Why Should I Care about the Power Transition in Beijing?

The 18th CCP Congress is going on right now in Beijing, I was lucky enough to be invited to BBC TV and BBC radio to comment on this once-in-a-decade power transition. Before that, I was asking many ordinary people around me about what this moment means to them. Some cannot care less, as they feel they have zero influence on the outcome. Some are watching it as a “Gong Dou Drama/宫斗剧” (Fights-in-the-Palace Drama) and found pleasure in all the conspiracy theories and the tabloids about power elites’ in-fights . Some are busy interpreting and deciphering the formulaic and predictable official announcements, and looking for so-called signals of future policy directions. Some are making their wish-lists of what reform they hope to see under the new leadership. I happen to think that it is futile to try to peek into this black-box of CCP meeting, but it is an interesting moment that triggered a lot of important public discussions about what China did right and what it did wrong in the past decade.

Jin Ge & Martin Jacques on BBC World News discussing the 18th CCP congress

In BBC TV’s program, I had a mini debate with Martin Jacques, author of When China Rules the World, who was known for championing the so-called “China Model”. Our debate was so short that I left out some key points, so allow me to make up here. Right before this Party Congress, Mr. Jacques wrote an article saying that the Chinese leaders are more legitimate than the US president coming out of an election. Well, the Chinese government certainly did not show much confidence in its own legitimacy, otherwise we should not having so much problem accessing the real Internet, buying kitchen knives, or letting our pigeons fly.

Jacques argues that unity is the core value of Chinese civilization. I find it offending that he feels comfortable to assume the huge population in China composed of diverse communities share one value. And he certainly ignored the fact that the value systems in China changed many times throughout the history.

But is unity currently a sufficient source of legitimacy for the Chinese government? What about the high percentage of rich Chinese trying to emigrate out of China? What about the peasants who are protesting against some local governments’ forceful land grab? What about the middle class who held protests against environmentally dangerous industrial projects run by state owned enterprises? It seems people care not only about whether the government holds the nation together with strong hands, but also about whether they can feel safe and free under the government.

Mr. Jacques likes to emphasize China’s economic growth in the past 3 decades as a proof of the superiority of the “China model”. But even President Hu in his speech on Nov.8th acknowledged that China’s current economic growth is “unbalanced, uncoordinated and unsustainable”. Also what about the fact that China is still a poor country in terms of income per capita? What about all the costs of nominal GDP growth, from environmental crisis to corruption to unjust wealth distribution?

I am not saying that all that growth is illusionary, but we cannot forget that it was the shift away from authoritarianism that initiated the economic growth thirty years ago. Mr. Jacques suggested that the lack of democracy contributed to the efficiency of China’s economy. Following that logic the centralized economy under Chairman Mao should have been the most efficient. Even today, the local governments and state owned enterprises are mis-allocating resources to the extent that wasteful and low-quality infrastructure projects are becoming a liability rather than an asset, real estate bubbles in places like Erdos and Wenzhou are busting, and so-called innovative projects heavily sponsored by tax payer’s money, such as solar or cloud computing, turned out to be technological disasters and hotbeds for corruption.

Mr. Jacques’ view has won him popularity among the power elites in China. But even the leaders of CCP have stated many times that “reform” is urgently needed to make the people more satisfied, evidently they are aware that economic growth and nationalism no longer can bring them the desired “stability”. Meanwhile, the increasing exposure to the outside world has changed the Chinese public’s expectation of their government fundamentally, although few of them are calling for a whole-sale adoption of western-style democracy, many are calling for more openness and transparency of the government and more rule of law. If China manages to overcome the current challenges, which is certainly my hope, it will not be the victory of the “China Model” that Mr. Jacques extolled, rather it will be a result of the Chinese public’s success in “reforming” the government.

 

 

Squeezed Middle Class II: Torn between Optimism and Pessimism

How strong is China’s middle class? This is a topic in vogue inside and outside of China these days. On one hand, there are optimists who believe the increasing consumption power of China’s middle class will keep propelling China’s economic growth till it becomes a super power, some even think that China’s middle class will be a force that facilitates the political reform of China. On the other hand, the pessimists are saying that middle class income will diminish along with the hard landing of China’s economy and middle class discontent may even breed social instability. Even my friends and I, considering ourselves part of China’s middle class, often swing between extreme optimism and pessimism about the outlook of our career, life quality and the stability of Chinese society. As a media researcher, I have also been tracking what people say about China’s middle class on social media, again I found a lot of confusion and anxiety.

What does being middle class mean in China?

There is no clear-cut definition of Chinese middle class. Various institutions, from the Chinese government to the World Bank to market research firms have proposed different standards of middle class in China, but the meaning of middle class is multi-layered to the public. The most commonly used criteria is income, for example, Goldman Sachs in one of its reports set the bar for Chinese middle class at 9000 USD per year, while in 2005 an official report from the Chinese government said that anyone making 60,000 yuan to 500,000 yuan per year should be considered middle class (By either standard, less than 10 percent of the Chinese population fit in).  But in my research I find most people think being middle class means much more than a certain level of income. Unfortunately many of the Chinese people who meet the income criteria don’t think of themselves as middle class, because they feel that the burdens of life are so heavy that they are still surviving rather than enjoying life, they lack sense of security and they are pessimistic about upward social mobility in our society.

The major concerns of Chinese Middle Class:

First of all, living cost is rising fast in China. In big cities like Beijing, Shanghai and Guangzhou, typical middle class consumer products, from Starbucks coffee to Levis Jeans to iPad, are usually at least 30% more expensive than those in the US. Even IMAX movie tickets are about the same as those in the US. So obviously not many Chinese can afford the Western-standard middle class life style, as the average income of Chinese white-collar workers is only one sixth of that of their American peers.

Enough has been said about the high prices of apartments in China’s big cities. In my city Shanghai, an average apartment costs more than 20,000 yuan per square meter (the downtown area costs several times more), while an average white-collar worker here makes less than 10,000 yuan a month. But not many people can choose not buy an apartment. As I have written before, home ownership is not only the primary store of wealth, but also a spiritual needs, an ends in itself and the ultimate pursuit in today’s Chinese society. Owning an apartment, however tiny, is the foundation of love and the premise of marriage. Disputes over property are also breaking up many relationships and families. For Chinese young people, choosing not to buy an apartment involves being seen as a loser, an untrustworthy, unstable and even unloved person.

But once you buy an apartment, you and even your whole family probably will become “the slave of the apartment”. With all your savings gone and heavy loans to pay back every month, you can hardly afford to spend or play.

What makes you feel worse is the perception that even if you work hard and keep improving yourself, you will have little chance to move upwards. That is the sentiment I often observe in many Chinese young people. They call this the age of “father competition” (拼爹), meaning that only those from the right families can succeed. I don’t think it’s too pessimistic to say that the uninhibited marriage between power and wealth has almost eliminated fair competition in our society, for example, many companies I know prefer to hire children of government officials, you know why.

Sometimes the basic sense of security is missing even in the young professionals of China. Most of my peers are now in their thirties and already have a good career, financially they are much more secure than the new college graduates who can hardly find jobs, but they are worried about health care and the care-taking cost of their aging parents. The parents of us “single child generation” are getting old, in a few years most of them will retire, that means each young couple of “single child generation” will have to take care of four parents. With the miserable health care and social safety net in China, how dare the young middle class consume rather than save?

Reasons to be Optimistic

The main reason that I still see hope of a growing Chinese middle class is that the conditions cannot get any worse. Consumption’s share in China’s GDP has been decreasing in the past ten years, it is as low as 35% right now (while in the US it is around 70%). Wage’s share in GDP has also been decreasing in the past ten years, it is standing at around 40%, much lower than the 50% 10 years ago. These things cannot go any lower.

The wealth and power of China’s middle class might not have increased as that of the oligarchy and crony capitalists, but their knowledge and skills have increased tremendously thanks to their integration into the global workforce and new sources of information online. I don’t see any skill gap between China’s young professionals and their Western peers, yes sometimes they don’t seem very creative, but it’s usually due to the environment rather than their lack of creativity. Precisely because I observe how China’s middle class struggled in an extremely extractive economic system in the past several years, I’m optimistic about their ability to adapt to the tough years ahead and make things better.

 

People’s Daily’s IPO Farce: Washing People’s Brain with People’s Money

The website of People’s Daily, the mouthpiece of the CCP, is now a listed company in the Shanghai Stock Exchange. The company raised 1.4 billion yuan (US$222.2 million) in its IPO, nearly three times the amount it hoped for. On the first day of its trading, its stock price surged 76%. Before People’s Daily’s IPO, some pro-democracy activists said that no citizen would buy the stock of a propaganda machine whose profit comes solely from government subsidy. But they couldn’t be more wrong.

Hu Xijin (胡锡进), the Chief Editor of Global Times and a shareholder of People’s Daily, proclaimed victoriously, “The strong performance of People’s Daily on the stock market clearly showed that the majority of Chinese people support our political system. People have voted with their own money.” Meanwhile, pro-democracy blogger Wu Yue San Ke (五岳散客) sadly reflected: “In our society most people are still willing to exchange democracy for monetary gains.”

I do find the retail investors’ enthusiasm over People’s Daily unnerving, only because it confirms my pessimistic view that many people are not against a repressive system as long as they have a chance to join the repressor side. But from an investor’s perspective, People’s Daily’s success is no surprise. The single most important lesson Chinese investors learned in the past several years is that you have to “Follow the Government”. People are buying People’s Daily only because they believe the government will not let it fail even if it means showering taxpayer money on it.

A Webpage of People.com.cn

Here are some facts about the website of People’s Daily that have been discovered by netizens so far:

  • It has certain monopolistic advantages in the heavily controlled news industry. For example, a Chinese journalist can only be acknowledged as a “professional journalist” after they received a “journalist license” from the government. Any journalistic investigation might be considered illegal if the journalist does not have the “journalist license”. None of the other Internet news portal has any journalist licenses, while People’s Daily has more than 120 ones.
  • The other Internet news portals, from Sina, Sohu to Tencent, are required to buy and publish news from People’s Daily. How many companies have such power over their competitors?
  • The biggest clients of People’s Daily are all government institutions who are not price sensitive at all.
  • It can generate profit even without income. For example, the People’s Search Engine, which is set up to compete with Google, has not been monetized at all, but already has more than 30 million yuan profit magically showing up in its book.
  • It plans to spend part of the money it raised on office equipment, namely iPhones and iPads, at the price of 10000 yuan each, several times the market price.

The successful IPO of the website of People’s Daily is a testament to the success of state capitalism in China. The bureaucrats working for People’s Daily must be celebrating: Who said the Internet or the market will undermine state authority? Now we have more money to buy luxury goods such as iPhones and LV or to fly first class to the US for business tour. And if we have some money left, we can spend it on educating people that democratic values are just Western imperialist ideology.

Related article: Red Pad, a Pad Tailor-Made for Government Officials

 

 

Squeezed Middle Class in China

I wrote an article for China Economic Review’s March issue on China’s income tax reform. In the article I emphasized that the voices of middle class discontent on the Internet have led to some efforts by the government to alleviate the tax burden of the middle class and improve the transparency of how taxpayer money is spent. But I increasingly feel that maybe I have over-estimated the power of the middle class in China. More and more evidence is showing that China is a very polarized countries, with over 80% of the total wealth concentrated in the hands of the top 10%, and the middle class is actually very small since the majority of people remain in the low income class. That helps to explain why luxury brands from BMW to LV are doing well here while overall the share of consumption in GDP remains unprecedentedly low.

In my article on income tax, I left out some crucial numbers because I didn’t know what to make of them at that time. According to our Ministry of Finance, when the threshold of taxable income was raised from 2500 yuan per month to 3500 yuan per month, the number of people who have to pay income tax was reduced from 84 million to 24 million. I was shocked by that number, so we only have 24 million wage earners who make over 3500 yuan (around 558 USD) a month? And 60 million people who we used to consider middle class are only making 2500-3500 yuan a month, which can barely pay for basic living needs in major cities? Of course this number does not tell us how much capital income and grey income that rich people are getting, but it is a sobering fact for those who are counting on the ever-growing demands of China’s new middle class.

How much influence do the middle class have on policy makers? I am becoming less and less optimistic. As Bloomberg pointed out during this year’s National People’s Congress Meeting, the so-called people’s national congress is made up of billionaires whose wealth “make capital hill look like pauper”. Only in a system of state capitalism can you see such a marriage of capital power and political power. And you expect these billionaires to represent the voices of the middle class?

My full CER article here:

Taxation and middle-class discontent

Monday, March 12, 2012 — 12:00 am

by Jin Ge

As Mid-Autumn Festival approaches each year, complaints begin to crop on Sina Weibo, China’s largest microblog platform, about the so-called “mooncake tax.” Since 2009, the policy has dictated that the round cakes many companies give their employees as a gift each fall should be considered a form of personal income, and are therefore subject to income tax. It is a simple policy, yet each year it invokes the ire of netizens who criticize it as “greedy” and “intrusive.”

The public outcry over taxation has been growing louder in China, largely in the forums offered by new media such as microblogs. In 2011, issues like the tax burden, government accountability and the unfair distribution of wealth were all hotly debated on the internet by China’s increasingly vocal middle class. This outpouring of emotion was different from the kind of discontent expressed by the protests of migrant workers or peasants, which usually assert a personal experience of injustice. Instead, these online discussions focus more on the structural problems of the Chinese economy.

This outburst of discontent seems to be rooted in the widespread feeling among the Chinese middle-class that their income and living standards have not grown at the same pace as the country’s spectacular GDP numbers or the government’s fiscal income. This feeling is not unfounded. The government’s fiscal income hit a new record in 2011 of RMB10.3 trillion (US$1.6 trillion) – up more than 200% over the last six years, according to the Ministry of Finance and National Bureau of Statistics. In the same period, average incomes increased only around 10% each year. In 2010, the average income for urban residents grew 7.8%, while rural incomes rose 10.9%.

The Chinese government is aware that the popular opposition to the distribution of wealth between government and society poses a threat to its legitimacy. To diffuse the tension, it is trying to control the flow of information through measures like “real-name registration” on microblogs.

But despite criticism in the Western media, it is not merely trying to stifle complaints; it is also trying to address the problem. Top leaders repeatedly stressed in 2011 that the government is determined to increase average incomes and to make domestic consumption the new growth engine of Chinese economy, rather than exports or fixed-asset investment.

The government’s efforts at income tax reform demonstrate its determination in this goal. Last April, the National People’s Congress published a draft of the new individual income tax law on its website and invited citizens to submit suggestions online. More than 200,000 netizens, including myself, took this novel chance of civic participation. To my surprise, the final version of the new law, published in July, reflected public opinions and exceeded popular expectations in many ways. For example, in the first draft the threshold for taxable wages was RMB3,000 (US$476.6) per month, but in the final version it was raised to RMB3,500.

The reforms were obviously directed at taxing lower-income earners less to help close the wealth gap. China runs a progressive tax system, meaning the tax rate increases as taxable income increases. The tax rate for the first bracket, people earning taxable income of between RMB0-1,500, was reduced from 5% to 3%. This means that a recent college graduate who makes RMB5,000 a month will now only be taxed RMB45 per month, down from RMB75 previously.

The new system is not lenient on the wealthy: The highest tax rate under the new law is 45%, though that is only applied to the portion of an individual’s monthly income that exceeds RMB 80,000. That is much higher than the highest rate in Hong Kong (17%) or Singapore (20%), which are known for using low tax rates to attract international elites. But China’s range of 5-45% is roughly in line with other big economies with progressive tax systems. For example, US federal income tax rates range from 10-35%, while Japan’s income taxes range from 5-40%, and the UK’s range from 20-50% – though these countries all have various local taxes and tax rebate policies that complicate comparisons of the tax burden.

Beyond the math

These reforms are positive, but online discussion threads point out that many major issues remain to be addressed, such as the “grey” income of officials and the heavy burden on small enterprises. The government still spends far more on its own ambitious fixed-asset investment projects than on the social programs the public demands.

In public discussions, how tax money is spent appears to be becoming an even bigger concern than tax rates. The debate was sparked in part by the tragic accident last November, in which 21 children were killed in an overloaded school bus in Gansu province; the bus had only nine seats but was carrying 64 kids. Angry netizens repeatedly asked questions such as: “Where did our tax money go? Why are children crammed into shabby buses while government officials drive fancy cars?” The incident (and complaints) prompted the government to allocate a special fund to subsidize school buses in poor areas.

Despite these efforts, it is clear that the Chinese government’s spending on social welfare is low by any standard. In 2010, for example, total government spending on Medicare was about RMB480 billion (US$76.2 billion). That figure was up 20% from 2009, but still represented only 1.2% of China’s GDP.

In comparison, federal spending on Medicare and Medicaid in the US (which is not known as a welfare state among developed countries) has exceeded 3% of GDP in recent years, according to the Congressional Budget Office. No wonder that news reports on the possibility of China giving funds to indebted European countries provoked responses from Chinese people such as: “If our government is so rich, why can’t it save us first?” “Don’t people in Greece still enjoy much better social services than we do?”

Due to the intensified information and idea sharing on the internet, the Chinese middle-class are increasingly aware of the relationship between the government’s macro-economic policies and individual living conditions. The policymaking process in China is still far from democratic, but the income tax reform example shows that the government is becoming more responsive to public demands. At the very least, there is a consensus both inside and outside the government that to make China’s economic development more sustainable and inclusive, we need a prosperous domestic market supported by the middle class.

The current system still does not seem secure or fair to many of these people. Most Chinese agree that only by raising domestic consumption can China switch to a more sustainable and inclusive model of growth, but this cannot happen without a prosperous middle class that feels secure and confident enough to spend more. Let’s hope we see more meaningful dialogues that lead to reforms to improve government accountability and empower the Chinese middle class.

Niall Ferguson Warned about “Shrill Nationalism” in the Documentary “China: Triumph and Turmoil”

In the documentary China: Triumph and Turmoil, just aired in UK on Channel 4, Niall Ferguson stated that the Internet and China’s integration into global economy didn’t really spread democratic values in China, instead, they facilitated a growing “unofficial nationalism”, particularly among young Chinese.

Ferguson says, “It is one of our comforting and enduring myths that as China becomes more modern and sophisticated, more like us, it will come to adopt our values. I’m not sure it’s going to be like that. [Chinese students during the Lhasa riots in 2008] were very hostile to the criticism of the Chinese government. The key insight for me is that rather than pro-democracy feelings increasing as China grows economically, it is a radical, shrill nationalism that is emerging. There is an enthusiastic embrace of the economic benefits of the market but resentment of Western cultural hegemony. The attitude is: if we make it economically, we don’t have to kowtow to you culturally.”

There is plenty of China-phobia in the West right now and Ferguson’s discussion played right into it. In another interview, he even talked about the troubling parallel between today’s China and Germany before WWI, on the ground that both had “rapid economic growth, self-confidence and increasingly a rather shrill nationalism”.

I have been studying nationalism in China for years, and like Ferguson, I found the nationalist sentiment among young people very unnerving. But Ferguson certainly exaggerated the power and social influence of radical nationalists in China, maybe just to make his documentary more sensational.

Yes it is true that there are some young people who are forming online communities that circulate xenophobic discourses, some even organized hacker attacks, but there are also many Chinese NGOs and individuals who are using the Internet to initiate cross-cultural dialogues.

It is also true that the government is relying on nationalism as a main source of legitimacy, but some top leaders are aware of the danger that radical nationalism could destabilize Chinese society and ruin China’s relationship with the International community. That is why one of the most influential nationalist website, Utopia/乌有之乡, was shut down recently for its speeches that defend the Culture Revolution and criticize the government for being too soft in China’s disputes with Asian neighbors over resources in South China Sea.

Also, the power elites are too invested in the current system of state capitalism, which is dependent on the global market, that it will not risk a show-down with the West. Many of our leaders, including the recently indicted Bo Xilai, have been storing their wealth in the US, and their family members are already US citizens. Are there such things in Germany a hundred years ago?

Many of the nationalist young Chinese, despite their resistance to so called Western values, fully embraced individualism and consumerism. I interviewed some leaders in the nationalist community, and I noticed that they are very fond of iPhones and LV bags, and they are even hoping to use the money they made from publishing nationalistic books to emigrate to the West.

However, nationalism has indeed become the main obstacle for domestic reform. It has worked well as a justification for the current status quo and local injustice. For example, nationalism has been used to justify internet censorship on the ground of national sovereignty in the cyberspace; and it was used to defuse media exposure of social problems, with investigative journalists being labeled “traitors” and “guides of Western imperialists”.

Overall, I believe Chinese nationalism is a bigger threat to the democratization of China than to global stability. Few nationalists in China are actually shouting “let’s conquer the world”, but many are telling the repressed in China that “you don’t need those Western values such as democracy, freedom of speech, equality or human rights.

 

Internet PR Company Sued for Hiring Hackers

Recently in the court of Shanghai Qingpu district, an “Internet public relations” company was found guilty of violating the article on Computer System Security in China’s Criminal Law. What this company did was to force a website to delete negative records of its client by hiring a hacker to attack the website.

“Internet PR” is a thriving industry. What’s special about Chinese Internet PR companies is that they don’t just manage social media publicity like their Western peers, they also offer water army service, post deleting service, and even hacking service. I’ve written about how the water army can be your personal online mercenary and crowd out voices of your critics. But Internet PR companies can also delete negative information about you by bribing web-masters and editors. For example, during the poisonous milk crisis in 2008, milk companies hired PR companies to help them “persuade” the search engine Baidu and major web portals to delete posts and discussion threads about their polluted products.

These PR companies often act in a treacherous way: in the morning they take your order to spread negative news about your competitor, but in the afternoon they might already get paid by your competitors to delete those news, and at night they might be posting negative news about you if your competitor pays more. Some of them even make up negative news about a company themselves in order to get deals of “post deleting”.

But this indicted PR company crossed the line by hiring hackers to attack a website that would not collaborate with them. It accepted an order from an accounting company to erase its past record of fraud on the Internet. So it contacted websites that contain such record, but one of these websites simply refused to collaborate no matter what they offer. Then it decided to pressure the website by hiring a hacker, who is a young man in early 20s, to attack and shut down that website. But the people in this PR company have no idea that the owner of this website reported their attack to the police, nor did they realize that their behavior is a criminal offense.

This case is a good warning for me also. I always thought the cyberspace in China is a wild west where you can get away with murder, as long as you don’t criticize the government. I have been saving money for a campaign that will transform my online image into a young man with no past but many followers. But now I am worried. Would there be more constraint on the practices of the water army, post deleters, and hackers? How will China’s legal system adapt to the new media sphere?

Empty Five Star Hotels

A new article on New Fortune (新财富)reports that there are already 651 five star hotels in China, but there are about 500 more that are under construction right now. The average occupancy rate for these hotels is only 61%, the lowest in Asia.

The International chains, from InterContinental, Marriott, to Hilton and Shangri-La, are all increasing their presence in China. But often they are just selling their licenses and managing service, the true investors of most of the new hotels are Chinese real estate developers. Most of these hotel projects are not nearly as profitable as selling residential apartments, so why do the developers do that?

Shanghai Skyline

The developers’ motive is actually no secret to industry insiders. First of all, these hotels raise the price of apartments in its neighborhood. Moreover, the local governments, who can give developers cheap land, love to have more five star hotels in their territories. Five star hotels are a symbol of local economic success and serve the officials’ vanity well.

But the developers are relying on sales profit of apartments to fund all these money-losing five star hotels. What will happen to these empty hotels when the real estate bubble burst?

 

Will Apple CEO Tim Cook Like Our Shanzhai Phones?

Apple CEO Tim Cook is visiting Beijing these days and meeting with Chinese officials. He even was spotted in the Apple Store in Beijing. But what my fellow netizens are curious about is how he likes our shanzhai(山寨) Phones.

I heard a story from a proud Shanzhai iPhone user: Tim Cook decided to try the subway in Beijing. And he was pleasantly surprised that the phones that most people were playing with on the train were iPhones. Then he noticed something even more surprising. One iPhone was running android, another was running symbian, and another even let the users choose from iOS, android, symbian and windows 7 in its menu!

Courtesy of Techweb China
Cook then noticed that a girl was opening the back cover of her iPhone, changing the battery. But Cook saw that her iPhone is holding 4 sim cards! Yes this is the legendary iPhone PS with built-in simultaneous dual-dual sim cards.

Courtesy of Techweb China
Apple had a partnership with China Unicom, but the iPhones bundled with China Unicom network are not selling well. My uncle, who is a peasant,
just got an iPhone for 600 RMB, while China Unicom is selling at 5888 RMB a piece.

Courtesy of TechWeb China
I’m a big iPhone fan also, but I’m not buying the iPhone 4s, I am waiting for an iPhone that I saw on the Internet, which can be worn on the wrist like a watch and has a built-in LED flash light!

Courtesy of Apple频道 中国

China’s Leading Liquor Company Moutai Ventured into Real Estate

Guizhou Moutai Company (贵州茅台), the producer of the most luxurious Chinese liquor Moutai Jiu (茅台酒), just bought a real estate company and annouced its plan to enter the business of real estate development. Why would it do that? Moutai Jiu has such a unique status in the history of Chinese alcohol that it seldom needs to worry about insufficient demand, but right now many real estate developers can hardly get rid of their huge stock of unsold apartments. Also Moutai Jiu’s profit margin is around 80% while that of most real estate projects is below 30%. But Moutai is a state-owned enterprises, its priority is not really profit. The local government of Guizhou Province (贵州省) wants it to lift up Guizhou’s GDP.Moutai Jiu has been an icon of Chinese alcohol since the Qing Dynasty and its unique flavor is tied to the particular water, soil, and climate of its origin–Moutai Town of Guizhou. So Moutai Jiu is perceived as scarce and precious by Chinese consumers. The value of a bottle of Moutai Jiu actually increases with the amount of time it is stored. A bottle of Moutai from 1953 was just bought at 1.5 million yuan at an auction in Jan. 2012. So Moutai Jiu is also a store of value for some people. No wonder the stock of Moutai Company is Chinese value investors’ favorite. But these value investors should worry about Moutai’s recent attempt to enter fields like real estate, where it has little experience. Continue reading

Real Estate Bubble Watch, Mar.2012 Update

Prime Minister Wen said the targeted growth rate of China in 2012 is adjusted down to 7.5%. No surprise there. Infrastructure, real estate, government stimulus programs, export, all these things that were propelling China’s GDP have went up so much in the past several years that the only direction they can go now is downwards.

Credit Suisse’s Tao Dong said on 3/7 that in 2011 each 1% growth of China’s GDP consumed 71 million tons of steel, a number unheard of in world history and unsustainable obviously. You see how dependent China’s GDP is on construction.

Wuhan government asked the real estate company Greenland to increase the height of Greenland Center Wuhan, a skyscraper under construction, from 606 meters to over 632 meters so that it will beat the Shanghai Center in being the tallest building in China.