First views on the quake from economists and analysts we follow regularly. Here’s Deutsche Bank’s Jun Ma, greater China chief economist, and Moody’s Economy.com’s Sherman Chan, an economist who covers China for the research firm:

Macro view

Deutsche Bank: “At the macroeconomic level, our current view is that the impact is limited … The equity market may be hurt by the rising uncertainties related to earnings impact and liquidity flows.”

Moody’s Economy: “Although the earthquake has caused major disruption only to the Sichuan province, which represents a relatively modest share of the country’s GDP, the economic impact of the earthquake to China as a whole is likely less severe compared to the snowstorm. Nevertheless, the earthquake has shaken market confidence.”

Sector and company view

DB: Sichuan Expressway (107.HK) will see slower traffic growth, Dongfang Electric (1072.HK) has major production bases in Sichuan. China Telecom (728.HK) is the worst hit of the telcos, the affected area represents about 10% of its fixed line network. The quake will also affect 7% of China Mobile’s relay network. Sinopec (386.HK) has a Sichuan gas project under development that will account for about 7% of FY10 revenue. Insurance firms, property companies with Sichuan and Chongqing in their portfolios. Cement makers like Shui On Cement (983.HK) and Anhui Conch (914.HK) could benefit.

ME: “The most direct impact is the disruption to economic activity due to problems with transport, communications and power supplies. In relation to business operations, the most affected by the disaster will be the manufacturing, retail, transport and tourism sectors. However, China’s construction and engineering industries will be able to take advantage of the massive reconstruction of buildings and infrastructure in coming months.

Highlights from the last week of China business news.

Numbers, numbers, numbers
The numbers are in, and China’s economic growth in the first quarter moderated to 10.6%, from 11.7% in the first quarter of last year. But inflation was on the rise, with the consumer price index climbing 8% year-on-year due in part to soaring food prices, which rose by 21% in the first quarter. Price growth did ease some to 8.3% in March from 8.7% in February, but Deutsche Bank economist Jun Ma doesn’t think China’s in the clear. He attributed the March dip to recovering vegetable production, more meat supplies and improved transportation following February’s winter storms. And just in case you thought this economy was weakening, a World Bank report said that China has finally overtaken Japan! Well… sort of. China was named the world’s second-largest economy as measured by purchasing power, although China is still behind the US, Japan and Germany in terms of GDP. While the US economy remains the top dog no matter how you measure it, China did beat back Germany to secure the number two spot in terms of purchasing power.

In appreciation of currency appreciation
The yuan continued its rise by climbing to its highest level against the dollar in more than a decade. It ended trading in Shanghai last Thursday at 6.9916 to the dollar, compared to 7.0017 the previous trading session, for an 18% rise against the greenback in the last three years and 4.5% this year alone. The yuan’s climb hasn’t been lost on speculators who’ve flooded China with hot money to the tune of US$80 billion in the first quarter, according to the deputy chief of the State Information Center’s economic forecasting department. This compares to US$120 billion in all of 2007. He encouraged China to maintain its tough stance on monetary policy, and the People’s Bank of China seems on board. PBOC governor Zhou Xiaochuan pledged to keep a tight rein on monetary policy and resisted calls to allow the currency to appreciate faster. The PBOC however did raise the reserve ratio requirement for commercial banks by 50 basis points to 16%.

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A few good posts over on Paul Midler’s The China Game blog over the last couple days. In the first, he reproduces a letter from a reader drawing an important distinction between China’s financial and “real” economies, and how exposed each is to external forces:

One point that I think needs to be borne in mind is the difference between the financial economy and the real economy. In China’s case, the financial economy is not integrated into the global economy (you can’t move large sums in to invest or repatriate or invest-out large sums without bureaucratic approval and good reasons), which is one reason people say Western financial conditions have limited impact on China. This is why many large financial firms are clamoring to get into China, not only because it’s a promising new market but because it represents diversification in the way few overseas markets do these days. As far as the real economy of imports and exports etc. goes, I think there’s little doubt that China is significantly integrated into the global trading system, for good and for ill.

In another post, Midler highlights a welcome introduction to the (English-language) China blogosphere, Pomfret’s China written by John Pomfret of the Washington Post, formerly that paper’s China bureau chief and the author of Chinese Lessons, which is a great read. He’s only starting, and like most blogs that have mentioned T!b3t in the past several weeks, it’s already attracted swarms of comments that are as valuable for their insight into the massive support the crackdown has received in China (and by native Chinese abroad) as they are disposable for the quality of their reasoning.

Finally, there is an interesting post from today on a Chinese drug firm that may have accidentally disqualified the Greek weightlifting team from performing in the Olympics by supplying it with “tainted” health supplements:

A surprise inspection of the Greek team by the World Anti-Doping Agency revealed that 11 of the team’s athletes had unapproved substances in their systems. The Chinese firm has already apologized for providing the bad product, saying: “We send [sic] you L-tyrosine mixed with something else that it [sic] only for research purposes.”

Six interest rate hikes, 10 increases in banks’ required reserve ratios (i.e. the proportion of assets they must lodge with the central bank and not lend out) - and the economy still grows by 11.4% in 2007, its fastest pace in 13 years.

Meanwhile, inflation came to 6.5% in December, just down from the record 6.9% consumer price index growth seen the previous month. This puts 2007 full-year inflation at 4.8%, well above the government’s 3% target.

Roll on a more frugal 2008… or so Beijing will be hoping. The policymakers made similar noises last year but the general consensus appears to be that the controls (direct credit tightening as well as the standard interest rate and reserve ratio measures) will be more severely imposed this time around.

For reference, Citi predicts 11%, Deutsche Bank 10.4% and UBS 10.4%.

Here’s a curious statistic: China is the world’s top exporter of creative goods, accounting for US$61 billion worth in 2005.

Don’t believe it? Take it up with the United Nations Conference on Trade and Development (the catchily acronymed UNCTAD), which published these figures ahead of a big meeting in April to discuss the increased influence of creative industries in world economies.

What exactly are creative goods? According to UNCTAD:

Creative products can be exclusive or mass-produced, since they are at the crossroads between the artisan, service and industry sectors.

They’ve broken products into categories like:

Cultural heritage: Crafts, traditional cultural expressions, festivals and cultural sites

Creative services: Architecture, advertising, research and development, cultural and recreational services

Design: Furniture, interior, graphic fashion, jewelry and toys

All sounds a bit vague, doesn’t it? These definitions have led UNCTAD to name Italy the top creative goods exporter among developed nations, and Europe as a whole as the world’s top source of such goods, accounting for US$149 billion, or 44% of the world total.

Where does the United States stand on this list? The US is a textbook case of a creative economy, and surely few countries can match its cultural reach? Apparently, however, American creative output pales in comparison to China’s, coming up to just US$25.5 billion in 2005.

Surely there must be a problem with the methodology here. Can the US, which pumps out the movies, music, software, clothing and other stuff consumed by people everywhere, really export three-times fewer creative goods than China? That’s a strange conclusion to reach.

Some of this is explained by this AFP report on the figures. Merely manufacturing a product that falls into the ‘creative goods’ category counts toward that country’s total.

At present, a fashion product by a French designer which is made in China would count as Chinese, said Edna dos Santos-Duisenberg, chief of Unctad’s creative economy and industries programme.

This is a fairly controversial methodology, but the paper’s authors didn’t highlight it. Instead, it looks like they’re downplaying it by saying it’s just a starting point for further studies. But this starting point is already directing us down the wrong path.

The Financial Times reported today that China’s National Social Security Fund (NSSF) has held talks with three US private equity (PE) firms with a view to buying a stake of nearly 10% in one of them.

Given Beijing’s long-held ambition to boost outbound investment this is hardly surprising. China’s desire to increase capital outflows has gained momentum this year with China Investment Corp’s (CIC) investment in PE group Blackstone (See our July 2007 piece on it), CITIC Securities announcing a tie-up with Bear Stearns and ICBC moving in on both Seng Heng Bank of Macau and South Africa’s Standard Bank.

What is also unsurprising is the concern expressed in the West at the nature of some of these investments. Politicians and industrialists in the US and Europe may be coming around the the fact that the countries that have gobbled up all their forex are now trying to put it to constructive use; but the opaque management of the sometimes politically-motivated sovereign wealth funds doing the buying is proving a little harder to swallow.

So where does the NSSF come into this? CIC’s investment strategy may be a closely guarded secret but its ultimate aim - to realize greater returns on China’s foreign currency holdings, with half an eye on strategic resource purchases - is quite clear.

The NSSF is generally referred to as the lender of last resort for China’s wobbly social security network. But what is this “last resort”? Since it was founded in 2000, various theories have been put forward: it is a strategic reserve; it is to be spent in provinces where poverty is most prominent; it is for use once China’s demographics become so twisted that each worker will have to feed a string of elderly dependents; it is only there to support the pension system; it is a cash pile for welfare in general, including unemployment benefits, medical cover, and so on.

Will the NSSF do all these things? Will it do none of them? This fund has been given license to invest abroad, it has been allocated chunks of big-money IPOs, yet we don’t know exactly why it is there. Ultimately, this isn’t an issue for suspicious foreign trade partners. It is an issue for the Chinese people who are supposed, at some time and in some way, to rely on it for support.

Highlights from the last week of China business news: Paulson’s latest visit (no prizes for guessing what he talked about. Starts with an R and ends with a ‘enminbi’); state-owned steel and auto giants get leaner, but not without dieting problems.

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The newly revitalized Shanghai Foreign Correspondents’ Club (facebook link) has been organizing some interesting and useful events lately, thanks to a new board.

It invited Kerry Brown, a scholar (now a fellow at the think tank Chatham House in the UK, though he has even lectured at Inner Mongolia University), former diplomat and now author of a new book on our favorite subject, for a talk at Arch on Changshu Lu. It’s called Struggling Giant: China in the 21st Century, and it’s published by Anthem Press.

The venue was rather cramped, but the talk went well - Brown made a few very good points about China from an outside observer’s point of view. We’ll be running an interview with him soon about his ideas on China. Here are some key points from his Shanghai FCC talk:

-China’s strategy of inviting foreign investment was primarily to facilitate technology and knowledge transfer; this has failed, so FDI is now no longer the yardstick the central government uses for provinces

-Foreigners tend to look at China in an ahistorical way, despite the country’s long history and attendant baggage

-NGOs are increasingly tolerated by the government as a way to help plug holes in a tattered social safety net

-Beijing’s control over the provinces is brittle – it can snap quickly and “the whole thing could fall apart tomorrow,” he said

-There’s no clear candidate for the top job when the Party Congress convenes this autumn, unlike previous leadership transitions

-What keeps Hu Jintao up at night? Not economic stability; not human rights and foreign government criticism. He’s worried about income disparities, including the great underclass of 200 million migrant workers, who are disenfranchised in almost every way. And since there’s no democracy, no one really knows what in the world they are thinking.

As I sit in my office on another white-sky Shanghai day (incidentally, I wonder if the sky actually needs to be blue for it to be an official Blue Sky Day, but that’s a subject for another post), a group of very lucky, quite esteemed people at the Aspen Ideas Festival are sitting cross-legged in front a gorgeous vistas in the Colorado Rocky Mountains (as I’m led to believe by the festival’s front page) talking about, among other things, China.

Shanghai resident James Fallows, of the Atlantic Monthly, and one of the event’s co-hosts, has been writing dispatches from the China-themed talks and panel discussions all week. Today, he gives us his musings on a discussion with Minxin Pei of the Carnegie Endowment for International Peace and David Dollar of the World Bank’s Beijing office, the former a presumed China skeptic and the latter a more optimist:

* No one was either all that optimistic or all that pessimistic. Pei’s case for gloom started by assuming that the next “seven to ten years” would still see China on the way up economically. There were enough positive trends underway whose momentum would carry China at least that long, he said. These included: the continuing flow of young, healthy workers from the countryside into the factory zones, the savings surplus, the markets opening up worldwide with increasing global integration. Only after that — starting sometime between 2015 and 2020 — would China start to hit the wall. (By the way, I’m going to have start making predictions for 7-to-10 years out: chances are nobody will remember them when that time comes.) The last word of Pei’s “pessimistic” introductory pitch was that China would not be able to keep growing at 10 per cent per year. It might fall all the way to seven per cent!

Dollar’s more positive case said that the favorable trends would last for probably the next 15 years, but that there were lots of risks in the meantime. In fact, he listed almost all the same perils that Pei did — environmental carnage, a “social deficit” (shortchanging medical care, schools, etc), China’s imbalanced role in the world economy, etc. The main difference is that he thought the Chinese government would be able to deal with them, and had already started to.

Related: Our interview with Minxin Pei in May, Fallows’ personal blog, which includes more Aspen musings (Anonymoused for GFW readers)

A post from 2point6billion.com that touches on the same theme as a recent dispatch from us:

With Shanghai Having a Market Cap Four Times The Size of Bombay - Why Is It Indian Companies Are Taking The Lead In Global M&A?

An examination of the roles and responsibilities of the stock exchanges of Shanghai and Mumbai leads to some interesting potential implications for the development of companies listed on the respective bourses – and some pointers as to why it is currently Indian – and not Chinese – companies that are currently expanding globally.

Firstly, lets look at some comparisons and history.

The Bombay Stock Exchange (BSE) – is known as the oldest exchange in Asia. It traces its history to the 1850s, when stockbrokers would gather under banyan trees in front of Mumbai’s Town Hall. The location of these meetings changed many times, as the number of brokers constantly increased. The group eventually moved to Dalal Street in 1874 and in 1875 became an official organization known as ‘The Native Share & Stock Brokers Association’. In 1956, the BSE became the first stock exchange to be recognized by the Indian Government under the Securities Contracts Regulation Act.

The Bombay Stock Exchange developed the BSE Sensex in 1986, giving the BSE a means to measure overall performance of the exchange. In 2000 the BSE used this index to open its derivatives market, trading Sensex futures contracts. The development of Sensex options along with equity derivatives followed in 2001 and 2002, expanding the BSE’s trading platform.

Historically an open-cry floor trading exchange, the Bombay Stock Exchange switched to an electronic trading system in 1995. It took the exchange only fifty days to make this transition.

The Exchange is known for tough listing regulations and a strict adherence to transparency, giving it an well deserved reputation internationally. This is demonstrated in it’s recent history and stability – over the past 15 years there have been only 22 changes of it’s top 100 listed companies. In total, the BSC has a market capitalization of USD900 million spread around 3,500 listed companies. (more…)