Ministry of Rail Apologizes to 235 Million (1-13-2012)

 What an absolute mess. The Ministry of Rail has issued its “first apology of 2012” after a failed attempt at online train ticket sales that discriminated against China’s lower classes. Transition to new ticketing systems will be pushed to 2013

March of the Penguins

3.158 billion passengers will trek across China in the forty days between January 11 and February 21. Not different people, obviously, as the transit systems double and triple count individuals making return trips and layovers. Even so, the end result is still the same; over the next five weeks, China’s infrastructure will have to absorb a little less than half the world’s population in commuters as students and workers go home for the holidays. Spring Festival is unquestionably the largest mass migration of human beings on the planet, and the government has to handle this phenomenon every single year in the dead of winter when travel conditions are at their worst.

According to announcements from the NDRC, Ministry of Transport, Ministry of Rail, and other relevant ministries (see full article in Chinese here), China’s 3.158 billion commuters will be distributed in the following ways:

• 2.845 billion will drive (71.13 million per day)
• 235 million will take the train (5.88 million per day)
• 45.5 million will travel by boat (1.14 million per day)
• 24 million will fly home (0.6 million per day)

Rail is the obvious option for those headed inland who can’t afford a plane ticket. Even if all of China’s lower classes had access to automobiles, who would ever want to drive 1,130 miles of traffic from Beijing back to Sichuan when they can just sleep on the train? The 2.845 billion car trips this winter won’t be made by motor enthusiasts. They will be made by people who simply couldn’t get one of China’s precious few train tickets.  

Thousand of workers queue in vain for a train ticket home

Angry and Empty-Handed

Spring Festival train tickets are a precious commodity in China, and so like iPads or access to the Shanghai World Expo, Chinese people will spend days lining up for them. The catch is that train tickets are only available from certain designated kiosks located throughout the city, and can only be purchased up to five days before your trip. Supply is extremely limited, and so tickets generally sell out within the first hour of being on sale. You don’t have to be a master of game theory to predict that every year China will see a longer line of angry, cold, and tired citizens lining up at these ticket windows with hopes of getting a seat on the country's increasingly bottlenecked train system.

China plans to dramatically boost consumption by increasing urbanization to 51.5% by 2015. This means that over the next four years, an additional 53.6 million Chinese citizens will move from rural to urban areas. Many of those relocating will be migrant workers, looking to build infrastructure in China’s burgeoning cities in exchange for some money to send back home. Without roots in the city, though, Chinese culture dictates that these people all return home each winter to spend a few weeks with their families. Unless they have access to a car and a driver's license, the majority of these workers will lining up for a train ticket.

Don’t expect the supply-demand gap to improve. As of Q3 2011, the Ministry of Rail (MoR) was RMB 2.1 trillion in debt, making their debt ratio about 60%, up 7 percentage points from 2009.  In early November, the government granted the MoR an additional RMB 250 billion in credit, of which RMB 140 billion was needed to make “emergency” late payments to rail workers. The workers were mostly billing for work done on China’s high-speed rail projects, over 70% of which have been suspended this year following a series of crashes and scandals that shook the nation and embarrassed the Ministry.

Fumbled Reform

The Chinese government realizes that with no hopes of closing the passenger rail supply gap, each year will see a larger mob of cold, frustrated workers disappointed at the news that they again won’t be able to go home to their families for the culture’s most significant holiday. In their frustration, the mob will turn their anger towards the Chinese government, or more specifically the MoR – the government body that monopolizes all of China’s railways.

If you can’t prevent the frustration, then at least prevent the mob. The government’s solution to the train ticket problem in 2012 was to pull most of the tickets from China’s traditional kiosks and sell them instead through a new online platform www.12306.cn. Tickets were linked to passengers’ personal identification number, which prevented people from buying bulk tickets and scalping them at stations for inflated prices. Guards were put in place at stations to ensure that ticket numbers matched the numbers on passengers ID cards. The new rules were broadcasted both online and over television news channels to make sure everyone got the message.

In their planning, the government seems to have overlooked the fact that the proportion of migrant workers to residents in the first-tier cities of Beijing, Shanghai and Guangzhou is more than 3:10. In Shenzhen, it is more than 7:10. Migrant workers live on bunk beds in dormitories. They don’t watch the news every day and they certainly don’t have internet access. They miss their homes, they miss their wives, and they have been looking forward to this train ride for the last 11 months.

Server Error

Predictably, migrant workers missed the memo. Many queued overnight in the freezing cold only to be turned away for not bringing their personal ID cards to the ticket window. Even the few who knew to bring proper documentation found themselves frustrated that most tickets were only available online, not at physical kiosks. Others found their way to public computers, but were unable to complete transactions without credit cards or online bank accounts.

To make matters worse, the government low-balled their servers after drastically underestimating consumer traffic. Users continually refreshed merchant pages hoping to be the first in line to buy tickets, netting a jaw-dropping 1.4 billion hits for the site in a 24-hour period on January 9. Broadband internet in China is already 1/10 the speed of that in the U.S., and so the equivalent of 20% of the world population logging onto the same site in just 24 hours caused more than a few problems.

Image of 12306.cn, down for repairs

What users didn’t know when angrily logging on and off of the frozen ticket website was that the system is built to lock users out after three unsuccessful attempts at purchasing tickets in a 24-hour period. As the day wore on and servers stabilized, the remaining patient few found themselves barred from finishing their transactions.

An Unsatisfying Punt

The MoR has acknowledged defeat for 2012, pushing major reforms to 2013. 12306.cn is still in use, but train tickets have been largely reallocated back to traditional sales kiosks. Train tickets will remain linked to passenger ID numbers, making this the one point of reform that will stick this season. Laborers caught in ticket lines without their ID cards will just have to come back next week and line up with the proper documentation and an extra blanket.

The announced plan for 2013 is to have a series of regional online ticket vendors, to replace its plan of funneling the entire nation onto a single website. This will take pressure off of the government servers and hopefully give citizens a 12-month window to set up online bank accounts and master the e-commerce learning curve. The problem still stands that if the government doesn’t find an effective way to alert migrant workers to new changes, the net effect will be trading one large national problem for a series of regional ones.

Chinese citizens are calling the Ministry’s statements their “first apology of 2012,” reflecting a growing bitter sentiment among the masses. Both on the street and online, Chinese are openly wondering why an unprofitable, corrupt, and inefficient government ministry continues to enjoy a monopoly over the nation’s railways. Over the last 12 months, the MoR has been faced with disastrous PR and a skyrocketing debt ratio. If the MoR isn't careful, their current minister may not last any longer than his predecessor.

 "If I have seen a little further it is by standing on the shoulders of Giants."

- Isaac Newton

Chris Lowder is the Director of Marketing Services at China Monitor. For more insights from China Monitor and the China Economic Information Network (中国经济信息网), please visit our website at www.chinamonitorisg.com

稳中求进 - The Phrase to Know in 2012 (1-6-2012)

2011 has concluded with China’s annual Central Economic Work Conference, which has set the rhetoric that will shape the decisions of 2012. Not surprisingly, the emphasis for next year will be to shore up and seek stability in a treacherous world economy. Expect conservative-leaning policies from a China looking to shield itself from overseas shocks while still squeezing out just enough growth to keep people employed and happy at home. Political terms are ending later this year, and so we may have to wait until at least November to see long-awaited financial reforms.

The Phrase to Know in 2012

In his interview earlier this week with Caixin Media, People’s Bank director general Zhou Xiaochuan made reference to the Chinese government’s new goal to “seek progress through stability.” What does this phrase mean? I agree that this phrase sounds vague and meaningless by itself. The trick with this and any other party rhetoric is to read between the lines. In the right context, these government phrases take on a potent meaning and reveal much about the communist party’s confidence in the domestic and world economies.  

The phrase “稳中求进” (wen zhong qiu jin) “seek progress through stability” was coined during December’s Central Economic Work Conference (CEWC). The work conference is one of China’s most influential economic summits in which the country’s leaders meet to decide the direction of economic policies for the following year. This piece of rhetoric is meant to become a recurring theme in 2012 government policy, and will be reflected in every decision made over the next 12 months. “Seek progress through stability” will be the phrase to know in 2012, and so it’s important that we stop to take a look at what it means.

f′(政策)

With all Chinese phrases, the devil is in the subtle details. I like to joke that the trick to understanding Chinese government rhetoric is to not read it at face value, but to analyze its first derivative. In other words, it’s really not about what the government is saying this week, but more about what they’re no longer saying, or what they’re just now saying for the first time.

In 2010, the CEWC concluded that the government’s 2011 goal would be to “pursue active, healthy, stable growth while remaining cautious and flexible” (积极稳健、审慎灵活). This sounds vague, but the phrase is a lot more than what meets the eye. Specifically, the order of the Chinese characters here tells a lot about government goals in 2011.

积极 - “Active” here means “we have room to overshoot the magic 8% minimum GDP growth needed for social stability.” “Stable” is a reference to controlling inflation. By putting these characters next to each other, the government is saying that they will shoot for more growth than the minimum, but will hit the brakes if inflation gets out of control.

稳 - Growth is further qualified as being “healthy.” The word “healthy” here isn’t directly talking about sustainability, but is rather referring to the structure of China’s economy. In years past, provinces would invest in fixed assets to create jobs and boost output regardless of whether or not these projects created redundancies in regional industrial economies. This “unhealthy” growth resulted in massive yet powerless sectors of the Chinese economy that are now overcapacity, unprofitable and internationally uncompetitive. Steel is a great example of this.

审慎灵活 - “Cautious and flexible” is making reference to the instability and unpredictability of the world economy. 2011 was the first year China enacted its 12^th 5-year plan (FYP). There is a risk with new major policies that government officials on a county level might follow them too literally to fulfill quotas and seek promotion. Political gain here comes at the expense of critical thinking and decision-making, and so in the event of an economic downturn officials might be stuck reading cookbooks while the oven is on fire.

Reassembled, the 2010-2011 government rhetoric can be understood as: “We would like to see GDP growth in 2011 to be higher than 9% while still taking measures to prevent inflation and overheating. Fiscal policy will be loose enough to spur growth, but investments will be purposeful and forward thinking. Having said that, we expect quick and drastic decisions if we start to see signs of a hard landing from our RMB 4 trillion stimulus package.” The beauty of Chinese government rhetoric is that you can condense all of that nuance into just eight characters.

2012 Rhetoric in Context

Now that we have established the 2011 rhetoric set by the 2010 CEWC, it is possible to do a YoY analysis on China’s new slogan for 2012. Reading the rhetoric, we immediately see that “积极” “active growth exceeding the minimum requirement of 8%” has been eliminated outright. Chinese officials are trenching for a hard year and no longer expect 2012 GDP growth to exceed 9%. In fact, the rhetoric has shifted from describing what kind of growth the government expects to no longer talking about growth at all.

稳中 - The emphasis in this year’s economic rhetoric is the character “稳” - “stability.” China is looking to avoid a hard landing at any cost, because economic instability means social instability, and social instability means political instability. In 2012, China will have to create enough jobs in urban areas to satisfy the joint demand of migrant laborers and new entries into the workforce. At the same time, too much gas can lead to a spike in CPI or a fresh investment bubble. In fact, they have taken the idea of stability a step further by making the primary goal “稳中” – “surround ourselves in stability.”

Political stability will be a major issue for China in 2012. The US election is sure to bring an unprecedented storm of anti-Chinese sentiment as politicians frame capital outflows to China as the reason for US. The reality that China is now losing manufacturing orders to India, Vietnam and Mexico will make little difference once campaign ads start to air. A flailing Eurozone will only add fuel to this fire as countries stop importing Chinese goods in favor of stimulating their own economies or in search of a cheaper deal from less developed countries. All the while, China will be making its own political transition in October from Hu Jintao’s administration to that of Xi Jinping. China doesn’t want an incident while everyone up top is shuffling offices.

The hunt for stability will also mean scaling back some of the more ambitious directives launched in the 12^th FYP. Goals to restructure and upgrade certain industries or launch major infrastructural projects may have to wait until the storm has passed and policymakers are comfortable enough to loose the necessary funds. 2012 will be a year of managing expectations.

求进 – Once the first goal of establishing firm and lasting stability has been accomplished, China will transition into its second 2012 goal of “seeking progress” “求进.” Some issues have to be tackled in 2012. Economic reform will be a major point of contention between political groups in China. Recently, neo-leftist circles in China have been attacking the privatization of industry and capitalistic trends initiated by Deng Xiaoping in the late 80’s. These groups have cited class separation, the corruption of officials, and the privatization of health care and education as the evils of capitalism. This debate will not result in a major reversal of economic policy, but it will determine whether state-owned enterprises or small-to-medium private enterprises will be granted more power as China’s economy continues to develop.

Financial reform will be on the table this week at China’s National Financial Work Conference. This conference is held once every five years, and will be taking place today and tomorrow, January 6-7. Issues up for discussion will be the creation of regulatory bodies for China’s bond markets and SOE asset management, as well as reforms aimed at weaning China away from knee-jerk financial controls and towards mid-term policies established scientifically through the careful and measured use of forecasting models.

Considering China’s upcoming political shifts, though, some issues may ultimately be punted into 2012. China will likely reach its goal of maintaining stability, but we may have to wait until next year’s CEWC for real talk of major reform.

 "If I have seen a little further it is by standing on the shoulders of Giants."

- Isaac Newton

Chris Lowder is the Director of Marketing Services at China Monitor. For more insights from China Monitor and the China Economic Information Network (中国经济信息网), please visit our website at www.chinamonitorisg.com

Policy Peep Show with Zhou Xiaochuan (1-3-12)

2012 will be a year of political transition for China. Hu Jintao's administration is coming to a close, and will be replaced by that of Xi Jinping in October. Likewise, local governments will also see a reshuffling of offices as new bureaucrats take charge of the Chinese economy. At the same time, 2012 promises to be a hard year for the global economy, and so the current set of leaders will have to battle domestic and international problems with one foot out the door. 

Chinese leaders face the joint pressures of slowing growth in emerging markets and instability in the US and Europe. At the same time, policymakers have to stimulate the economy just fast enough to create new urban jobs for migrant workers, but just slow enough to protect its citizens' wealth from inflation. The government has shifted its goals from aggressive economic restructuring to maintaining domestic stability. As a result, certain infrastructural projects may be delayed until 2013 when the global economy is (hopefully) more stable and China's new leaders have had a chance to settle behind their new desks.

Nowhere is this shift in tone more clear than in China’s most recent Central Economic Work Conference. The work conference is one of China’s most influential economic summits in which the country’s leaders meet to decide which direction economic policies will take in the following year. Taking a central role in the conference was Zhou Xiaochuan - Director of the People's Bank of China. 

Today, January 3, 2012, the Chinese business and economic magazine "Century Weekly" published an interview with Zhou (original Chinese text here). The interview touched on topics such as inflation; adjustments to monetary policy; a free-moving interest rate; how much room the exchange rate has to drift; the opening of capital accounts and the question of making the RMB an international currency - all of which are challenges that the new administration will have to tackle in the new year. I have translated the interview below:

12-31-11 Interview with Zhou Xiaochuan

Caixin Media "Century Weekly”: Looking back on 2011, there were a few changes to macro policy made to suit changes in the economy. The year started with tight macro controls that were later fine tuned, and then the Central Economic Work Conference (CEWC) announced in December the government's new platform of "seeking progress through stability." How do you see the economy changing in 2012, and what policies will be chosen to match these changes?

Zhou Xiaochuan: The CEWC has set explicit macro policies and has considered the issues of preventing downward economic trends and controlling inflation.   China faces a number of international issues including the European debt crisis, the uncertain state of the US economy, and slowing growth in emerging markets. If all of these issues intensify simultaneously, it will form a very negative environment outside of China. More importantly, the international economy is changing rapidly, and so China has to take some precautionary measures to guard against unstable growth abroad.

As for our domestic situation, China's local governments will be changing leaders as political terms end in 2012. China is still showing strong growth and has a lot of potential for further economic expansion. Commodity prices have taken a turn for the better, meaning that the issue of controlling inflation is not as pressing as it was in 2011. Of course, China also has its own points of instability. We haven't accumulated enough experience or data, for example, to know how recent real estate trends will impact the national economy.

In general, China needs to prepare for poor international economic conditions.  It must also continue to put pressure on overheated commodity prices while reasonably managing inflationary expectations. China also still has the formidable task of restructuring its own economy.  All of these issues still need to be addressed in our macro policies.

Caixin Media "Century Weekly": November data shows that CPI was only up 4.2% YoY for the month, which is a 1.3 percentage point decrease from October data and is also lower than the market's expectations. How do you view these changes in inflation?

Zhou Xiaochuan: The CEIC has reiterated that it wants to "maintain a steady level for commodity prices." This shows that our leaders are still worried about inflation.

China's goal for inflation for FY 2011 was around 4%, but they will be hard pressed to meet this goal. The final figure for the year will come in at around 5%. The second issue is more technical and has to do with monthly YoY data. This kind of data can give people false impressions, and so they need to do more work with the numbers before reaching conclusions. Since the financial crisis, data has been unstable, and this instability has caused a substantial base effect on YoY data. You need to account for the base effect on all monthly YoY data. On one hand, you can say that a shift from 5.5% to 4.2% means that efforts to control inflation have been successful so far. On the other hand, the CPI grew 1.1 percentage points between October and November 2010, creating a strong base effect. In order to push against inflation with the appropriate strength, you first need to have an accurate quantitative understanding of the situation. You cannot presume that numbers will fall again by 1.3 percentage points next month. I have always advocated the use of seasonally adjusted monthly data, as that kind of data is able to quickly reflect changes in the CPI. Anyway, we can see that we have had some success in controlling inflation and that things are moving in a positive direction, but we can't afford to suddenly drop our guard as a result.

Looking at the general trends of China's economic growth, we can see that China still has huge potential for urbanization. More people will move into cities, seeking to improve their livelihoods. This trend means that China still has a lot of room for major infrastructural projects nationwide, and it is up to the government to assume a role of leadership here. Government officials have a uniform desire to take care of their duties, take care of the economy, and build beautiful and comfortable cities. But this all takes money. It has been over 30 years since China opened its economy. During this time, there have been periods of deflation. During the Asian financial crisis, for example, we saw some negative growth in the CPI. Generally speaking, though, inflation has been a constant issue during these years. For this reason, it is easy for China's economy to exhibit hotter trends. Generally speaking, emerging markets tend to have a higher CPI than developed countries. This doesn't mean that China is currently facing risks of overheating, but it does mean that we can't let our guard down when it comes to inflation.

Caixin Media "Century Weekly": It's been two years and the CEWC is again taking precautions against economic downturn. Which macro policies will be readjusted?

Zhou Xiaochuan: Currency policies and financial stability policies need to be used to make adjustments in opposing ends of the economic cycle. For the most part, they have been incorporated into the framework of China's prudent macro policies.  The conventional wisdom is to make knee-jerk adjustments at alternating ends of the economic cycle. When the economy slows, hit the gas. When inflation rises, hit the brakes. The CEWC specifically made mention of the fact that macro controls need to be more forward thinking. We need to start with a reasonable forecast and make measured adjustments and fine-tune our policies ahead of time.