From "Back to the Middle Class" by UBS Asia Chief Economist Jonathan Anderson, April 6, 2007:
There are any number of possible definitions for a middle class in China. … A more useful definition would be the ability to sustain above-average spending on "luxury" items: a decent flat, a car, nice appliances and an entertainment budget. With this definition in mind, we set out to put an upper and a lower bound on the size of the mainland-style middle class.
First, the upper bound. Our minimum requirement for a middle class family of three would not involve significant housing costs, since the family would still be living in a historically state-provided flat … we end up with a figure of close to US$10,000 in family income, or some US$3,300 per capita. By our estimates, roughly 100 million urban residents nationwide would fit this definition, including nearly 70 million in the "core" urban area.
Now let’s turn to our more restrictive lower bound. Here the family is no longer living in a privatized state flat, but can afford to purchase one on the market … We end up with a figure closer to US$18,000 per year, or US$6,000 per head. How many people in China actually have that level of annual income? … 25 million people (or 2% of the total Chinese population). Assuming that the bulk of these are located in the "core" urban market in the top cities, we have our final, smaller estimate for China’s middle class … In dollar purchasing power terms, the mainland middle class shows up as a virtually invisible 1% to 2% of their US counterparts. Enough said.
From "Asia Economics Daily" by Deutsche Bank Greater China Chief Economist Jun Ma, April 12, 2007:
The most remarkable number [in the March monetary figures] is the US$136 billion increase in foreign exchange reserves in the first quarter, up 73% from the US$78 billion increase in the same period last year. The amount also significantly exceeded the conventional sources of foreign exchange reserve accumulation – the sum of the trade balance and foreign direct investment (FDI) inflows (from non-financial sectors) at US$62 billion – by US$74 billion. We think the most plausible explanations for the excessive increase in foreign exchange reserves include: inward transfers under the current account; a few commercial banks were permitted to convert large amounts of foreign exchange assets to RMB; several foreign banks remitted foreign exchange to China for registration of local entities; conversion of foreign exchange to RMB by corporates and individuals. These four sources should explain a gap of about US$65 billion. Looking forward, we believe that illegal transfers, errors and omissions, and banks’ currency conversions may moderate, while official trade surplus, FDI, and local corporates’ and individuals’ currency conversions continue at the current pace. If these are true, second quarter foreign exchange reserve increases may still be substantially higher than those of a year ago, resulting in pressure for the PBOC to tighten monetary policy.
From "China Update: The State Foreign Investment Corporation" by JPMorgan Asia Pacific Chief Economist Frank Gong, March 23, 2007:
In the near term, shifts in the investment portfolio of China’s forex assets would likely take place in an orderly, gradual manner … Medium to long term implications on international capital flows could be more significant and complicated. One particular concern is the issue on the "recycling" of China’s current account surplus, which according to IMF forecasts would be sustained at annual levels of US$200-275 billion over the next five years. Going forward, the incremental accumulation in China’s forex assets, largely arising from the current account surplus, will more likely be channeled into the major investment categories as laid out by the mandate for the State Foreign Investment Corporation (SFIC), and less into US Treasuries and other US assets. However, having less incremental flows into the UST market is not the same as saying such money will all go into non-US dollar assets, as a large portion of the SFIC’s strategic and portfolio investment targets would still likely be US dollar-denominated.
From "The China Fix" by Morgan Stanley Chief Economist Stephen Roach, presented to the US Senate Finance Committee on March 28, 2007:
Getting China right could well be one of the greatest challenges of the current era of globalization. China has one of the most "open" development models in history – more than willing to open its economy up to imports and foreign direct investment, while at the same time going full-throttle down the path of an export-led expansion. China knows full well that it can’t stay its present course. A rebalancing of the Chinese economy is now under way that poses great opportunity for China and the broader global economy. A China that makes meaningful progress on the road torebalancing, will also offer the United States expanded benefits for two-way trade. Getting bogged down in a contentious currency issue without offering an alternative agenda raises the risks of trade frictions and protectionism. Once the world goes down that path, it’s a very slippery slope.
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