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It Is Now Down To Seven Guys In A Room

Business, China, Company Strategy, Economics, Environment
By John Richardson on 11-Mar-2013


 Source of picture: China Daily


By John Richardson

The famous investor, Jim Chanos, warned three years years ago that the West places an inordinate amount of trust in “nine guys in a room” (i.e. China’s Politburo Standing Committee) getting it right. Since last year’s leadership transition that trust now needs to be placed in just seven guys in a room.

It is ironic that a great deal of plain vanilla analysis from chemicals companies and their investors continues to assume that these men will get it right, whilst both groups are very willing to criticise the shortcomings of Western politicians.

The blog hopes that this plain vanilla analysis is only for the sake of maintaining good relations with China, of giving the country’s leaders adequate “face”.

We would like to believe that at hidden, deeper levels, the chemicals companies have research departments carrying out immensely complex studies necessary to prepare for  many different outcomes over the next few decades.

If this is so, we have the right to access to this resarch if we are continue to place our trust in certain companies. 

One of the mantras that the blog has heard chanted by many companies over the last 16 years, as it has has shuffled from one conference presentation and press conference to another, is “urbanisation” – as if the word in itself, by itself, guarantees continued prosperity.

But what has urbanisation really amounted to since China’s “economic miracle” began?

China’s urbanisation rate is said to have reached 51% in 2011, but if you strip away migrant workers without hukou (residency permits) and homes, the real urbanisation ratio is closer to 36%, according to Bank of America’s Ting Lu, who is quoted in this Business Inside article.

As China nears the Lewis Curve turning point, Ting adds that it is therefore “absolutely right” that China’s leaders are focusing on how to unlock much greater real urbanisation during this year’s National People’s Congress meeting.

“Speeding up urbanisation could boost demand and improve efficiency and social harmony,” adds Ting.

“China [has] experienced rapid industrialisation but rather slow urbanisation in the past decade, resulting in 150 million migrant workers living in urban areas without having urban residency permits,” he adds.

“Most of those migrant workers cram in factory dorms, are excluded from urban public services and social welfare systems, and leave a total of around 58 million of their children in rural areas.

“It is true that for many small cities migrant workers can get urban residency permits by buying homes there, but it is hard for most migrant workers to accumulate enough wealth to do so.

“{This is] partially because they cannot sell (or capitalise) their cultivated land and residential land, and partially because home prices have risen too much as a result of limited supply,” writes Ting.

“Surging home prices in China in the past decade are to a large extent due to the under-supply of residential housing, which in turn is the consequence of under-supply of land for property development.”

He sees the solution as increasing supply of land for homes.

“Close to 200 million migrant workers don’t live in their rural homes except during the Chinese New Year holiday.

“Urban residential land [totals only} 11,000km2, whilst residential land in the rural area is estimated at 92,000km2.”

He therefore argues that the focus of land reform should be expanding the urban area from the current level of 39,000km2, “which is only 0.4% of {the} total national {land] area, versus 2.6% in the US and 4.0% in Japan.”

China, as a result, needs to get rid of collective land ownership – one of the foundations of its political system. Did simple, eh?

And what about food security? Given China’s history, this is surely hugely sensitive.

“Vested interests” have made a fortune out of rising property prices and millions of hard-pressed middle income people have overstretched themselves to buy homes.

Badly engineer this expansion of residential building to the extent that you end up with a property-price collapse and you, thus, end up with a lot of angry people.

Further, the health of a huge amount of speculative bank lending is tied-up in maintaining property prices where they are now.

The benefit, though, of giving millions of migrants the freedom to get rid of their hukou status would be that they would have access to health care services, pensions and free education.

But can China afford to give migrants this freedom, given rising social costs resulting from its one-child policy?