With so much going on in China, and only a limited amount of bandwidth, I have created this weekly post to highlight articles that I feel are (1) important, (2) relevant, and (3) interesting.

This week there are 3 articles that I have chosen to highlight as each are quite interesting, they are all relevant, and there are issues within each that I think you the reader should be aware of.

If you have an article that you feel needs to be mentioned, please do so in the comments section. We all have different areas of interest and bandwidth, so I hope you will take some time and post those articles!
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Liu Mingkang, Chairman of CBRC and PBOC, is interviewd by Stephen Sackur for the show HARDTalk.

the interview covers a range of issues, including

• China’s economic decoupling - and U.S./ E.U. reverse coupling
• Balance of Power - U.S. economy getting weaker/ China getting stronger
• Banking industry in China

Chairman Liu does a good job overall of handling Sackur, especially when asked about the Chinese banking industry, the role of the government in the banking industry, and restrictions China places on foreign banks.

The best exchange is in the area of the banking industy, and whether or not China offers a level playing field

Sackur starts off by saying E.U. Commissioner Peter Mandelson said the industry was closed, that there wasn’t a level playing field.. where Liu responds simply that Madelsen thinks that way because he hasn’t spent enough time in China and says that there are 250 branches of banks from 71 countries in China.

For Sackur that isn’t enough though as these 250 are having to compete with the 10,000s of Chinese banks and a EU Chamber of commerce report showing that Foreign banks held less than 2% of assets in China.

now.. it is at this point that the interview gets cut off, and so we cannot get the response, but my question would be how open is the EU .. or the US. to Chinese banks? I can go to nearly any 2nd tier city in China and see an HSBC, but could you say the same about the U.S.?

Most will agree that for China to balance itself, it must create an econmoy that is more than just an export market, that provides more opportunities in the inner provinces, that moves 400 million more people from the farm to the city, that balances the ebb and flow of raw materials and labor, and… that does all this without spinning apart.

When recently discussing this with some visiting academics, and looking at their faces when discussing all the balls that are in the air, I closed the discussion by saying that what you are watching is the NYC Philharmonic. The central government (at the time in the middle of the NPC) is the maestro, there are dozens and dozens of musicians on stage, and we are all privileged to be watching the greatest show on earth.

The recent release from Mckinsey Global Institute entitled Preparing for China’s Urban Billion takes all this and has put it into a very interesting piece of analysis that I suggest everyone read.

Having looked at 25 cities myself, the role of logistics in development, migrant labor, and a host of other issues related to the sustainability, and trajectory, of China, I think that this is one of the more interesting pieces I have seen thus far, and where I appreciate the effort is that they are not simply pumping the bubble… they are very clearly throwing out caution signs as to where the fissures exist,and the potential for trouble.

In the end, MGI is optimistic that they will be able to grow the GDP 4 times over over by 2025 through the growth of megacities and the benefits that lie in them. I myself am still skeptical, and perhaps that is because I am focusing more and more on the raw material, energy, etc side of the economy, and the fact that at this point there are already real shortages in many of the goods necessary to grow another 400%.

like, water… oil… and energy.

anyone want to guess where the materials will come from? what level of efficiency must be achieved to grow this fast without the ability to aquire materials at the same rate? or when innovation will come into play?

Yesterday, my post Senior Economists: China to Surpass by 2025 - Me: HOW? looked at the fact that China would need to overcome some large raw material barriers to maintain a level of growth that would propel the economy past the U.S.’s.

With oil going about 105 USD per barrel this week though, I think we have found a point on the curve where China’s sustainability see a barrier… as at this level, where petro companies make more money by exporting their gas rather than selling it domestically (I think)

My proof? 3 days I ago I began seeing lines of motorcycles in my neighborhood waiting for gas… and today while riding out to a migrant school, it was trucks. 20-30 deep… and,when asked, the bus driver was telling us that the lines were becoming worse and worse

Being at the front of the bus, I asked the driver about the current rations, and he told me that the current rations allow for each driver to buy a maximum of 200RBM of gas, and that if they need more they have to go to another station.

Now, I have done absolutely no research to understand how widespread this is, however I am going to make a guess that this is a phenomenon that only gets worse in the hinterlands.

Where this is important is that, as I discussed in China’s Economy is Running Out of Gas… Literally, transportation costs and delays are increasing (pay attention JIT exporters), price hikes are coming, and this issue will get worse as more cars hit the road.

i.e. the curve is no longer linear… it is becoming exponential (as the graph shows)

What do you think could be done? Petro China thinks a price hike is in order, but what about reducing the number of cars on the road? Will the strategic oil reserve help?

Update: Here is a interesting article on Petro China’s recent earnings release, where the opening paragraph is:

PetroChina Ltd. said Wednesday that profits rose by just 2.3 percent in 2007 as government controls blocked it from passing on record-high crude costs to consumers, though a Chinese auto-buying boom drove a 21 percent jump in total sales.

So, my last question is what would petro prices move to if they were priced to market?

I am a big believer in China.  BIG…. but, even I have my limits.

Last week while attending a discussion at Three on the Bund, Economist Jeffrey Sachs said that China’s GDP would pass the United States by 2030.  According to him, that would mean that China (currently about the same size as Germay) would need to grow 4-6 times its current size.

Then, while following a paper trail of articles, I bumped into this PWC press release where  John Hawksworth, head of macroeconomics at PricewaterhouseCoopers LLP says:

Our latest projections suggest that China could overtake the US in around 2025 to become the world’s largest economy and will continue to grow to around 130% of the size of the US by 2050.

At the discussion, I asked Professor Sachs (A man whose work in poverty alleviation and country building is amazing), just how this would be possible when the country is already running out of coal, water, petro… is trying to control inflation… is having a hard time with depleting agricultural land…

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This morning, I was reading an article published a couple of weeks ago over morning coffee, and I had to have a bit of a laugh to myself. To be honest, there is nothing overly protective or critical in the article As China’s inflation soars, world fears knock-on effects, but for some reason a spark went off in my head.

More than the decoupling conversation, and the snow storms, the effect of rising prices in China has become the topic of conversation. It is a conversation that many are having in and out of China, and what is interesting is that those of us in China have been watching the pieces fall into place for a long time… and those outside of China (in the media at least) seem to have missed it.

Now, before I go any further, I must make it clear that I am only going to address a few of the issues and couldn’t possibly cover all the reasons for China’s inflation in a single post… much less what the ripple effects will be.. However, the author opens the article with

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Press release just went out that Booz Allen & AmCham Shanghai have teamed up to study American businesses in China, and how they are doing.

The first collaberation between the two (AMCHAM Shanghai previously conducted the survey on their own), the 12 page China Manufacturing Competitiveness 2007-2008  offers some very interesting data from their study that represented a cross section of companies:

66 of the largest foreign-owned or foreign-invested manufacturers in China, representing more than 10 percent of the 600 largest foreign-owned or foreign-invested manufacturers in China.  Online survey questions, on-site visitations, and in-depth interview methods were all deployed.  Of the companies surveyed, 81 percent were wholly owned by foreigners, 10 percent were joint ventures between multinationals and Chinese partners, and 9 percent were categorized as “other.”

According to the release the key findings were:

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