The National Bureau of Statistics (NBS) says that January’s consumer price index (CPI)came in at 4.9%. That was up from 4.6% the month before, but down from 5.1% growth in November. Crucially, however, the number was lower than many market watchers had expected – droughts have been crippling China’s wheat-growing areas, and food prices globally have been rising due to a combination of poor harvests, trade restrictions and speculation. Food prices rose 10.3% year-on-year in January, up from an already-high 9.6% rise in December.

 

The lower-than-expected CPI number might seem less puzzling when one takes into account changes the NBS made to the CPI basket beginning in January. Food, which formerly contributed 32.4% to the index, now contributes 30.2%. Also given lower weights were entertainment, sports and services (to 13.7% from 13.9%), health, medical and personal products (to 9.5% from 9.8%), home electronics and maintenance (to 5.5% from 5.9%), clothes (to 8.4% from 8.9%), and tobacco and alcohol (to 3.3% from 3.8%). The difference has been made up by a 4.22 percentage-point rise in the weighting of housing – which includes rents, but not housing prices – to 19.2% from 15%.

 

But hold off on the conspiracy theories: According to the NBS, the re-weighting of the CPI actually raised – not lowered – January’s CPI by 0.024 percentage points.

 

The rise can be explained in part by rising costs of home services (up 11.4% from 10% in December), rental costs (up 7.1% from 6.8% in December) and residence costs (up 6.8%, from 6.0%). Brokerage CLSA has calculated that more than 85% of the rise in the CPI in January can be attributed to rises in food and residence expenses.

 

The re-jigging did not come as a particular surprise. The NBS has expressed dissatisfaction with the CPI basket in the past – in particular its heavy emphasis on food – and says that it alters the basket every five years to reflect changing consumer patterns. But despite the bureau’s insistence that the re-weighting of the index is “smooth,” the process has revived real questions about the usefulness of the way CPI data is compiled.

 

In particular, a simple listing of the new and old weights of different components ignores changes within the components: The CPI’s food component now features different weights for items like grains, and it appears that there have even been changes to the weighting of specific grains.

 

Furthermore, most discussion of the changes to the CPI has made little mention or explanation of changes to the producer price index (PPI) basket, which some economists say may be even more significant. To date, the NBS has not released detailed information that would help to unravel the differences between the new and old measures.

 

Statistics in China have long been suspect. At one time, discrepancies with reality were intentional; today, most problems arise from the inherent difficulties of surveying such a large country. The NBS itself frequently issues revised figures for various indicators as clearer information presents itself. But the situation is not helped by a combination of willful obstruction – as exemplified by the lack of detailed information about the new CPI and PPI baskets – and continued political pressure to meet specific numerical targets for a wide range of economic indicators.

 

Still, the obstruction in this case is puzzling, given that the need for alterations to the CPI and PPI baskets is by no means a controversial idea. China’s consumer patterns are changing, and as average wages rise, the percentage of each family’s income devoted to food – while still high – is gradually falling. Attaching greater weight to housing costs, even if still leaving out property prices, is also a reasonable reflection of reality.

 

To what degree the aggregate inflation numbers are also a reasonable reflection of reality is less clear. Certainly, they are acceptably accurate indicators of overall trends over periods of months or years. In the short term, they remain approximations at best, and a source of suspicion at worst. While the wish for precision may ultimately be unattainable, Beijing and the NBS would do well to let the numbers speak for themselves. 

 

Sino-US relations started off the Lunar New Year with a slew of suspicious headlines. An unnamed Beijing energy giant stands accused of hacking the computer networks of five multinational oil companies and stealing secrets. Whoever the attackers were, they started and stopped working strictly on Beijing office time.

 

In the same week, 74-year old former Dow Chemical (DOW.NYSE) scientist Liu Wen was convicted of leading a conspiracy to steal trade secrets from his employer beginning in 1995. Other Chinese scientists from General Motors (GM.NYSE), Ford (F.NYSE) and DuPont (DD.NYSE) are preparing to stand trial for similar charges. The US is also suspicious about similarities between China’s new stealth fighter and a US F-117 shot down in Serbia.

 

Everyone spies, and China and its companies are no exception. But headlines like these have business consequences: National security concerns over foreign investments into the US were a major justification for the creation of the Committee on Foreign Investment in the United States (CFIUS) in 1975.

 

CFIUS has a strong mandate to be paranoid, and it is now heavily influenced by China hawks: A representative from the Department of Homeland Security at a CFIUS meeting reportedly led off a question about a proposed Chinese investment with: “When we go to war with China – and we all know it’s ‘when,’ not ‘if’ …”

 

CFIUS has blocked one Chinese investment after another, especially investments by telecom equipment maker Huawei, which is currently embroiled in another dispute with the committee over intellectual property acquired from US-based technology firm 3Leaf Systems. However, as the string of court cases shows, blocking investment does not block theft: So long as the US continues to import top scientists and engineering students from China, the risk of industrial moles will persist – and of course scientists of any nationality can be bribed.

 

Preventing Chinese firms from buying competitive technology keeps US firms from selling it for a profit – it must be noted that mainland companies are known for overpaying for assets – and makes spying that much more attractive.

 

The US certainly has the right to protect its military secrets, but the struggle for dominance is economic, not military. If Chinese firms want to pay top dollar for trade secrets from willing sellers, the US should welcome them.

From “China: CPI inflation below prior expectations, impact of basket adjustments not clear, further tightening still needed and likely” by Song Yu and Qiao Hong, Goldman Sachs, February 15

We believe further tightening measures are still needed given: 1) Despite the lower-than-expected CPI inflation reading which could be lower than otherwise, its sequential month-on-month annualized reading still remains elevated at above 5%. 2) Although the lifting of supply-side restrictions is likely to provide some relief to inflationary pressures, aggregate demand growth is becoming strong. Domestic demand probably has been boosted by the frontloading of lending since the start of the year, which probably led to a loosening of monetary conditions. Meanwhile, external demand growth has also been accelerating quickly in recent months, which adds additional pressure on aggregate demand growth. Although January exports data was clearly distorted by the Lunar New Year on the upside, the strength of the growth is such that we believe its underlying growth momentum is indeed very strong amid the recovery in global demand. 3) The recent drought in northern China may change people’s expectations about grain and food prices despite the fact that its actual impact on grain output might not be as large as many people have feared.

 

  

From “The Interest Rate Hike: You Can’t Beat the System!” by Carl B. Weinberg, High Frequency Economics chief economist, February 14

Up until a few years ago, the reserve ratio was a perfectly fine tool for forcing banks to cut back on their lending. However, the growth of the interbank lending market has added a new wrinkle to the funding patterns of banks. Whereas banks were previously entirely dependent upon People’s Bank of China (PBoC) reserve creation and foreign capital inflows for funding, the new reality is that they rely on the interbank market for marginal liquidity. As the interbank market has grown, we have seen interest rates for term interbank money rise whenever the PBoC squeezes the reserve ratio, as you might expect. The connection to monetary policy is that raising the reserve ratio nowadays can eradicate banks’ profits on marginal loans and shut down lending altogether. Short-term lending rates broke through 8% last month, as banks shut down interbank lending – they had no excess reserves to lend out – and retained whatever reserves they had received. This pushed funding costs for new loans over the administered official lending rate of 5.81%, which shuts down lending altogether. Interbank lending was invented only in 2006, and it has become important policy only in the last few years.

 

 

 

 

Yangjiaya village, Nanchong city,

Sichuan province

Coordinates

105.52.06 East

30.49.06 North

Distance from Shanghai – 2,203 km

 

It was around 11 a.m. on a bright day in the rolling countryside in the western part of the Sichuan basin when I passed a group of six or seven men standing by the road. I said hello, as I did to everyone, and one of them invited me over to join them. We chatted for a while, and someone brought a stool out for me to sit on – a nice but unnecessary gesture. I placed my camera on it.

 

“It’s nearly lunchtime. Would you like to join us?” one man asked. I naturally accepted the invitation. We walked in single file along a mud wall between the paddy fields at right angles to the road, toward a picturesque farmhouse among trees and bamboo.

 

Up the slope and into a courtyard with chickens, and washing on the line. There were stools outside the door and we sat down in the pale sunlight. A small table was brought out on which was placed a large mug of tea for me. The house walls were composed of horizontal wooden struts and vertical pillars of stone blocks, with the squares filled in with flagstone rectangles and mud bricks. There were holes in various places, and it looked rather ramshackle, but it was home for them. I asked how old the house was and the best answer I could get was “several decades.” I also asked how it was to live in.

 

“It is cool in summer and not too cold in winter,” said one of the men. I commented on how charming the scene and setting were, which puzzled them. I pointed over our heads to the rich bamboo fronds above us.

 

“The bamboo beside the house is just lovely,” I pointed out as an example. He laughed and said to the others: “You know, he sees things we don’t because it is new to him.”

 

The plump old mother came out wearing the standard red woolen hat for older ladies in this region, an apron and a big smile.

 

“She has never seen a foreigner before,” said the son. “Probably in thousands of years a foreigner has never been to this house.”

 

“I’m honored to be the first,” I said.

 

The lady said something to me that I did not understand.

 

“She says that she is concerned that you will think this place is dirty,” her son said. It was not clean for sure, but it had all the warmth in the world.

 

“Not at all,” I said. “It is a pleasure to be here.” She could understand my Mandarin, nodded happily and went back inside the house to tend to the food cooking noisily on the stove.

 

The talk turned pretty quickly to international politics.

 

 “I think Bush is a criminal,” the son offered.

 

 “Well, I agree he was not a smart man,” I replied. “But I am not sure criminal is the right way to describe him.”

 

The son, whose name was Ren, asked me about the US and why it had invaded Iraq. “Why would you say?” I asked.

 

“Energy,” he said.

 

As a one-word explanation, that was pretty good, but I suggested that the view of the US as an aggressor was somewhat simplistic.

 

“I would say the long-term goal of the US is a stable Middle East, which is what China needs too, due to its very large oil imports from that region,” I said. “China in many ways benefits from US actions but prefers not to publicly support them.”

 

We moved into another courtyard nearby where there was a round table set up under a tree, with big, deep bowls of food in the center and no plates, only chopsticks, at each setting.

 

“This is the local way, no plates,” said the boy sitting next to me. He was a graduate from a college in Chongqing in what he called “electronic business,” which turned out to be the study of internet commercial activities.

 

I had told them I didn’t eat meat and so there were three or four bowls that were vegetables only and delicious. One of the men pulled out a bottle of grain alcohol – baijiu – and the drinking began, with the vile liquid being poured into paper cups. It was Tuo Brand (沱牌) baijiu, and it was vicious. I looked up the character in my phone’s Chinese dictionary and it said the word means “tearful.” That made sense to me.

 

Sitting at the table were three brothers, the old father, two nephews, a friend from across the road, and a girl from the town of Nantong just north of Shanghai. She had married one of the brothers and given him a son who constantly had morsels pushed into his mouth. Her husband was the biggest drinker of the group and wanted me to drain my paper cup as quickly and as often as possible. I continued to sip in the face of the pressure but got mildly drunk anyway in the sunshine.

 

“The US economy is built on the military, and it is the main arms seller around the world,” he challenged me.

 

“I believe China has just become the main arms supplier to many countries in Africa,” I countered. My goal in these conversations is always to introduce an alternative viewpoint without being confrontational. Not always an easy task when alcohol is involved.

 

I asked him how it was living in Nantong as a migrant worker.

 

“Let me put it this way,” he said. “There is someone else from our village who lives in Nantong and he invited me to visit, but he has done well and is well-off. I told him I cannot come to visit you and I cannot invite you to visit me, so we will have to wait until we are both back in the village to meet again.”

 

The chip on his shoulder was in full view. He poured some more alcohol.

 

“My wife says I drink too much, but I know how to handle liquor,” he said.

 

The courtyard in which we were sitting consisted of long wooden structures on three sides with maybe eight doors to each side facing out into the courtyard. It looked a little like a motel from the 17th century. But only one side was occupied – the other two were shuttered and abandoned, with vegetation starting to encroach from above and around about. The tattered remains of New Year’s couplets around the doors looked as if they were from at least a decade ago.

 

“The people who used to live here have moved away,” said Ren.

 

“They don’
t come back now. Maybe we will knock it all down and build a big villa here. You can buy it for almost nothing.”

 

The man on my right was aged 40 and worked in Shenzhen.

 

“He and I went to primary school together,” said Mr Ren, the man who had invited me into this little world. “We were the most naughty children ever in our school and were terrible students. We did not go on to high school. But our teacher always says he is proud of us because unlike many others we did not end up as thieves, robbers or cheats. We both have our businesses in Shenzhen.”

 

“That’s right,” said his friend. “Being self-employed is a big freedom. It means I never have to worry about the expression on the boss’s face.”

 

I asked the young man sitting on my left, the one who had graduated in eBay studies, what he was doing now.

 

“I work as a clerk for a company,” he said. “The job has nothing to do with what I studied. By the time I find a job that does I will probably have forgotten everything I learned in college.”

 

How about setting up your own company, and working  for yourself?

 

“That is what I’m thinking,” he said. The two men, one a self-employed welder, the other driving his own truck, encouraged him in this idea.

 

The graduate said he had just bought a laptop, and the man to my right asked him if it was an Apple. Wow. The long arm of Steve Jobs.

 

The time came to leave, and after we took some photographs and exchanged names, I walked back to the road with an alcohol buzz and Mr Ren showing me the way.

 

“If you ever need any welding done, just let me know,” he said as we shook hands and parted.

 

 

The China Reading Project donates books to schools in rural China. Donations are tax-deductible. Payments can be remitted to The China Reading Project, Xinhua Finance Library Foundation Limited, HSBC Hong Kong account 809-215064-838, SWIFT code: HSBCHKHHHKH, HSBC Causeway Bay Branch. Visit http://www.chinareadingproject.com for details. For more Travels articles, visit www.chinaeconomicreview.com/travels.

  

Graham’s book, The Great Walk of China, can be purchased from Blacksmith Books and at all good bookshops.

 

There is no doubt that the impact of China’s one-child policy, probably the most ambitious social engineering effort the world has ever seen, is far-reaching.

 

 Discussions about the controversial policy have highlighted a number of issues and outcomes – from forced abortions to factory labor shortages – and what it means in terms of supporting China’s rapidly aging population.

 

 There are drastic social implications as well. The concern is that the massive increase of single-child families is producing a generation of self-centered “little emperors” and “little empresses.” More than 90% of all urban children and over 60% of rural children have no brothers or sisters as a direct result of the 1978 policy.

 

 It is inevitable that only-children experience certain things differently from children with siblings. Discrepancies in social dynamics and personal development mean that the one-child policy will have a significant impact on the country’s future leaders, and also the way China’s business world is run.

 

As such, business schools must do their part to find a way to help shape this unique demographic into responsible, people-savvy leaders. While it’s difficult to measure the true impact of the one-child policy on China’s new generation, many fear the emergence of leaders characterized as self-seeking and socially awkward.

 

One of the oft-cited issues with only-children is their lack of social exchange, compared with children who have siblings. Business schools must therefore help students develop the soft skills of leadership and cooperation. While subjects like management theory, economics and financial strategy are all vital to an MBA education, it’s no secret that business success depends on effective communication and intrapersonal skills. More courses and modules should focus on helping students acquire an understanding of how to lead an organization and manage others effectively.

 

Furthermore, there are concerns that the one-child policy will lead to a more selfish generation – a result of single-children commanding more attention in their homes and being fawned over by their parents. The danger is that this may lead to overconfidence and feelings of superiority.

 

This can, and must, be checked. In the past, MBA programs around the world centered their leadership development on confidence and individual strength. But since the start of the financial crisis, business schools have had to take a different approach, teaching students to be more introspective and to think critically about the big picture.

 

Overconfidence can be blinding, and China’s management education must do more to instill in future leaders the importance of probing what’s happening around them in both academic and business worlds.

 

Educators can play a significant role in shaping  the country’s managers and top executives to be thoughtful thinkers – leaders who have the ability to make decisions that benefit all stakeholders, not just themselves.