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SEEKING ALPHA by: Williams Equity Analysis December 19, 2011

China’s growth curve has gone parabolic in recent years. For the last couple of decades, China has typically averaged 10% GDP growth, and it has maintained that growth even as a multi-trillion dollar economy. Of course, 10% growth in an economy already worth trillions is an astounding achievement, but it can also lead to severe economic tribulations, such as soaring housing and food prices. China has incurred both of these troubles. As a growing middle class emerges, demand for beef has far outstripped supply growth, and beef is typically making record highs every month. Additionally, the usage of real estate as collateral for local government loans, amongst other factors, has led to soaring housing prices.

China has a significant housing bubble on its hands. Growth in the real estate sector is important in all modern economies. Construction of homes and commercial office space is a huge driver for demand in the steel, cement, and construction sectors, and is an important part of demand in the commodities market. Construction requires the use of iron (in steel), copper, and fuel. Moreover, local governments depend wholly on rising land and real estate prices, since almost all of their collateral is in their properties. The famously investment driven Chinese also depend heavily on rising home prices to attain better rates of return than are possible in other markets.

A slowdown in the real estate market has appeared recently; prices in nine major Chinese cities fell 4.9% in April from a year earlier. Real estate prices in major cities had been on an absolute tear for the past several years, as a growing Chinese middle class desires to migrate from the countryside into major cities. A year ago, prices in these cities rose an astounding 21.5%. Now, as demand has significantly weakened, some analysts believe the supply glut in two of China’s largest markets (Dalian and Tianjin) could be as bad as twenty months of housing inventory. Furthermore, China’s official numbers need to be taken with a grain of salt, since the central government can twist the numbers a bit; the government can pressure developers to withhold or add high-value properties, contingent on the kind of statistics it wants to display. Therefore, China’s housing slowdown is potentially being understated.

Ordinary citizens are finding it nearly impossible to buy a reasonably priced home in Chinese cities, which is a classic sign of a housing bubble. When average, financially sound individuals can no longer buy homes, prices have typically deviated far away from their equilibriums. In 2006, it cost $100,000 to buy a decent apartment in Beijing. The average Chinese citizen would have had to save for 32 years based on the average disposable income. Five years later, in 2011, it cost $250,000. Of course, the actual price of housing is irrelevant if incomes are rising as much, if not more than housing prices are growing. Unfortunately for Chinese citizens, income growth came up short, and it now takes more than 57 years of saving to be able to cover the cost of buying said apartment. 57 years of saving is not a normal figure for average citizens in a healthy, economically balanced real estate market. Even the chairman of China Construction Bank, one of China’s largest banks (and who is heavily dependent on strong real estate growth) said, “In some ways, real-estate prices are really crazy.”

Housing prices got to this level mainly because the Chinese government wanted its citizens to save, but it has not offered them viable alternatives to the real estate market in which to invest. As previously mentioned, the stock market has been too volatile for most individual investors, capital markets are considered to be overwhelmingly underdeveloped, and the deposit rates that banks are paying their customers are much too low to provide reasonable rates of return after inflation is factored in. Thus, citizens have had no other practical investment vehicles in which to park their savings. China has, in recent years, attempted to cool the real estate market, most notably by requiring that prospective buyers put 40% down in cash on their purchases. Even more recently, that mandate was bumped up to 60% down. There will, at the very least, be an assuredly long-term trend of deflating construction activity and declining housing prices. This development will lead to lower GDP growth.

Fitch, another one of the “big three” rating agencies, also put out a terrifying note: “the process of bundling the debts into securities continues to grow, which is transferring the credit risk to a broad group of investors.” What this process essentially describes is securitization; any hint of the word should spook those familiar with the 2008 financial crisis. These banks are wrapping up bad loans and selling them to outside investors in return for a sum of cash. Investors can typically bet on different tranches of the security; the tranches with the highest probability have the lowest rate of return for the investor, and as you move into riskier tranches, the rate of return improves (providing that the default limit is not reached). Chinese regulators are considering allowing banks to further securitize more of their assets, in order to reduce liquidity and capital strains (by generating more cash flow). This should come as unwelcomed news, and it appears that the central government is becoming worried about the low-quality loans that are maturing in the short term.

Increased leverage in China is a dangerous development. Worldwide, overwhelming debt levels, particularly in developed economies, have been a major economic concern recently; China is typically (and mistakenly) not included in these discussions relating to over-leveraged economies. The ability of the Chinese economy to expand right on through the global recession at a torrid pace was baffling. The Chinese Gross Domestic Product grew at 9.6% in 2008, 9.2% in 2009, and 10.3% in 2010. This expansion, compared with the figures in the European Union and the United States, whose economies saw negligible growth in 2008, contraction in 2009, and about 2% growth in 2010, shows a stark contrast. The obvious question, of course, is how it is possible that China grew an incredible 9.2% in 2009, while two of its biggest customers were plummeting into their worst recessions in decades. The answer lies within massive, hidden government expenditures.

Chinese exports make up 30% of the nation’s GDP, so any decline in total annual exports should result in a subsequent decline in GDP growth, everything else equal. In 2009, China’s global exports fell 16% from 2008, yet its GDP mustered 9.2% growth. This kind of growth in a multi-trillion dollar economy is difficult enough, without the added hurdle of severe demand contraction in overseas markets. In order to pick up the slack, consumer spending (domestic consumption) had to have either surged, or the government must have had to sink hundreds of billions, or even trillions into the Chinese economy to achieve 9.2% growth. Total household consumption is typically used to measure domestic consumption. Chinese household consumption checked in at 35% of GDP in 2008 and 35.1% of GDP in 2009. This negligible growth is clearly not enough to make up for a $230 billion decline in exports; the only driver of growth left is government spending. Not surprisingly, the World Bank calculated that while fixed-asset investments (the definitive measure of social capital investments and government real estate projects) were only responsible for 4.6% of China’s GDP growth in 2008, they were responsible for 8.8% of GDP growth in 2009; this was good for a 91% year-over-year increase. This investment is now equal to 70% of China’s GDP. To put this figure in perspective, Japan’s fixed-asset investment was equivalent to approximately 35% in the 1980s (during its housing boom), and the United States’ measurement has typically hung around 20% for the last couple of decades.

Certainly, China needs to allocate significant capital toward infrastructure; China has a massive population, a furiously growing middle class, and a great deal of migration from rural areas into major cities. The issue, however, is that much of this investment is highly leveraged (little cash is put down as payment, while the rest is financed through bank loans), and a large proportion of these projects exist simply to sustain headline growth over 9%, despite deteriorating fundamentals. Because these projects are so leveraged, merely servicing the debt becomes a huge intermediate-term cost. Beijing’s public finance system is set up so that local governments are responsible for almost all social services, which include social capital and real estate investments, even though the central government collects 60% of all national taxes. Because of this, local governments have almost no equity to finance projects, even while Beijing is mandating increased investment to sustain rapid headline growth, as written in the 2008 national stimulus bill. Worse still, local governments aren’t even allowed to sell bonds to institutional or private investors to help pay for the projects; a typical solution is to create state-run corporations to whom private banks will then lend money to, thereby serving as the intermediary.

To make the system even risker and more confusing, the collateral that the local governments and their subsidiaries often use to attain the bank loans is lofty, and likely overvalued land prices. Finally, in confusing and illogical fashion, private banks aren’t even allowed to collect on bad loans, or any loan for that matter. Essentially, money lent to state enterprises is free. Of course, private banks have trillions in consumer deposit monies, so a growth in asset toxicity, or bad loans, would require huge recapitalizations from the Chinese federal government, or a financial crisis could ensue.

Furthermore, Beijing’s tight controls have resulted in a structure in which bank loans are the only way to finance public projects. Since local governments collect almost no tax revenue (the central government collects 60% of all taxes), they can’t use cash to fund capital ventures. Also, as previously discussed, since local governments can’t issue bonds, they must go to private banks to get the necessary principal; their only collateral for the loans is state-owned real estate. This has inexorably led to unquantifiable risk for banks, local governments, and the central government (since Beijing will have to bail-out involved parties if and when the loans go rotten). Land-grabs have become common in China (government authorities seizing private property in order to generate revenue), a sure sign of deteriorating conditions.

Moreover, Chinese officials have a destructive propensity for attempting to distort underlying demand by pumping up spending, and then hiding it in state-run investment corporations. To see figures that show severe exports contraction and stagnant domestic consumption, in conjunction with 9.2% GDP growth in 2009 screams falsification and distortion to me. I also believe that China’s tendency to re-stimulate its economy every time international demand weakens is a horrible way to try and achieve sustainable long-term growth.

Given these factors, it appears certain that most investors have yet to grasp a firm understanding of both how secretive and manipulative the Chinese Government is, and how much debt is hidden in the system. Additionally, a horrific financial structure will be a major factor in China’s eventual crash landing.

This shouldn’t be surprising to anyone. The idea that a few government officials can decide how an economy should function, and consequently set countless controls on markets is remarkably ignorant. Perhaps the most important thing to note is that the Chinese governemnt is desperate to keep GDP growing at a pace above at least 7% for the next several years, since China requires astonishing expansion to mitigate the effects of a rapid migration into cities. The political pressures alone will almost certainly lead to poor decision making (over-aggressive stimulus), and an eventual uprising from the Chinese people. There is simply no way that a wealthier, more educated China will remain quiet (they’ve already begun protesting) about a suppressive system.

While sheltered from discussions involving the failed Keynesian practices of incredibly over-leveraged developed economies, China is indeed the younger brother of countries like the U.S. and the European Union.

What Should Investors be Doing?

Investors need to understand that China’s days as “the driver of World growth” are numbered. No, that doesn’t mean China will fall off a cliff tomorrow, but it’s coming. All it takes is one serious catalyst; it could be Europe, angry Chinese banks, or a continued decline in real estate prices to the point where local governments become insolvent.

At the very least, investors should know how much prospective investments rely on Chinese growth. Companies like Intel (INTC) derive half of their revenue from the region.  You can also play the short side of companies who are heavily reliant on Chinese growth, but this complicates the process a bit and may not provide the exposure you’re looking for.

Conclusion

As was the case in the years leading up to the 2008 global economic collapse, the so-called “China bears” are often brushed aside as doom and gloomers. General consensus is that China can engineer a soft-landing, so as to avoid to a rapid decline in economic activity.

Well, for those in that camp, let me ask you something. Why would you ever want to turn off good economic growth? Healthy, natural economic advances should never be thwarted by governments or central banks. The only reason growth would ever need to be turned off artificially, i.e. by a central authority, is because it has bubbled so much that further growth would cause a catastrophe.

Granted, as an economy surges, any free market should begin to inch interest rates higher anyway. The issue in Beijing is that the time to decrease speculative activity was before it saw housing prices reach epic levels, or before it saw food prices begin to cause street riots. At this point, any central action is too late. A horrificially constructed financial system, in conjunction with overly agressive central planning, has set China up for anything but a soft-landing.

Reuters November 21, 2011

By Chris Buckley

CHENGDU, China (Reuters) – Chinese Vice-Premier Wang Qishan warned on Monday the global economy is in a grim state and the visiting U.S. commerce secretary said China would spend $1.7 trillion on strategic sectors as Beijing seeks to bolster waning growth.

Wang said an “unbalanced recovery” may be the best option to deal with what he had described on Saturday as a certain chronic global recession, suggesting Beijing would bolster its own economy before it worries about global imbalances at the heart of trade tensions with Washington.

“An unbalanced recovery would be better than a balanced recession,” he said at the annual U.S.-China Joint Commission on Commerce and Trade, or JCCT, in the southwest Chinese city of Chengdu.

The comments, echoed by Vice Finance Minister Zhu Guangyao, stopped short of suggesting China would try to boost exports as it had done during the 2008-2009 global financial crisis when it pegged the yuan to the dollar.

Instead, U.S. Commerce Secretary John Bryson told reporters that China had confirmed to U.S. officials that it planned to spend $1.7 trillion on strategic sectors in the next five years.

Beijing has previously said these sectors include alternative energy, biotechnology and advanced equipment manufacturing, underlining its aim to shift the growth engine of the world’s No.2 economy to cleaner and high-tech sectors.

The investment amount of 10 trillion yuan ($1.7 trillion) is more than two times bigger than the eye-popping 4 trillion yuan stimulus package launched during the global financial crisis, plans first reported by Reuters a year ago.

“Global economic conditions remain grim, and ensuring economic recovery is the overriding priority,” said Wang, the top official steering China’s financial and trade policy, at the start of the second day of talks with the Americans.

His comments suggested that Beijing should attend to bolstering China’s own growth before it worried about global imbalances. In other words, a strong Chinese economy that brings a continued trade deficit with the United States would be better for the world economy than a slowdown in China itself.

“As major world economies, China and the United States would make a positive contribution to the world through their own steady development,” Wang told dozens of trade, investment, energy and agricultural officials from each government seated in a conference hall.

ALARM OVER ECONOMIC RISKS

Policymakers globally have voiced alarm over economic risks, which mainly stem from the euro zone debt crisis.

On Monday, Singapore and Thailand said their economies would shrink in the fourth quarter and Japan posted a bigger than expected fall in October exports. Some central banks, including those in Brazil and Indonesia, have cut interest rates.

On Saturday, Wang gave the most dire assessment on the world economy from a senior Chinese policymaker to date.

“The one thing that we can be certain of, among all the uncertainties, is that the global economic recession caused by the international financial crisis will be chronic,” he was quoted as saying by the official Xinhua news agency.

The remarks weighed on Chinese and Hong Kong stocks, while world markets were also weak as investors fretted over the euro zone debt crisis.

China’s growth slowed to 9.1 percent in the third quarter from 9.5 percent in the second-quarter and 9.7 percent in the first quarter, but the rate remains in Beijing’s comfort zone.

After tightening monetary policy to fight the threat of inflation, the central bank has since loosened its grip on bank credit in a bid to support cash-starved small firms and pledged to fine-tune policy if needed as economic growth slowed down.

“It’s clear now that Beijing is ready for policy fine-tuning (to support growth) at a time when the overall domestic and foreign economic situation is not optimistic,” said Hua Zhongwei, an economist with Huachuang Securities in Beijing.

ON TRADE, FRICTION AND PROGRESS

U.S. officials said the discussions yielded progress on the question of forced technology transfers to Chinese companies, long a sore point for U.S. businesses.

In particular, China committed not to require foreign automakers to hand their new energy vehicle technology over to Chinese partners, or to establish Chinese brands as a condition for market access, said U.S. Trade Representative Ron Kirk.

“China also confirmed that foreign-invested companies will be eligible on an equal basis for any subsidies or incentive programs for electric vehicles,” said Kirk.

Although the JCCT talks do not address exchange rate policies, U.S. officials at the talks warned Wang and his colleagues that they could not ignore rising American impatience with China’s trade policies and investment barriers.

U.S. gripes about China’s trade-boosting policies spilled into President Barack Obama’s meeting with Chinese Premier Wen Jiabao on Saturday in Bali, when Obama raised China’s exchange rate policies, which many in Washington say keep the yuan cheap against the dollar in order to help Chinese exports.

However, Zhong Wei, an influential economist at Beijing Normal University, said the benefits to the United States of yuan appreciation “are nearly zero.”

“Cheap Chinese goods have been a subsidy for the poor in the U.S., and now the U.S. government wants to eliminate such subsidy while it’s having difficulty creating jobs,” he said.

At the heart of the trade friction between the two countries is a U.S. trade deficit with China that swelled in 2010 to a record $273.1 billion from about $226.9 billion in 2009.

Bryson told the talks the United States welcomed more expanded trade and investment, on balanced terms.

“But a reality also is that many in the U.S., including the business community and the Congress, are moving toward a more negative view of our trading relationship, and they question whether the JCCT is able to make meaningful progress,” said Bryson.

By Stacy Curtin | Daily Ticker  December 5, 2011

More evidence emerged over the weekend that China is increasingly worried about slowing growth and the social unrest that could arise as a result. Always a concern, this is a particularly sensitive issues in a time of political transition as the top leaders of the Communist Party are set to change next fall.

“It is an urgent task for us to think how to establish a social management system with Chinese characteristics to suit our socialist market economy,” warned Zhou Yongkang, the Chinese leadership’s law-and-order czar. “Especially when facing the negative effects of the market economy, we still have not formed a complete mechanism for social management.”

These comments come on the heels of last week’s news that manufacturing in China fell to levels not seen since February 2009. As a result, many economists — including those at IHS Global Insights and J.P. Morgan — have lowered growth expectations for the rest of the year.

Gross domestic product averaged 9.7% in China from 2008 to 2010, but since the beginning of this year growth has been slowing. The country’s GDP slowed to 9.1% in the third quarter, from 9.5% in the second and 9.7% from the first.

Last week, the Chinese government also unexpectedly cut bank reserve requirements by 50 basis points, which will likely help banks increase lending in the months to come. “They are much more worried about the Chinese economy slowing very fast so they are putting their foot back down on the accelerator,” says Daniel Franklin, editor of The Economist’s The World in 2012, a publication focused on the trends and stories that will shape the year to come.

To his point, at the end of November, China announced another stimulus plan roughly two times the size of its initial program back in 2008, which did prevent a recession but has led to inflation and a country-wide debt crisis. The country is now set to spend $1.7 trillion on seven “strategic” or high-tech sectors.

But the question remains: Is this new spending program a short-term fix or means to restart sustained long-term growth?

The World in 2012: China

What is not in question these days is the fact that China, as well as other emerging markets, are not only producing much of the world’s goods, but are consuming more and more of the world’s goods too.

According to Franklin, a big shift is coming in 2012. Emerging economies are set to overtake the rest of the world as the biggest importers of goods.

“That is a dramatic change since 2000, when they imported barely half as much as rich countries did,”writes Pam Woodall in the magazine. “This rapid growth in developing countries’ buying power will boost the profits of companies in rich economies over the coming years.”

And by 2014, China alone will surpass the United States as the world’s biggest importer.

“Within ten-to-15 years emerging markets could produce half of the revenues of several big multinational firms,” writes Woodall. “This rapid growth in developing countries’ buying power will boost the profits of companies in rich economies over the coming years.”

The Western world has run out of ideas and is “finished financially” while emerging economies across the world will continue to grow, David Murrin, CIO at Emergent Asset Management told CNBC on the tenth anniversary of coining of the so-called BRIC nations of Brazil, Russia, India and China, by Goldman Sachs’ Jim O’Neill.

“I still subscribe and I’ve spoken about it regularly on this show that this is the moment when the Western world realizes it is finished financially and the implications are huge, whereas the emerging BRIC countries are at the beginning of their continuation cycle,” Murrin told CNBC.

Murrin added he believes the power shift from the West to emerging economies beyond Europe and the United States was “unstoppable” and he blamed a lack of ideas from Western leaders on how to stimulate growth together with contracted demographics and rising inflation as catalysts for Western decline.

“We suffer from no growth and we suffer from imported inflation… that means we have negative real growth and societies fracture when you have negative real growth and quite simply our society faces fractures for trying to stick Europe back together again is not going to work with that underlying paradigm, unless you can create five percent growth to overcome that imported inflation,” Murrin explained.

Murrin said that the East was depending less on the West and the rise of a consumer society was the first step in the expansion of an economic empire.

“If you look at the cycle of an empire system from regionalization to expansion to empire, the first phases of that catalyst are when you have a self fuelled consumer society and so actually that process of building your consumer base which is really what’s going on in China, day by day their consumer base increases and the dependence on the West decreases,” he said.

Containing China

Murrin added that while China is by far the biggest emerging economy and would be at the center of a new economic order, other emerging nations were set to join the BRIC countries and new political orders and alliances would come about as a result.

“This isn’t just a BRIC story, this is the end of the Christian Western Empire versus the rise of the whole emerging world led by China as the foremost and most powerful,” Murrin told CNBC.

“I think it’s going to be the whole world trying to contain China’s growth and there’s going to be completely new alliances that take place… between Australia, Japan and India and America and possibly Russia if the foreign policy is expansive enough, there’s going to be a ring of containment trying to hold this bulging entity which is like no other nation we’ve ever seen coherently challenge for control of world commodities and resources,” he added.

Intervention Not the Answer

Finally, Murrin stressed that Europe in particular was set to experience a rapid and deep decline and intervention by the European Union and its financial institutions was not a solution to stimulate growth.

“I think there’s a real reality amongst investors and just taxi drivers, that without growth, the system’s not sustainable, so intervention is just a drug and we all know that the more drugs you put into someone, the more the system becomes immune to their response and so I don’t see this as a solution,” he said.

Pointing to previous economic downturns, Murrin said the West was much less equipped than the emerging world to deal with its current decline.

“In all our examples of disastrous events, Argentina, Russia, the Asian crisis, they’re not good references for us in the West because they take place in countries with good demographics, good commodity stories and essentially underlying tides which lift them away from their problems,” he said.

“We in the West have none of those, we live in a world where resources are increasing in prices, where we’re a consumer society, we’re an old society, we’re not innovative, we’re not expansive, so we don’t have any of those natural lifting qualities to actually pick us out of the mire which is what decline is really about,” he added.

Reuters November 21, 2011

By Chris Buckley

CHENGDU, China (Reuters) – Chinese Vice-Premier Wang Qishan warned on Monday the global economy is in a grim state and the visiting U.S. commerce secretary said China would spend $1.7 trillion on strategic sectors as Beijing seeks to bolster waning growth.

Wang said an “unbalanced recovery” may be the best option to deal with what he had described on Saturday as a certain chronic global recession, suggesting Beijing would bolster its own economy before it worries about global imbalances at the heart of trade tensions with Washington.

“An unbalanced recovery would be better than a balanced recession,” he said at the annual U.S.-China Joint Commission on Commerce and Trade, or JCCT, in the southwest Chinese city of Chengdu.

The comments, echoed by Vice Finance Minister Zhu Guangyao, stopped short of suggesting China would try to boost exports as it had done during the 2008-2009 global financial crisis when it pegged the yuan to the dollar.

Instead, U.S. Commerce Secretary John Bryson told reporters that China had confirmed to U.S. officials that it planned to spend $1.7 trillion on strategic sectors in the next five years.

Beijing has previously said these sectors include alternative energy, biotechnology and advanced equipment manufacturing, underlining its aim to shift the growth engine of the world’s No.2 economy to cleaner and high-tech sectors.

The investment amount of 10 trillion yuan ($1.7 trillion) is more than two times bigger than the eye-popping 4 trillion yuan stimulus package launched during the global financial crisis, plans first reported by Reuters a year ago.

“Global economic conditions remain grim, and ensuring economic recovery is the overriding priority,” said Wang, the top official steering China’s financial and trade policy, at the start of the second day of talks with the Americans.

His comments suggested that Beijing should attend to bolstering China’s own growth before it worried about global imbalances. In other words, a strong Chinese economy that brings a continued trade deficit with the United States would be better for the world economy than a slowdown in China itself.

“As major world economies, China and the United States would make a positive contribution to the world through their own steady development,” Wang told dozens of trade, investment, energy and agricultural officials from each government seated in a conference hall.

ALARM OVER ECONOMIC RISKS

Policymakers globally have voiced alarm over economic risks, which mainly stem from the euro zone debt crisis.

On Monday, Singapore and Thailand said their economies would shrink in the fourth quarter and Japan posted a bigger than expected fall in October exports. Some central banks, including those in Brazil and Indonesia, have cut interest rates.

On Saturday, Wang gave the most dire assessment on the world economy from a senior Chinese policymaker to date.

“The one thing that we can be certain of, among all the uncertainties, is that the global economic recession caused by the international financial crisis will be chronic,” he was quoted as saying by the official Xinhua news agency.

The remarks weighed on Chinese and Hong Kong stocks, while world markets were also weak as investors fretted over the euro zone debt crisis.

China’s growth slowed to 9.1 percent in the third quarter from 9.5 percent in the second-quarter and 9.7 percent in the first quarter, but the rate remains in Beijing’s comfort zone.

After tightening monetary policy to fight the threat of inflation, the central bank has since loosened its grip on bank credit in a bid to support cash-starved small firms and pledged to fine-tune policy if needed as economic growth slowed down.

“It’s clear now that Beijing is ready for policy fine-tuning (to support growth) at a time when the overall domestic and foreign economic situation is not optimistic,” said Hua Zhongwei, an economist with Huachuang Securities in Beijing.

ON TRADE, FRICTION AND PROGRESS

U.S. officials said the discussions yielded progress on the question of forced technology transfers to Chinese companies, long a sore point for U.S. businesses.

In particular, China committed not to require foreign automakers to hand their new energy vehicle technology over to Chinese partners, or to establish Chinese brands as a condition for market access, said U.S. Trade Representative Ron Kirk.

“China also confirmed that foreign-invested companies will be eligible on an equal basis for any subsidies or incentive programs for electric vehicles,” said Kirk.

Although the JCCT talks do not address exchange rate policies, U.S. officials at the talks warned Wang and his colleagues that they could not ignore rising American impatience with China’s trade policies and investment barriers.

U.S. gripes about China’s trade-boosting policies spilled into President Barack Obama’s meeting with Chinese Premier Wen Jiabao on Saturday in Bali, when Obama raised China’s exchange rate policies, which many in Washington say keep the yuan cheap against the dollar in order to help Chinese exports.

However, Zhong Wei, an influential economist at Beijing Normal University, said the benefits to the United States of yuan appreciation “are nearly zero.”

“Cheap Chinese goods have been a subsidy for the poor in the U.S., and now the U.S. government wants to eliminate such subsidy while it’s having difficulty creating jobs,” he said.

At the heart of the trade friction between the two countries is a U.S. trade deficit with China that swelled in 2010 to a record $273.1 billion from about $226.9 billion in 2009.

Bryson told the talks the United States welcomed more expanded trade and investment, on balanced terms.

“But a reality also is that many in the U.S., including the business community and the Congress, are moving toward a more negative view of our trading relationship, and they question whether the JCCT is able to make meaningful progress,” said Bryson.

The expansion of China’s deserts is taking a heavy toll on the lives and livelihoods of people all over the world’s most populous country. A new video from Asia Society’s China Green project documents attempts by ordinary citizens, NGOs and the government to counter the growing threat of “desertification.”

Watch now

Related articles

• Images of Desertification in Inner Mongolia, China (Pics) (treehugger.com)

THE MOTLEY FOOL  By Dan Radovsky  October 21, 2011

The Chinese government is sick and tired of hearing U.S. regulators question the validity of the auditing done on U.S.-listed Chinese companies. So it has done what it considers the best thing to do to squash those complaints. It has requested the world’s largest auditing firms to come in and recheck the work they did for those Chinese firms in 2010, and to do it quickly.

The Ministry of Finance and the China Securities Commission asked the “Big Four” accounting firms, KPMG, PricewaterhouseCoopers, Ernst & Young, and Deloitte, to also review the initial public offering, or IPO, work they did on behalf of Chinese companies wishing to be listed on the U.S. exchanges.

In addition, the firms have to inform the Chinese regulators whether any of the auditing work or client information was passed on to U.S. and other foreign regulators, something the Chinese government really would be upset about. The auditors have until the end of the week to complete this work.

What has brought on this desperate action by the Chinese? The get-rich-quick allure of investing in the new world of Chinese capitalism brought opportunities for many newly formed companies with little innovation and less financing to get listed on the U.S. exchanges. This made it easy, perhaps too easy, for naive investors to get in on the fun. As my Foolish colleague Alyce Lomax wrote, “The ‘Go-go’ China investment thesis made logical sense at first.”

The main problem with investing in U.S.-listed Chinese companies is the higher potential for fraudulent or inaccurate accounting. A case in point is that of Longtop Financial Technologies. At one time it had a market capitalization of more than $2 billion. But after the company was accused of fraudulent financial behavior, its auditor resigned. That auditor happened to be one of the “Big Four,” Deloitte.

According to Tim Hanson, another of my Foolish colleagues, Deloitte wrote in its letter of resignation that it found Longtop’s state-owned bank “complicit in helping Longtop deceive Deloitte and its investors.” This implied, according to Tim, that “fraudulent practices may be systemic in China’s financial system.”

This is obviously a perception that the Chinese regulators would like to change. It knows how bad publicity can negatively affect investment in China. And there are U.S.-listed Chinese stocks that certainly seem on the up-and-up (with a caveat regarding so-called variable interest entities): There’s Baidu (Nasdaq: BIDU), Country Style Cooking (NYSE: CCSC), Yongye International (Nasdaq: YONG), Guangshen Railway (NYSE: GSH), China Mobile (NYSE: CHL), and Renren (NYSE: RENN), just to name a handful.

The Big Four auditing firms are in a precarious position. Estimates put Chinese revenues for those firms at $1.5 billion for 2010, with growth at 20% over the previous year, so they can’t just ignore the Chinese regulators’ concerns.  But if they can’t do an audit of a Chinese company that would meet the standards that the U.S. regulators set, then their audits would have no credibility.

As Michael Pettis, a professor of management at Peking University, said, “I expect it is going to be a little messy.”

CNN MONEY Les Christie, On Friday October 21, 2011

Hey, wealthy foreigners! Want to live in the U.S.? Buy a home here.

International purchases of American homes are ramping up, and a new Senate bill designed to boost the ailing real-estate market would encourage globe-trotting investors to buy even more.

The bill, co-sponsored by Charles Schumer (D-N.Y.) and Mike Lee (R.-Utah) would grant a U.S. visa to international investors who agree to spend at least $500,000 on residential real estate here.

If passed, the legislation could add to a surge in homebuying by international purchasers over the past year or two that’s already given some local U.S. markets a welcome boost.

Growing international interest

Foreigners spent $82 billion buying up U.S. homes in the 12 months ended in March, up 24% from a year earlier, according to the National Association of Realtors (NAR). That represents 8% of total U.S. sales.

In places like South Florida, international buyers already account for a whopping 25% of the market. California, Texas and Arizona also attract many foreign buyers, as do Hawaii and New York.

South Florida condo sales have been surprisingly strong, said Brad Hunter, chief economist for Metrostudy, a housing analytics company. “And the majority of those sales are to South Americans and Canadians,” he said.

All that international buyer activity has been a tonic for the anemic Florida market. Housing starts were up nearly 20% in the three months ended Sept. 30, according to Metrostudy.

Your local forecast

In Manhattan, there’s been a steady baseline of foreign condo buyers, said Jonathan Miller, CEO of Miller Samuel, a New York appraisal firm. They generally account for about 15% of investors, but in recent years, the buyer mix in New York City has shifted, he said.

When the euro was strong in the mid-2000s, buyers from Western Europe — and particularly Ireland — dominated.

The Irish “economy was so strong back home — the ‘Celtic Tiger’ years — that many were flush and wanted to invest and take advantage of the spread between currencies,” said Miller. “There were marketing groups that would go to Ireland and sell packages of condos here.”

Now, said Miller, the New York market now attracts more Asian and Latin American buyers than in the past.

Wei Min Tan, a real-estate agent with Charles Rutenburg Realty who specializes in selling Manhattan real estate to Asians, said his volume has more than doubled this year.

“I tell [buyers] it’s going to be a stable investment that should go up 10% a year,” he said. That’s “not as much as they might get in Hong Kong or Shanghai,” but there’s less volatility, he said.

Even better for homeowners, foreign sales can be very easy: The buyers are often affluent and buy more expensive homes. The median sale price of $175,000 they pay in Florida, for example, is well above the median sales price of $136,500 for all transactions.

There’s also no hassle over financing or waiting around for a mortgage lender to approve the deal: Overwhelmingly, international buyers pay cash.

Indeed, the Senate bill would require buyers to pay cash for the homes to qualify for the new “homeowner” visa. They’d also need to pay U.S. taxes and spend at 180 days a year in the country, and can’t work here or take out home-equity loans against the properties. In return, they’d get to live here for at least three years.

A vote of confidence

The program could improve the housing market nationwide, said Schumer.

“We think a very significant number of people will be brought in,” he said. “They’ll sop up the extra supply of homes we have right now that has been dragging down the economy.”

Foreigners seem to have more confidence in the U.S. real estate market than Americans do. Almost half of buyers surveyed by NAR cited the profitability or safety of their investments as the main factor that persuaded them to buy.

“With the economic distress in Europe,” said Miller, “people are still looking for safe havens for investing and the U.S. is perceived globally as safe.”

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