Friday, 25 May 2007

China's Stockmarket - "how does it work"?

I am aware that there have been a number of posts on the Chinese stock market on this blog recently.

However, given there may be a more general "economics" audience and other interested travellers I am posting an article from today's Independent that gives a nice little overview of the Chinese stock market and how it works (it is part of a much larger article dealing with the Greenspan comments - see previous post).

Before the article here is my prediction - let time be the judge.

1. Stockmarket will continue to rise perhaps by another 25-30% over the next 6 months to a year. 5000 could be the psychological barrier that is a digit too far. There will be a series of small hiccups on the way.
2. What will follow will be a trigger than may, by itself, seem quite unimportant that will lead to a widespread sell off of Chinese stocks with perhaps a 10-15% one day fall.
3. Over the next year shares will fall by as much as 40-50% off their all time highs before stabilising.
4. The knock on effect on the world markets will not be as great as some commentators fear but there will be some contagion effect on neighbouring exchanges.
5. Internally, real estate prices will fall and many individuals will be wiped out. Given the large share holdings by the Police, Army and state owned enterprises what happens then is anyone's guess but it could conceivably get quite ugly quite quickly.

Greenspan's warning for China
China operates two stock exchanges on the mainland, in Shanghai and Shenzhen, as well as the Hong Kong Stock exchange, which is entirely separate.

The Shanghai bourse is the larger of the two - the Chinese government maintains a controlling interest in many of the companies listed in Shenzhen - but the combined total market was capitalised at around $500m at the end of last year.

Domestic investors have a choice of around 900 stocks, but two types of share are traded. A shares, with prices in the local currency, were originally off-limits to overseas investors, though this restriction was relaxed to some extent in 2002. B shares, meanwhile, are priced in US dollars, tradable by both domestic and foreign investors. The Chinese government plans eventually to merge the two classes.

Investment amongs the Chinese middle classes has until recently been limited, but has rocketed over the past year.

According to the China Securities Depository and Clearing Corp, which is jointly owned by the Shanghai and Shenzhen stock exchanges, the number of trading accounts has risen by 30 per cent over the past year to 95 million. One sixth of these have been opened in the past four months, and on one day alone last week, investors opened 552,559 new accounts.

Thursday, 24 May 2007

"Greenspan on China" - more than a little exuberance

Alan "irrational exuberance" Greenspan has weighed in on the "China Bubble" debate.

Not surprisingly he also feels that the Shanghai stock market is due for a serious correction.

It is interesting to compare this speech with his Nasdaq comments back in the mid to late 1990's.

Whilst he was undoubtedly correct "eventually", after a small correction, the NASDAQ continued to rise for a number of years and to some extreme highs before eventually crashing to earth. Figures in the article below.

My feeling is that whilst the bubble will burst at some point, there is some way to go before we reach that point.

Greenspan says China’s stocks may post a ‘dramatic’ decline
Madrid: Former US Federal Reserve chairman Alan Greenspan said he was concerned that Chinese stocks might undergo a “dramatic contraction” after its main stock index jumped more than 90% this year.

The benchmark CSI 300 Index, which tracks yuan-denominated A shares listed on China’s two exchanges, rose to a record 3,938.95 on Wednesday. It closed 0.5% lower on Thursday, 24 May 2007.

The index more than doubled last year as investors bet corporate profits would be boosted by the world’s fastest-growing major economy.

“It is clearly unsustainable,” Greenspan told a conference in Madrid on Wednesday by satellite. “There is going to be a dramatic contraction at some point,” he said.

China last week increased the amount it lets the yuan move against the dollar and raised interest rates to restrain economic growth and a swelling trade surplus.
The changes came ahead of two days of meetings in Washington between US treasury secretary, Henry Paulson, and his Chinese counterpart, vice-premier Wu Yi, aimed at smoothing trade frictions.

Greenspan’s comments contributed to the first decline in US stocks in four days and Chinese stocks also declined in US trading on Wednesday.

“The strength of the Chinese market has kind of spilled over into the positive sentiment here in the US,” said Michael James, senior equity trader at Wedbush Morgan Securities in Los Angeles. “To have someone like chairman Greenspan calling for a dramatic contraction in the Chinese markets might have made a few people a little nervous,” he added.

Greenspan, 81, continues to move financial markets with his utterances since he retired from the Fed in January 2006 to return to his previous career as an economic forecaster.

His 26 February comment that a recession in the US is possible this year contributed to a brief global sell-off in stocks that started in China, according to some traders.

Chinese shares have since resumed their climb, prompting concerns among some investors and regulators that a sudden collapse may ensue should the Chinese government succeed in its efforts to cool the economy.

“The Chinese have lost control of monetary policy and now it has reached the stock markets,” said Nouriel Roubini, chairman of Roubini Global Economics in New York. “There’s a bubble, and eventually it’s going to collapse.”

Greenspan said the global financial system remains resilient. “I am not worried about the system overall, but I am worried about some parts,” he said. “I am concerned, for example, about China.”

The People’s Bank of China had, on 18 May, announced that it will let the yuan rise or fall 0.5% a day, up from 0.3%.

The central bank also raised interest rates for a fourth time in the past year and ordered banks to put aside more money as reserves.

China’s practice of limiting the yuan’s gains has sucked in overseas capital, contributing to $1.2 trillion (Rs49.2 trillion) in reserves and fuelling a property and stock-market boom. It has little room to raise interest rates to damp its economy, because higher borrowing costs would only attract more money, Roubini said.
US lawmakers say an undervalued yuan is responsible for a record US trade deficit with China that has cost American manufacturing jobs.

They say China’s steps to loosen curbs on its currency aren’t enough to forestall punitive legislation. Since China ended a strict peg to the dollar in July 2005, the yuan has risen 7.9%, less than the 12% gains in currencies, including South Korea’s won and Malaysia’s ringgit.

As Fed chairman for 18 years, Greenspan was known for convoluted prose that was occasionally punctuated with memorable phrases.

In a December 1996 speech, Greenspan wondered whether asset prices were being driven by “irrational exuberance”, a phrase that was later seen as foreshadowing the technology-stock bubble of the late 1990s.

His musing on that day sent stocks lower around the globe, though they soon recovered and extended their rally for more than three years. The Standard & Poor’s 500 Index stood at 744.38 on 5 December 1996, the day of the remarks, and climbed to a record close of 1,527.46 on 24 March 2000.

Since his retirement, Greenspan has been giving paid talks to audiences around the world and writing a book, The Age of Turbulence, to be released in September.
He will advise the world’s biggest bond fund, Allianz SE’s Pacific Investment Management Co. (Pimco), on strategy during quarterly economic forums, Pimco said last week. Greenspan will join Bill Gross, Pimco’s chief investment officer who also manages the $100 billion Total Return Fund for the Newport Beach, California-based company.

For a review or to buy the Greenspan book:

The Age of Turbulence: Adventures in a New World

For a previous blog post comparing the Nasdaq and the Shanghai stock prices see:

Shanghai 2006-2007 vrs Nasdaq 2000-2001

"Bursting Chinese Bubble" - a contagion effect?

Who is REALLY inflating the "Chinese Stockmarket Bubble"?

Wednesday, 23 May 2007

China Untamed - can China control its overheating economy?

The stockmarket "bubble" is merely part of a much larger crisis in China at the moment (although few of those getting very rich, very quickly would call it a crisis including UK pension funds).

The FT yesterday published an excellent article with the by-line "China's Leaders struggle to restrain a surging but unbalanced economy".

There are some real economic and social problems on the horizon for China if the current growth rate continues (and even if it doesn't).

I have not yet posted on the Blackstone deal as $3bn is a mere drop in the forex ocean and is simply being used by China to placate the US in their current negotiations and the upswing in China bashing going on in the US press (substitute China 2007 for Japan in the late 1980s).

In this post I highlight a few of the more pressing issues:


For more than three years, Beijing has shouted from the rooftops that its economy is out of balance: too reliant on exports and investment for growth, with a dangerously high share of output from energy-intensive, polluting heavy industries.

This will not change any time soon - so apart from the environmental issues which are important (see the China category of Globalisation and the Environmentblog), things will not change that quickly.

The immediate problem is the mountain of cash that is rapidly accumulating. You might wonder however, what is the problem with having lots of money? Surely this is a good thing?
In the short term, the problem of managing excess liquidity will only get worse. The latest estimates put the current account surplus for this year as high as $400bn (£203bn, €296bn), or about 12 per cent of gross domestic product. This would be unprecedented for a big country such as China. Surpluses of this magnitude have usually been recorded only by smaller nations emerging from a crisis or by significant oil exporters.

So what is the problem? More on that later - so what has China attempted to do so far?
Given the size of China's challenges, it is no surprise that the measures announced on Friday, the latest in a series of small interest rate and bank reserve ratio requirement increases over the last 12 months, had little impact. Their most immediate target, the stock market, which has more than tripled in the past 18 months despite repeated efforts to talk it down by senior officials, rose by 1 per cent yesterday.

This is similar to the supertanker argument - changing China's direction of travel will take a long time and some seriously strong policies otherwise the trade surplus will continue to grow.

In an interesting paragraph the FT also highlight that China is slipping in some trade protection - this will help create jobs but is a dangerous strategy.
China has been happy to facilitate this trend through protectionism. In a little noticed decision, China in March ended tariff exemptions for nearly 200 kinds of industrial equipment, such as smelting and mining machinery and packing materials, imported for use by local companies. The finance ministry said the 30 per cent tariff had been restored to "create a fair environment for domestic equipment makers to compete with foreign rivals through innovation".

Exports of the output of China's rapidly expanding heavy industries, such as steel, aluminium and chemicals, are also picking up. Overseas sales of finished steel rose by 159 per cent in April year-on-year, according to Macquarie Research. In this case, the surge is partly attributable to manufacturers front-running the government's well-signalled decision, announced yesterday, to tax steel exports, the kind of product that can bring trade tensions to a head.

But if the trade surplus is the problem, neither appreciation of the renminbi nor random administrative measures to restrain exports, such as the ones applied to steel, will be a panacea. China's increased labour productivity alone over the past two years has been enough to wipe out any cost increases - and therefore any decrease in export competitiveness - from the roughly7 per cent appreciation in the renminbi against the dollar since mid-2005. Even if China's currency rose rapidly, the bilateral trade surplus would remain high in any case.

China will witness a significant labour productivity increases in the next few years - this will be China an even more fearsome competitor in international markets.
However, problems remain -
China's spectacular growth rates for the moment are camouflaging the fact that the country and its citizens are getting a lousy return on the billions the country invests and the raw materials they use.

This is crucial - all the foreign reserves have to be parked somewhere. We have posted before on moves to allow investment in riskier assets and not just US paper. However, it still holds that China is getting a poor return for all the capital and resources it is using up. Problems of job creation and inequality will get worse.

Monday, 21 May 2007

Good governance and FDI in China

Some interesting research looking into China's success in attracing FDI inflows. This is an area of research where there is plenty more to do.

Below are 3 other China related papers from the World Bank Policy Research Working paper series. These papers are free to download from the SSRN website (see links below).


"Does 'Good Government' Draw Foreign Capital? Explaining China's Exceptional Foreign Direct Investment Inflow"
World Bank Policy Research Working Paper No. 4206

Chinese University of Hong Kong - School of

University of Alberta - Department of Finance and
Management Science, National Bureau of Economic
Research (NBER)

World Bank - Development Research Group (DECRG),
Peking University - Guang Hua School of Management

New York University - Department of Economics

Full Text:

ABSTRACT: China is now the world's largest destination of foreign direct investment (FDI), despite assessments highlighting its institutional deficiencies. But this FDI inflow corresponds closely to predicted FDI flows into China from a model that predicts FDI inflow based on government quality indicators and controls and is estimated across a sample of other weak-institution countries. The only real discrepancy is that, if government quality is measured by constraints on executive power, China receives somewhat more FDI than the model predicts. This might reflect an underestimation of the strength of these constraints in China, a unique institutional setting for FDI operations, FDI based on expected future institutional improvements, or a unique Chinese model of development. The authors conclude that Ockham's razor disfavors the last. They also note that FDI may be elevated because Chinese institutions protect foreign firms better than domestic ones.

Other papers that may be of interest are:

"Formal Finance and Trade Credit During China's Transition"
World Bank - Development Research Group (DECRG)
World Bank - Development Research Group (DECRG), Peking
University - Guang Hua School of Management
Hong Kong University of Science & Technology - Division
of Social Science

"Local Elections and Consumption Insurance: Evidence from Chinese Villages"
Texas A&M University - Department of Economics, National
Bureau of Economic Research (NBER)
World Bank - Development Research Group (DECRG), Peking
University - Guang Hua School of Management
Peking University - CCER

Sunday, 20 May 2007

China by numbers: more on the bubble

Today's observer has yet another piece on the Chinese stock market.

Is China's trick cycle on the turn?

Whilst most of this article just regurgitates "taxi driver" anecdotes there are a couple of more interesting paragraphs. The first backs up by previous post "Bursting Chinese Bubble" - a contagion effect? that argued that even a burst bubble would have no lasting effect on world stock markets.
Judged by size alone, the Shanghai market is still small, and with most shares owned by domestic investors there would be little direct impact on world markets from a crash. But when prices dropped 9 per cent in February it triggered sell-offs from Tokyo to New York, as anxious investors fretted that China could be the first domino to fall in an emerging-markets shake-out. Since then, Shanghai has bounced back - prices are now 45 per cent higher than they were in February - but another wobble could shake global confidence.

What is useful is a list of China related numbers:
200m: The number of people in the Chinese middle class

10pc: Average economic growth per year for the last 15 years

$1 trillion: Beijing's total foreign exchange reserves

800pc: The increase in output per head over the last 30 years

3rd: In 1978, China was 23rd in the league table of trading nations; last year it was third

45pc: The rise in the value of the Shanghai stock exchange since February

15pc: Average growth in exports per year between 1990 and 2005

1st: China is the world's largest consumer and producer of steel, cement, colour televisions and meat

60pc: Thirty years ago, more than 80 per cent of the Chinese population lived in the countryside; today, less than 60 per cent do

$18bn: The total trade deficit the US ran up with China in March alone

Who is REALLY inflating the "Chinese Stockmarket Bubble"?

As Chinese share prices resume their relentless rise the Friday's FT presented an excellent piece entitled:

Elusive drive share-dealing boom

I admit that on this blog I have tended to emphasise the burgeoning number of retail/small shareholders and have quoted the oft cited statistics that "the Chinese have been opening 300,000 share trading accounts a day, taking the total number to 80 million".

Whilst these are still very large numbers and are certainly not helping the situation, the FT is correct to point the finger in another direction. Given my recent investigations into business practice in China, a lot of this makes sense. Moreover, it suggests that the fall out from any bursting of the bubble may be more serious that I had originally envisaged.

The hypothesis expounded in the article is that a large percentage of the free float (shares available for public purchase) have been bought, not be small individuals, but by state owned enterprises, the army and unregulated private funds. Now the fall out from any potentially large losses begin to look at little more scary.

I have included only selected paragraphs. My "bold" highlights.

If there is a symbol of China's stock market boom, it is the novice retail investors who have rapidly developed a passion for equities. Brokerage offices that were almost empty a year ago are now packed with young and old would-be speculators. In recent weeks, the Chinese have been opening about 300,000 new stock trading accounts every day, taking the total number of accounts to more than 80m.

But who is really driving the Chinese market, which has quadrupled in value in two years? The new retail investors have captured the headlines, yet some market-watchers believe they are just one part of a much broader surge in stock-buying, which contains the seeds of potentially big problems for the government.

According to a provocative new analysis from Fraser Howie, an investment banker and author of a book on China's stock markets, the role of retail investors has been exaggerated. Instead, Mr Howie says, around $225bn (£113bn) of shares - or nearly half the float - are owned by less conventional fund managers.

He believes a significant chunk of shares has been bought over the last year by different parts of the government, such as state-owned companies, local government units, the police and the army. Such investments are impossible to prove but he argues the same thing happened during the last bull market, which ended in 2001, and that accountability of government spending at local level remains weak.

Some of his impressions are supported by other investors. "It was the big, cash-rich state-owned enterprises, particularly the tobacco companies, that were the main drivers of the market until the end of last year," says Chris Ruffle, co-chairman of MC China, a subsidiary of Martin Currie Investment Management and a large investor in China. "They have so much money they don't know what to do with it, so they put it in the stock market."

Another significant slice of new money has come into the market from the hundreds of new private investment funds that have sprung up over the last two years, often run by individuals who invest the money of friends and family. In China they are often referred to as hedge funds because they are not regulated, and they usually call themselves "investment consultants". They are gradually becoming a powerful force in the market. Mr Howie reckons these funds could have $50bn under management, while other estimates go as high as $75bn.


"The market is not being driven by accounts held by old ladies or farmers from Guangxi," he says.

While the real ownership of the stock market is impossible to pin down, Mr Howie's analysis poses important questions about what might happen if there is a sharp crash in share prices. The losers would not just be the small, retail investors who piled into the market when it was already relatively expensive. they could also include government organs and state-owned companies.

With speculation mounting that the government will seek to burst a perceived bubble in the market, such investments would add to the complicated vested interests the authorities face.

"I would hate to be the market regulator at the moment," says Mr Howie.

Friday, 18 May 2007

Research Paper: China and the Multilateral Trading System

This is an interesting and important paper by Robert Lawrence at Harvard looking at the broad issue of China and the WTO. What is crucial in my opinion is that he looks at the proliferation of free trade agreements (seperate from the WTO) and the concerns of some of the creation of a "East Asian Fortress".

This discussion links to Baldwins concept of the "noodle bowl" effect. Also an excellent paper.

Managing the Noodle Bowl: The Fragility of East Asian Regionalism

The conclusion of the Lawrence paper that "There is also a risk however that the proliferation of FTAs will lead to web of overlapping agreements that could make the trading system unnecessarily complex" fits nicely with the noodle bowl effect.

"China and the Multilateral Trading System"
NBER Working Paper No. W12759

Harvard University - John F. Kennedy School of
Government, National Bureau of Economic Research

Full Text:

ABSTRACT: This paper reviews China's multilateral and preferential trade policies. It reviews the demanding terms of China's WTO accession, its current tariff and trade regime and its participation in the Doha Round negotiations and the institution`s regular activities. The analysis concludes that China's trade policies are broadly supportive of a rules based multilateral trading order and its behavior at the WTO is that of a status quo power rather than one seeking major systemic changes. The discussion then turns to China's regional trade initiatives. China has been extremely active in negotiating these and their implications remain uncertain. Concerns about an East Asian fortress, though, appear misplaced. Directly, and through their impact in inducing others to respond, these FTAs could provide a powerful impetus to the process of competitive global liberalization. Countries that do implement agreements with China will find it relatively easy to open their markets to other developing countries. There is also a risk however that the proliferation of FTAs will lead to web of overlapping agreements that could make the trading system unnecessarily complex.

Downloads are free for NBER subscribers (most academic institutions). Otherwise ask a friendly academic for a copy or pay $5 I think.

Wednesday, 16 May 2007

"Bursting Chinese Bubble" - a contagion effect?

There have been many articles written on the ineviatable crash in the Chinese stock market.

In yesterday's FT there was a letter that I repost here. I have to say that I disagee with the writer of this letter.

I have highlighted in bold the areas of disagreement.

For one, as we saw with the 9% fall in the Shanghai market earlier this year, there appeared to be a knock on effect. However, after looking at this more closely Shanghai was merely a trigger that led investors and institutions to look more closely at US market fundamentals.

As was pointed out then, the Chinese market is still tiny by any measure. It is still relatively closed and is being fueled by local retail investors (with millions of retail accounts being opened this year alone).

In the UK there are numerous China based companies listed on AIM and the main market (see my previous post on this Shanghai 2006-2007 vrs Nasdaq 2000-2001). What is clear is that these stocks have not seen anything like the rises seen in China (if any). This will also hold for Chinese stocks listed in Hong Kong and elsewhere. If one examines the PE of this other shares they are on entirely reasonable ratings (as are the rest of Asian stock markets).

(Aside - the recent news that China "Investment from China" now allows overseas share buying boosted other Asian stock markets that now expect a wave of Chinese money to flood in). This may take pressure of the A share markets in the short term and could, long term, lead to a contagion effect. However, for the moment this is not a worry.

It is the relatively restricted Chinese stocks are the exception. Whilst a crash is inevitable there is no reason to suggest that the fallout will be globally or even regionall widespread.

The letter below misses the point - Hong Kong is NOT sure to follow. Investors ARE able to distinguish between China and other emerging markets. The Chinese bubble will cause pain to the "last suckers in" but investors in blue chip firms in the New York and London can rest easy. The resticted nature of the Chinese market ensures this.

The coming crash in Chinese stocks

Sir, Six years ago, according to an article in the FT, Wu Jinlian, an economist with the State Council Development and Research Centre, described the Chinese market as worse than a casino. Not much has changed. The lack of transparency, corporate governance, free press and property rights has divorced the Chinese market from any economic reality. As Cheng Siwei, a senior member of the National People's Congress, pointed out, only 30 per cent of the more than 1,300 listed companies had investment value. In relationship-based systems such as China's, "truthiness" has been mistaken for the truth of a rule-based market.

What has changed are the effects. In the past six years the Chinese economy has become a major factor in the world economy. When a bubble bursts in China, it will not stay in China. If the government decides to support the market, it fortunately has the cash. Unfortunately, it is in US Treasury bills. If there is no intervention, the debris from a crash will unsettle a rising Chinese middle class and their political apathy.

Where Shanghai goes, Hong Kong is sure to follow. It is doubtful that investors will make a distinction between China and the rest of the emerging markets, so undoubtedly several more will fall. The problem in China is that the stock market is not the only bubble. Speculative bubbles also exist in property markets upon which much of Shanghai's economy depends. China's irrational exuberance has also been driving commodity prices around the world. These markets will be tested along with much of the financial engineering involved in private equity, hedge funds and credit derivatives. And pensioners in the US may wake up to discover that their interests are being determined in a Beijing court presided over by a retired Peoples Liberation Army major.

The collapse of the Chinese stock market is not a question of if, only when. The real question will be how many dominoes it will take with it.

William Gamble,
Emerging Market Strategies

Friday, 11 May 2007

Corruption in Chinese Academia

As an academic there is a notion that, stuck in our ivory tower, we are immune to the vagaries and temptations of capitalism. More so for economists who would never enter academic life for the money given the large number of lucrative outside options available.

It is a shame therefore to see that even academia in China has embraced rampant capitalism so readily.

This recent article from China.Org.Cn (H/T Cal Poly MBA Trip)

Academic Dishonesty: Corruption in Chinese Universities

The academic world has traditionally been considered a realm of pure scholarship virtually free from temptations to abuse administrative power and control more often seen in the political or business sectors.

However, duty-related offences committed by college and university teaching staff have become a growing problem in recent years, mostly involving corruption and bribery in student enrollment and capital construction, the People's Daily reported on April 17.

The problem is particularly severe in the capital city of Beijing and provinces of Shaanxi, Hubei, and Sichuan where colleges and universities are centralized, the newspaper reported.

Records from the Haidian District Court of Beijing show, between 2004 and 2006, it handled 20 criminal cases involving 28 teaching staff. These cases came from 14 colleges and universities, with the maximum amount involved in a single case being 1 million yuan (US$129,473).

It appears that most of the corruption is related to basic bribe taking for contract work. More intriguing is:
People's Daily also provided examples from southwest China's Sichuan Province. In 2004, a series of textbook purchase corruption cases were uncovered involving 36 teaching staff in 13 colleges and universities and a total of 12 million yuan (US$1.55 million).

So how is it done and could it happen (or does it happen) in the UK or US? It would appear not.
"A director of a university's asset management department has the power to independently examine and approve deals up to 1 million yuan each time," explained Zhou Xuebin, a division chief from the Hubei Provincial Department of Finance. "Although the financial department is responsible for examination and approval of the budget reports submitted by colleges and universities and the allocation of funds, the latter mainly decide themselves how to spend the money."

The answer to the problem appears to be "increased regulation" - does this always have to be the answer? The final paragraph hits the nail on the head.

"Corruption and duty-related offences committed by college and university teaching staff cause more than just financial losses," stressed Gao Jinzhang, an official from the Hubei Provincial Commission for Discipline Inspection of the CPC. "More importantly, they exert a bad influence on students and this has a direct bearing on the future of the country."

International Political Economy Zone

Whilst we will occasionally (or often) highlight (steal) interesting posts from other blogs and news sources, every now and then we will review an entire blog if it is consistently good.

International Political Economy Zone is one such blog.

This blog is described as:

"Tales of Power, Money, and Occasional Violence"

For this tag line alone this blog deserves to be applauded. However, the content is also excellent and the sidebar links are appropriate and illuminating with an emphasis on quality links.

From the prospective of this readers of this blog, the China section is also the largest category with trade the second largest. Rarely does one come across a blog where the writer and the content appear so closely aligned with my own.

The blog layout is depressingly good for a blogger blogspot and is well laid out and constructed.

The fact there that there is no information on the writer except that he is called Emmanuel adds a little intrigue to proceedings ;-) It is also difficult to gauge how many readers this blog currently enjoys although I am sure it should be more.

International Political Economy Zone/CHINA

All in all a highly recommended blog and somewhere I shall be looking to steal posts from in the future :-)

Here are a few recent links as examples of what to expect.

China on $ Holdings, 06 CA Surplus

Philippines Scores One Over China

US & China, Enviro-Fiends?

Robert Mugabe, Friend of China

Corruption and environmental control in China

The Globalisation and Environment blog have posted a couple of posts on China and its fight against pollution.

What is interesting is the political battle between the centre and the regions. When central government uses local officials to monitor pollution levels of firms that the local officials have a financial stake in it is clear that this conflict of interest will lead to tension.

China and environmental accidents

Environmental Regulations in China: The battle between Beijing and the regions

A quote from one of the articles (original source PlanetArk):
Many Chinese factories, smelters and power plants have bought equipment to minimise pollution from smokestacks, but are notorious for turning off the equipment as soon as government inspectors leave their gates.

Scrubbers and other equipment can be expensive to operate, or can reduce the energy efficiency of a plant, tempting owners to flout the rules.

Understaffed environmental bureaux lack the manpower or the clout to enforce compliance, since they often report to local governments that own stakes in local industry.

Thursday, 10 May 2007

Shanghai 2006-2007 vrs Nasdaq 2000-2001

Below is an interesting little figure lifted from ADVFN's China Thread.

ADVFN is the website I use to track Chinese shares traded in the UK. I will post on this subject at a later date. It is becoming increasingly popular for Chinese companies to trade on the lightly regulated UK AIM market. There have already been some spectacular failures and indeed successes.

Click here to register (all free) to read the thread - the link is also in the sidebar. All currencies, commodites and shares worldwide can be checked on this site. It also has a very active discussion board.

How much higher can it go? Apologies for the small print. Check the China Thread on ADVFN to see the picture in a larger form. Blogger is not cooperating.

Note the similarity - this also suggests that there is not long to go. The issue of valuations is an interesting one - some of the Nasdaq valuations went way beyond what is being seen in China but even so, China is well overvalued relative to the rest of Asia.

This other figure is perhaps scarier - this is why taxi drivers and students are investing.

Interesting times ahead.

"China's Stockmarket" hits the headlines again

That fine institution the Finanacial Times has allocating more column inches to the topic of the Chinese stockmarket and the potential bubble that is emerging/has emerged.

There is nothing a financial newspaper and indeed an academic economist likes better than a rich rich quick/ get poor quick story.

It is similar to the tabloid newspaper effect when they build up celebrity so they can take even greater pleasure from their downfall. It self perpetunates column inches.

Financial bubbles are no different.

I have posted on this topic before - the key, as I said then, was when taxi drivers and students start buying shares - the quote below in bold is therefore telling.

"Chinese Stockmarket": Speculative bubble?
Here are a few links to "China bubble" stories.

Bubble inflation
A market that goes up 200 per cent in less than 18 months, and trades on a price-to-earnings multiple of about 50 is not necessarily a bubble. But if it looks like a crocodile and grins like a crocodile, it is probably best to treat it as a crocodile, just in case. China's stock market has inflated to a worrying level, and because of Chinese policy and the state of the Chinese economy, it could go higher before it falls.

Penniless college students, housewives, and taxi drivers are reportedly flocking to deal in a Shanghai market that is up more then 40 per cent so far this year. Chinese investors have shrugged off a caution by the governor of the People's Bank of China and pushed shares to valuations that are extremely optimistic, if not yet insane.

But valuations do not matter much in a bubble. In 1990 many Japanese shares reached price-to-earnings multiples in the 1980s, and in 2000 the Nasdaq market in the US traded at more than 100 times its constituents' profits. Once investors start to buy shares purely because they are going up, what counts is whether they have the confidence to keep the process going.

Two features of China's economy encourage that kind of confidence.

First, like every other economy at an early stage of development, there are structural problems that can force money into the stock market. There are not many domestic bonds and bank deposits barely keep pace with inflation. China, still somewhat communist, has capital controls that prevent individuals investing abroad. Chinese citizens' only real investment choices are property, which is illiquid, and the stock market. It was always going to be bubbly.

Second, China's fixed exchange rate makes it hard to keep credit growth under control. The People's Bank of China may have to buy $500bn of foreign currency with renminbi this year to keep the exchange rate down. But the exporters who receive those RMB deposit them in China's commercial banks, so the PBoC has to hoover up the RMB by selling government bonds to the banks, to prevent explosive growth in the money supply.

But sterilising reserve accumulation of $500bn a year - a level unprecedented in economic history - is becoming increasingly hard and rapid growth in bank lending adds fuel to the stock-market fire. There are still things the Chinese authorities can do: liberalise capital outflows, free up domestic markets, and float more state companies to increase the supply of shares to investors. But China may not be able to avoid a large currency appreciation for too much longer.

China bources eclispe all of Asia

Without new policies China’s shares could go still higher

The Short View

Wednesday, 9 May 2007

China's stockmarket: Bubble bubble toil and trouble

China's stock market continues to reach new highs - the bubble continues to inflate. There is no doubt this is a bubble. We know that, the institutions know that, the government know that and the poor retail investors should know that.

This is a classic game of chicken - just a few more percent and then I will sell. The emotions of greed, fear and regret are all mixed in there and for many Chinese retail investors this is their first experience of an asset bubble.

This means this bubble could get very large indeed before the inevitable.

...why I am posting here - time to get onto my broker FAST.

From today's FT:

Chinese investors shrug off ‘bubble’ fears

China’s stock market brushed off a central bank warning about the danger of an asset bubble on Tuesday and rose to another record high in a sign of the government’s waning ability to control share prices.

At least three state-run newspapers ran prominent stories about the warning from Zhou Xiaochuan, governor of the People’s Bank of China, in Basle on Sunday. When Mr Zhou was asked if he was worried about a bubble forming in the stock market, he said he was.

But his comments, the latest in a series of official public statements expressing alarm about the level of the market, were ignored by investors, who bid up the index by nearly 3 per cent.

Authoritative statements from senior officials about the stock market have for many years set share prices in China, where investors have taken the government’s word as gospel.

Such statements were traditionally delivered through the People’s Daily, the mouthpiece of the communist party, usually in articles signed by an unnamed “special correspondent”.

In the current bull market, however, with new stock trading accounts being opened at the rate of more than 1m a week, the admonitions of senior officials suddenly seem impotent.

“No one believes [Mr Zhou] can do anything to affect the market,” said Fraser Howie, the author of a book on Chinese stocks. “There are a lot of gamblers with a whole pile of money who are prepared to continue punting.”

The Shanghai composite index rose by 130 per cent last year, and is up by just 50 per cent so far in 2007.

One of the main drivers of the market remains China’s low interest rates, which offer the country’s thrifty savers a return of just 2 per cent – offering a negative real return compared with inflation of more than 3 per cent.

“If Zhou Xiaochuan really wanted to affect the market he could double the [government-controlled] bank deposit rate, but that would wipe out the state-owned banks,” Mr Howie said.

In December, 1996, the People’s Daily ran a front-page editorial entitled “On correctly understanding the current stock market,” which warned against excessive speculation.

The market fell that day by 9.91 per cent, and by a further 9.44 per cent in the following trading session as investors dutifully interpreted the editorial as the government's official stance.

By contrast, when the “special correspondent” declared in the same paper in June 1999 that a run-up in stock prices was “healthy”, the market soared.

As recently as this January, share prices fell sharply after comments about the market by Cheng Siwei, a senior member of the National People’s Congress.

The authorities do have other ways of influencing share prices. Most importantly, all issues of equity must be approved by the securities regulator, which theoretically allows it to increase the share supply and dampen price rises. The government could also use fiscal measures to calm demand.

Copyright The Financial Times Limited 2007

Tuesday, 8 May 2007

IMF Conference on Global Implications of China's Trade, Investment and Growth

This recent conference on the 7th April shows that there is considerable work being done on the global impact of China's trade, investment and growth. The papers are presented by, for the most part, well established and respected economists in this field.

Although I have come across the majority of these papers before it is handy to have them in one place. My experience of working on similar papers relates to the quality of the data. I have seen a number of these papers presented elsewhere and the issue of data quality remains in my opinion.

I have linked to the papers that I need to read more carefully.

IMF Conference on Global Implications of China's Trade, Investment and Growth


Patterns of Trade Expansion

An Anatomy of China's Export Growth
Mary Amiti (Federal Reserve Bank of New York) and Caroline Freund (IMF)
Discussant: Chong Xiang (Purdue University)

The Relative Sophistication of Chinese Exports
Peter Schott (Yale University)
Discussant: Caroline Freund (IMF)

Global Factors that Promote or Impede the Expansion
Chair: Mark Allen (Director, Policy Development and Review Department)

Multinationals and the Creation of Chinese Trade Linkages
Deborah Swenson (University of California, Davis)
Discussant: Beata Javorcik (World Bank)

China's Export Growth and the China Safeguard: Threats to the World Trading System
Chad Bown (Brandeis University) and Meredith Crowley (Federal Reserve Bank of Chicago)
Discussant: Michael Moore (George Washington University)

Consumption, Investment and Growth
Chair: Jonathan Ostry (Deputy Director, Research Department)

China's Role as Engine and Conduit of Growth
Shaghil Ahmed. et. al. (Board of Governors of the Federal Reserve System)
Discussant: Jahangir Aziz (IMF/APD)

Das (Wasted) Kapital: Firm Ownership and Investment Efficiency in China
David Dollar (World Bank) and Shang-Jin Wei (IMF)
Discussant: Francesco Giavazzi (University of Bocconi and MIT)

Implications for Other Economies
Chair: Steven Dunaway (Deputy Director, Asia Pacific Department)

Measuring the Vertical Specialization in Chinese Trade
Judith Dean, K.C. Fung and Zhi Wang (U.S. International Trade Commission)
Discussant: Kei-Mu Yi (Federal Reserve Bank of Philadelphia)

Is China Changing its Stripes? The Shifting Structure of China's External Trade and Its Implications
Li Cui and Murtaza Husain Syed (IMF)
Discussant: K.C. Fung (University of California, Santa Cruz)

Thursday, 3 May 2007

Determinants of Household Saving in China

Thi recent NBER research paper examines the determinants of China's high household saving rates. One of the problems China will face in the next few years as it shifts from an export driven economy is how to boost domestic consumption.

We have touched on this is previous posts but as long as government services such as health and education remain underfunded then saving rates will continue to remain high.

This will mean there will be no end to China vast foreign exchange surpluses and hence pressure for the currency to appreciate will continue.


"The Determinants of Household Saving in China: A Dynamic Panel Analysis of Provincial Data"
NBER Working Paper No. W12723

Osaka University - Institute of Social and Economic
Research (ISER), National Bureau of Economic
Research (NBER)

Osaka University - Osaka School of International
Public Policy (OSIPP)

Full Text:

ABSTRACT: In this paper, we conduct a dynamic panel analysis of the determinants of the household saving rate in China using a life cycle model and panel data on Chinese provinces for the
1995-2004 period from China's household survey. We find that China's household saving rate has been high and rising and that the main determinants of variations over time and over space therein are the lagged saving rate, the income growth rate, and (in some cases) the real interest rate and the inflation rate.
However, we find that the variables relating to the age structure of the population usually do not have a significant impact on the household saving rate. These results provide mixed support for the life cycle hypothesis, are consistent with the existence of inertia or persistence, and imply that China's household saving rate will remain high for some time to come.


NBER papers require an academic subscription or can be purchased. Academics are generally a friendly bunch and may not be adverse to emailing copies to those interested.

An anecdote on the Chinese education system: Any lessons for the West?

One of the primary goals of this blog is to document China's growing presence in the increasingly "flat world". The role of education in China is of particular interest as, in an increasingly globalised world, it means large multinationals will hire the best whichever country they come from.

The question is whether current UK students will be able to compete with the Chinese. Even at undergraduate level it is clear that Chinese students are more mathematically able.

For any US or UK readers, I believe this anecdote from Chinese Appreciation is telling. Remember that similar stories are playing out across the whole of China on a vast scale.

There is something faintly disturbing about this well written article.

Olympic Education
I rent a set of rooms from a single mother and daughter who live next door. Only after moving in did I realize that my apartment made up the bulk of their former living space. They live next door in single room, barely large enough for a bed and a desk at which ungodly amounts of homework is completed. They nonetheless live a relatively comfortable life: receiving regular income from two rented apartments in a booming part of town. My landlord, originally from Chongqing, often invites me over to taste her extremely spicy and devastatingly salty Sichuan dishes. Last night while dropping my rent off for the month I stayed for dinner and we began talking about her daughters education. The Chinese education system has been in the news a lot lately, most recently profiled in this week's New York Times Magazine. My 小妹 (little sister as I call the daughter), is no where near the top of her middle school class, but routinely spends 6-7 hours a night doing homework: she usually starts at 5 often finishing after midnight. I made the mistake last night of asking the poor girl if testing into high school brought as much pressure as the infamous 高考:the college entrance exam that pretty much defines a student's life in China. The test, among other factors, is suspected of being a cause of China's terrifyingly high suicide rate among young people. (see Useless Tree's article on youth suicide in China here).Her face dropped immediately explaining quickly to her rice bowl that if you don't get into a good high school, you cant get into a good college, and you cant get a good job. (and there are few fulfilling alternatives in hyper capitalist china).
While China's education system has always been known for its draconian or rather Confucian enforcement of learning by rote, I was nonetheless surprised to find out that local government officials had doubly burdened 小妹's class of Beijing middle schoolers. As they are to graduate on to high school (high school being perhaps the darkest period of any young Chinese life) in 2008, government standards were upped to make these middle schoolers shining examples to the world of China's education system during the Olympics. According to my 小妹,teachers were ordered not to give out the study aids traditionally given to the middle schoolers, while competition was made more cutthroat by raising the cut off scores for the best high schools. I asked incredulously why anyone especially foreigners here for the Olympics would be concerned with middle school test scores... 小妹's remarks are especially surprising given the CCP's increasing awareness of the disturbing consequences of applying intense academic pressure on the generation of 小皇帝 (little emperors) promoted by increasing affluence and the one child policy. Just another shining example of the insanity that seems to generally grip local officials in China: especially those in any way remotely connected to the Olympics. I only hope the expected post-olympic recession does not leave Beijing's students as empty as its condominiums.

China Job Survey

An interesting list from PanAsianBiz on "the best way to find a job" from a Chinese survey. There is a lack of any real meat on in this article but it does raise a number of issues that we will return to in this blog.

Namely, the desire to work for a foreign owned firm and why so many still want to work in the government sector - the percentage here seems way out of line with Western countries. Is this because the job is "safe" or because it can pay so well (legally and illegally).

The "social networking" aspect also appears to be a strong determinant and is a variation on the UK's "old school tie network". However, the economic consequences can be severe as less able applications get the jobs due to their "connections". This will eventually harm the economy. A system based on merit alone would be a far better alternative.

Finally, it is clear that the pay expectations of those in the survey are relatively low. If we compare their wages with the cost of an overseas education it is clear to see why less Chinese are coming to the UK for undertake postgradate (MSc Economics) and undergraduate studies (BSc Economics).

It would also be nice to have some idea about the survey - how many answered it? Who answered it? What is the geographical coverage? Without such information the answers are largely meaningless.

The Best Way to Find a Job
Nearly half of college grads consider guanxi - a relationship with someone powerful or influential - as the most effective way to get a job.

In the west, it's called connections.

A survey in China also revealed that:

1. 43% think finding a job is rather fierce

2. 18% think the key to find a good job lies in professional skills. Talents with good techniques could easily find a job, and those who lack will have problems."find.a.job

3. 50% hope to make no more than $194 month.

4. 25% expect to make $194-259/month.

5. 22% wishfully think they will make more than $259/month (2,000 yuan).

6. 45% want a government position

7. 22% want to work long hard hours for a foreign country or joint venture

8. 15% opt for a state owned enterprise

9. 7% will work for a private company

10. 11% want to start their own business

The most effective ways to find a job:

1. 45% - social networking through family, friends and acquaintances

2. 17% - talent fairs

3. 15% - self-recommendations

4. 15% - university-organized job-hunting programs

The article ends with the question "How did you find your job?".

I will leave that question open.

Wednesday, 2 May 2007

"Economics": Guardian University League Tables Released

A number of national newspapers now make an effort to rank UK Universities. The latest release is from the Guardian. For Chinese students looking to study "BSc Economics" or "MSc Economics" in the UK such lists can prove invaluable to ensure they are picking the best Universities to study in. Going to an average or poor Univerity can be a very expensive mistake.

In the sidebar we already include links to the other bodies such that use various methodologies to rank Universities (the Times and the Newsweek top 100). What is interesting about the Guardian rankings is that it is done by subject so we can look at Economics directly.

Here is the link to the methodology used in the rankings.

We have used seven statistical measures to contribute to the ranking of a university or college in each subject, weighted as follows:
· Teaching quality - as rated by graduates of the course (10%)
· Feedback - as rated by graduates of the course (5%)
· Spending per student (17%)
· Staff/student ratio (17%)
· Job prospects (17%)
· Value added - comparing students' degree results with entry qualifications (17%)
· Entry score (17%)

So far so good. So what is the ranking:


Institution Guardian score/100

Oxford 100.00
Cambridge 93.40
Warwick 86.10
LSE 84.70
UCL 81.40
St Andrews 80.20
Birmingham 78.80
Edinburgh 78.00
Lancaster 77.20
Durham 75.00

OVERALL (top 20)

Institution Guardian score/100

Oxford 95.29
Cambridge 91.92
Imperial College 82.27
St Andrews 79.30
UCL 79.17
LSE 78.53
Edinburgh 75.15
Warwick 75.01
Loughborough 73.44
Bath 73.43
Soas 71.55
King's College London 70.58
Southampton 69.58
Bristol 68.89
York 68.60
Manchester 68.14
Durham 67.57
Birmingham 67.48
Nottingham 67.22
Leeds 67.10

Only Lancaster makes it into the top 10 Economics departments but not into the top 20 Universities.

The advice remains the same - try and study economics at one of the top 10 Economics departments at one of the top 20 Universities.

It is also useful to then compare the costs of living, the costs of the course and the size of the city (where there is more likely to be a thriving Chinese community which may help with the provision of temporary work etc.)

The Guardian website also provides profiles of each and every University.

See the following posts for more information:

Studying "Economics in the UK": General Links

Which UK University to study in? "Academic Ranking of World Universities"

Studying in the UK: Cost of Accomodation

World University Rankings: Rankings and text

"UK University Ranking": large city effect

Tuesday, 1 May 2007

"Chinese Stockmarket": Speculative bubble?

The continued rise of the Chinese stock market should ring bells for anyone currently caught up in the stock buying mania in China. The bubble will busrt, the question is when. This is clearly a speculative bubble that has been created, naturally enough, from the access to stockmarkets previously unavailable to the average Chinese citizen.

As soon as one hears that people are taking loans to buy stocks you know there is trouble ahead. This reminds me of 1999/2000 when many of my students took their student loans and bought dot.come shares and making 10 times their money in a matter of weeks - until.....

In my experience you know the end is neigh when taxi drivers start giving you tips - it seems China is past this point. See boldtext for the main points.

This article from CRIEnglish by Andy Xie sets the scene.

Fit to Burst
China's stock market is now a full-blown financial mania. If left unchecked, it could mushroom massively in the coming months. Its subsequent bursting may destabilise the society and complicate economic development. Government should intervene to cool the market by cracking down on market manipulation, increasing leveraging cost, and imposing tax on short-term capital gains.

College students are putting their tuition money and living expenses into the market. White-collar workers trade until the market close and then begin to work for their paying job. Stroke-stricken retirees get wheeled into branches of securities firms to trade. Some even mortgage their apartments to put money into the market. From 18-year-olds to 80-year-olds, from doctors to janitors, it seems that everyone is playing the market.

As making money in the stock market appears so easy, many companies are abandoning their core businesses for financial games. Businessmen who have become rich in the economic boom are putting their working capital into the market.

Market valuation is getting out of control. Most stocks appear to trade above 40 times earnings. Further, earnings are exaggerated by the stock market itself. Banks make money from selling funds. Insurance companies book capital gains. Regular companies are also making big profits playing their own capital. A stock-market bubble usually gets into trouble when it trades above 60 times earnings. China's is getting close.

When the bubble bursts, there are serious social consequences. College students who lose their tuition money will certainly cause social instability. Pensioners who have lost everything will add to the social welfare burden. As the bubble is a redistribution game, the losers are sure to resent the winners who usually have inside information.

China is bubble-prone for two structural reasons and one cyclical. First, it is experiencing capital surplus. Its one-child policy is a major reason for the high savings rate. This factor will keep China bubble-prone for another 20 years until the baby-boomers born before the one-child policy are mostly retired.

Second, China's public psychology is very buoyant due to rapid industrialisation and urbanisation that generate rapid productivity growth. The visibility of the cake expanding leads to greed and speculative fervour.

Third, and cyclically, appreciation expectation for China's currency is keeping local money at home and foreign money flowing in. The hoarding of China's currency is keeping interest rate and, hence, speculation cost low.

The mainland's economic development is far from over. It cannot afford to waste the energy of its best and brightest in financial speculation. The private sector is woefully underdeveloped. Despite three decades of economic boom, China does not have one world-conquering company.

The service sector is yet to combine quality and scale efficiently, which is the foundation for a modern service economy. China needs her best and brightest to build the corporate sector first, and not to waste all the energy playing asset markets.

China's per capita income is only US$2,000 and it is not in a position to experience prolonged stagnation. When the cake stops expanding for a few years, social instability is likely. This is why China cannot let the bubble run its own course.

In the long run, there is an alternative to asset speculation. The surplus liquidity could be channelled into creating and building new companies. Because of China's size, almost anything can be scaled up to improve efficiency and create value. China could encourage money to flow into venture capital or direct investment to fund startups or expansion of small companies. In that regard, China must build up its own venture capital and direct investment funds. The foreign funds that dominate the scene at present are too faddish in their investment approach. Their piling-in becomes another factor in inflating the bubble.

As the mainland economy becomes diversified, business creation opportunities become too complicated for fly-in types to understand. The country urgently needs its local investment professionals who can raise local money to fund local businesses for local demands. The first policy action is to pass laws that allow qualified financial professionals to set up funds to raise local money for direct investment.

While opening alternatives to excess liquidity is a solution, it takes time to work. The government should take action now to contain the bubble as a stop-gap measure. First and foremost, the government must crack down on market manipulators who take advantage of the bullish sentiment and suck public money into worthless stocks. When the bubble bursts, these stocks can easily drop by 90 per cent. As with the property tightening, the stock market tightening should start with fraud investigations.

Second, the government must stop bank loans being diverted into the market. Securities firms appear to be returning to the market with their own money again. They were mostly bankrupt a couple of years ago but bank lending kept them afloat. Even though they have made some money in this bull market, many are doing the same again by stir-frying selected stocks. Such practices benefit insiders and, when the bubble bursts, leave bad debts.

Listed companies that invest their working capital should also be investigated. The government has already ruled against this practice, but the compliance is still uncertain. If a company is private and invests its own money, the government does not have to intervene. However, if companies borrow from banks in the name of funding real business activities but speculate in the stock market instead, it endangers banks.

Third, the government already has a 20 per cent capital gains tax and should enforce it for short-term trading gains. Stocks that are bought and sold within a month are a case in point. The full 20 per cent should apply. If the holding period is longer than two years, the tax could be exempt. Such a policy would slow the market down, cool short-term speculation and force the market to become more long-term and value-oriented.

The time for action is now. The market is in a frenzy and the bubble can mushroom quickly. The longer the government waits, the bigger the disturbance to social stability when the inevitable burst comes.

Andy Xie is an independent economist.

A good well argued post. I suspect however that this bubble will have to run its course. There will be many losers but at the moment there are also many winners.

Confucian values to reduce corruption: No drugs, mistresses, prostitutes or mistreating elderly relatives

As part of our "China corruption watch" comes the news from today's Guardian newspaper that:

Civil servants in China face sack for keeping a mistress

It is difficult to know how to interpret this latest attempt by China to crack down on corruption. This seems to be an attempt to "get to the root of the problem". However, it is hard not to think that civil liberties have to come in here somewhere.

The aim appears to be to prevent a "degenerate lifestyle". A worthy aim - I wonder how many UK or US civil servants lead such lifesytles that include "gambling and having a mistress"?

It comes down to the age of problem of how much to pay civil servants. In Singapore civil servants are paid very large amounts in the hope that will are rich enough not to have to endulge in corruption. In the UK civil servants are not paid particlary well and corruption is low.

Certainly, when one looks at overseas Chinese students, a lot of them appear to have government officials as parents. Is this changing?

China's 6.5 million civil servants were warned yesterday that they could be fired for keeping a mistress or neglecting elderly relatives, under new ethical guidelines aimed at curbing rampant corruption.

The prime minister, Wen Jiabao, signed the code of conduct, which will extend deep into the private lives of bureaucrats once it comes into effect in June.

Officials face possible dismissal if they are caught with a prostitute or abusing drugs, according to the People's Daily.

Reflecting the resurgence of traditional Confucian values, they can also be demoted if they abandon their families or fail to look after their parents.

The regulations' main aim is to prevent the abuse of power for financial gain. As well as bribery and embezzlement, civil servants can be sacked for setting up side-businesses without authorisation.

Beijing has been trying to rein in corruption for several years, but despite a handful of high-profile arrests - such as Chen Liangyu, the party secretary of Shanghai - the problem remains endemic.

The state media have linked several recent cases to the culprits' "degenerate lifestyles" - a term that normally refers to at least one mistress, as well as gambling. Last June, the former deputy mayor of Beijing was sacked amid reports that he used illegal funds to keep a pleasure palace on the city outskirts. The media said his mistress turned him in because she was jealous of his relationship with another woman. Four months later, the director of the national bureau of statistics, Qiu Xiaohua, was sacked amid claims that he milked public funds to maintain a bigamous relationship with a woman in Shanghai.

Reflecting government fears that many officials are fleeing the country to enjoy their ill-gotten gains and extramarital affairs, the new regulations also include punishments for civil servants who overstay overseas trips. Xinhua News Agency reported last week that 300 government employees have escaped overseas since 1998. In the 30 years since the start of China's market reforms, 4,000 officials suspected of crimes totalling $50bn (£25bn) are thought to have fled the country.

For years, graduates have flocked to secure government jobs, which are seen as a fast track to wealth. But the new guidelines attempt to emphasise the responsibilities and restrictions of public service.

Officials face punishment for negligence resulting in avoidable accidents, pollution or public protests. They are also forbidden from participating in strikes, joining illegal organisations or organising "superstitious gatherings".