of real estate marketing in the fourth quarter and the first half year of 2012.
~ It's likely that large and medium-sized enterprises will survive the shakeout, but small enterprises have little choice but to withdraw from the market. Data from China Index Academy shows that there were close to 90 real estate company mergers and acquisitions nationwide in the first three quarters of this year, with 26 billion yuan worth of deals being hammered out, an increase of 120 percent over last year.
~ Some developers are still holding out for a relaxation in bank lending policy early next year, but the optimists are not in the majority. Research on China's property sector by Standard Chartered Bank shows that most real estate enterprises expect that real estate policy will be further tightened over the next three to six months.
~ Economist Ba Shusong (巴曙松) estimated that the average housing price decrease should be between 20 and 30 percent in the first-tier cities, and 10 and 20 percent in the second-tier cities.
~ Most people think that the major sign of house prices hitting bottom is that a couple of large property companies collapse, leading to a large-scale shake-up within the industry.
Original article: [Chinese]

Hard to Replicate Chongqing's Real Estate Investment Model
News, page 3
~ As local governments struggle with the risks posed by their local financing platforms, Chongqing stands out as a successful example of reform of a local state-owned assets administrative body. Chongqing Municipality plans to build 40 million square meters of low-cost public rental housing within three years, and its eight investment companies have spent a total of some 589 billion yuan, or around 80 billion yuan annually.
~ Often, local governments in China earn hardly any profits on infrastructure investments, with the benefits instead accruing to a handful of developers. However, Chongqing has retained a greater financial interest in the land around infrastructure projects and the municipality has therefore profited from the land's appreciation once those projects are completed. The Chongqing bureau of the State-owned Assets Supervision and Administration Commission (SASAC) has also been one of the first in the country to achieve control of all the state-owned assets in its area.
~ Chongqing's model may be hard to replicate elsewhere. The Chongqing SASAC has wider powers than provincial bureaus of the commission elsewhere, with the municipality able to allocate an annual budget of one trillion yuan in addition to tax revenue and land transfer fees.
~ "Our goal for the development of state-owned enterprises is to set up a base and support the development of other local enterprises," says Cui Jian (崔坚), the director of SASAC in Chongqing. He adds that unless state-owned enterprises are strong, they can't contribute to social welfare and wider development.
~ Chongqing is unique though – its SASAC bureau manages personnel, finances and operations and is overseen by Huang Qifan, the city's mayor. Unlike other cities and provinces, Chongqing also has support from Beijing and abundant land resources to experiment with its reforms.
Original article: [Chinese]

Pace of Investment Growth is Starting to Decline
News, page 4
~ At the start of this year, the central Chinese province of Anhui had planned to investment about 41 billion yuan in railway infrastructure, but the final figure for how much will be investeds this year has since been reduced to 10 billion yuan. An official from Anhui's provincial-level development and reform commission told the EO, although the rate of growth in investment in Anhui is still higher than the national average, the pace at which investment in the province has increased this year has slowed sharply this year.
~ The pace of investment growth in the central province of Shaanxi is also declining. An official from Shaanxi provincial development and reform commission told the EO that some major infrastructure construction projects have still not been able to get underway, mainly due to problems with raising the required funds.
~ For the rich coastal province of Zhejiang, the decline in the pace of investment growth is even more obvious. Data shows that in the first three quarters, the growth of all kinds of investment in Zhejiang province, excluding the figures for real estate and commodity investment, has dropped to 8 percent.
~ Over the 2 years when China was spending the funds included in it's 4 trillion yuan stimulus plan that was unveiled at the end of 2008, investment across the country was growing by an average 27 percent a year, however, in the first ten months of this year, that rate has dropped back to an annualised rate of 25 percent.
~ According to data from the National Development and Reform Commission (NDRC), by the end of October, after factoring in for price distortions, the average rate of investment growth was 17 percent. The amount invested in power, gas and water projects was actually declining, if the figures are adjusted to take price fluctuations into consideration.
~ Yang Ping, the deputy director of investment division of the NDRC, said that up until now, the slow down in the pace of investment growth hasn't had any serious effects, though he added that the rate of investment growth next year will likely be lower than this year.
~ The NDRC is currently preparing the central government's investment plan for 2012. According to some sources, next year the government plans to invest about 380 billion yuan, which is about the same amount that was invested last year.
Original article: [Chinese]


Bussing in Pupils to China's Overcrowded Kindergartens
Nation, page 9
~ Like most of China's recent school bus accidents, the crash that killed 19 children in Gansu Province's Zhengning (正宁) took place in a village. The EO sent a team of reporters to Zhengning to examine how preschools in a dozen villages in the region operate.
~ Many of the children who died in the Nov 16 crash were from Xiaoboshi Kindergarten. Xiaoboshi is the only kindergarten in Xiagou village (下沟村). There had been other kindergartens, educating a total of 1,000 children, most of whom were bused in from the surrounding region, but Xiaoboshi's rival kindergarten was forced to close in February when one of its pupils was hit by a car.
~ The EO found that 29 of Zhengning county's 32 kindergarten are run privately.
~ According to research by Tian Pengjun (田彭军) from Northwest Normal University, there are 6,389 children in Zhenning who don't attend kindergarten, and most of them are looked after by grandparents or other relatives while their parents work.
~ Xiaoboshi Kindergarten started to take students from far-away villages with school buses in 2006. The number of buses increased from one in 2004 to six in 2010. They carried 492 students to and from school. In order to save money, these school buses were modified to carry as many as 30 people each. "Kindergartens around the country are doing this. You just can't get all these children home unless the busses are overloaded," according to a Mr. Li, whose elder brother runs the kindergarten. The villages where these pupils live are scattered throughout the area and many of the roads that the bus has to take are hazardous.
~ "School bus companies are used to competing for more students, but also of satisfying the needs of parents to send children to the county kindergarten," says Li's cousin Shi Zhenbo (施振波).
~ Xiaoboshi Kindergarten has 740 pupils who are mostly taught by untrained teachers. It has invested one million yuan over the past seven years and has a 300,000 yuan debt. Public kindergartens usually have more funds available for school buses and buildings. The government never answered Xiaoboshi's application for subsidies.
~ The number of students in kindergartens has increased by 16-fold in the last 10 years, but the local government has invested nothing for the preschool education. As one of the least developed countries, Zhengning's government can hardly make ends meet. After the accident, the government's allocation for preschool education rose to 680 million yuan from 580 million yuan. Zhengning promised to set up a public kindergarten for all towns to increase the proportion of public to private kindergartens to 79.6 percent by 2015.
~ Many are still skeptical. "Why are nine years of education free, when preschool education isn't?" says Lu Ling, who owns the rival kindergarten to Xiaoboshi . "All I hope is that there can be a kindergarten in every village with low tuition fees, so that children don't need to rush to school and can enjoy breakfast at home in future."
Original article: [Chinese]

Chinese Banks Recruiting as Foreign Counterparts Shed Jobs

Market, page 21
~ Foreign banks in Hong Kong have been signing a string of redundancy deals in the last two weeks, as they cut back on staff following weak third-quarter results.
~ Currently, Bank of America and HSBC are planning to layoff the largest number of employees, with each planning to slash 30,000 jobs worldwide.
~ However, Chinese investment banks in Hong Kong are bucking the trend and adding extra employees.
~ For example, popular Hong Kong recruitment websites list lots of positions at the Bank of China, compared to only a few at foreign banks.
~ Market sources told the EO that Guosen (国信), Shenying & Wanguo Securities (申万) and ICBC International are also recruiting, with some of them even renting extra office space as part of their expansion.
Original article: [Chinese]

Foxconn's Workers Calm at Prospect of One Million Robots
Corporation, page 25
~ Foxconn President Guo Mingtai (郭台铭) is putting his money on robots. On Nov. 15, he announced that the company will make 300,000 robots in 2012 to handle monotonous and dangerous tasks. Labor costs have always been a major expense for Foxconn, the world's biggest Original Equipment Manufacturer, or OEM. Now with the labor shortages and higher saleries, Guo plans to turn to robots to overcome his company's dependence on cheap labor.
~ "If the robot strategy succeeds, Foxconn can break through the glass ceiling of human labor and achieve its global strategy," says a veteran Foxconn employee. As logistics is another big cost for many countries, globalization can also reduce costs. Apart from the robot strategy, Guo is also promoting his plan to invest $12 billion to Brazil to broaden Foxconn's global footprint. The manufacturer's operations in India and Vietnam are also growing.
~ Inside Foxconn, the robot plan hasn't created much of a stir. Even the employees don't feel threatened. "I can't see the inner drive for Foxconn to pioneer the use of robots in this industry." says one company insider.  
~ The current machinery arms that Foxconn uses cost more than 10,000 yuan each, which is approximately the same as the annual salary of three workers. As each machinery arm can work for 24 hours a day, it's possible that the cost could be covered within a year, with profits accumulating from then on. However the situation is more complicated. "It costs a lot to maintain the machinery arms," said one middle-level employee at Foxconn. Robots can do only do 50 percent of the work that employees can due to limitations with accuracy in automated processes. Besides the upfront costs, the employee also pointed out that unemployment caused by the wide use of robots may lead to more serious social problems for Foxconn.
~ "While the one-million robot strategy may be a big gamble, it is also a necessary response to the current situation," says an insider at Foxconn. Despite the high salaries, Foxconn still can't hire enough employees in inland China areas like Zhengzhou, where most young people prefer to move to coastal areas. Besides, Chinese manufacturing costs are only 10 percent lower than other countries right now, and the cost of labor is still increasing.
~ After the spate of suicides at Foxconn in 2010, the company raised salaries and moved much of their manufactring into inland Chinese provinces. On the surface, its robot strategy has a lot in common with the western manufacturing model. According to a research conducted by the Boston Consulting Group, the net cost of China's labor will be the same with that in the U.S. by the year 2015. Chinese manufacturers therefore will be stuck in a dilemma with expensive labor and less advanced technology, and OEM may migrate to India and South American countries where labor costs are lower.
Original article: [Chinese]

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