Reuters

Is something wrong with China’s 2011 GDP data?

A solid outcome for China’s gross domestic product in 2011 – 9.2% growth despite fears of a sharper slowdown – has panda hunters reaching for their flamethrowers. Derek Scissors of the Heritage Foundation is leading the pack, suggesting that China’s numbers cannot be trusted.

In sum, Mr. Scissors’ criticisms can be boiled down to three points:

-There are other indicators that suggest growth is lower than the government claims – growth numbers for oil imports, car sales and ship exports are all significantly lower than GDP.

-Foreign exchange reserves fell in the fourth quarter, evidence of capital flight – which suggests China’s economy was less appealing to investors than even dismal alternatives available elsewhere.

-China’s decision to ease policy late in the year hints that growth must have been worse than the official figures are letting on.

While at first glance all three points are striking, none is the smoking gun that convicts China of fabricating its 2011 GDP data

There are good reasons why car sales, ship exports, and oil imports underperformed. Car sales had a very high base for growth after breakneck sales in 2009 and 2010. Oil imports were pinched by the low price of domestic gasoline and diesel, which meant losses for refiners, and slower growth in demand as a result of weak car sales. Ship builders, meanwhile, faced massive overcapacity and declining growth in world trade – both of which dented orders.

It would be just as easy to find numbers that grew faster than GDP. Iron ore imports, exports of electronics, and production of cement all grew faster than the economy as a whole. But that is no more evidence of GDP numbers erring on the downside than slower growth in cars, oil and ships are of erring on the upside. It just shows that not all parts of the economy grow at the same pace as the whole.

Next up, the foreign exchange reserve numbers. China’s FX stash did shrink in the fourth quarter of 2011, and that might suggest capital flight. But a depressed real estate sector, dismal equity markets and diminished expectations on yuan appreciation explain the decision of investors to place their funds elsewhere. They are all the result of deliberate government policy – not of a sharp slowdown in growth.

Lastly, the government’s decision to ease policy in the final months of 2011. There are two points to make here: First, good policy is pre-emptive, coming before and hopefully preventing precipitate falls in growth or increases in inflation. So shifting into easing mode before a slowdown is in full swing makes sense. Second, the shift in policy at the end of 2011 was very moderate – with none of the big stimulus guns coming into play – and so consistent with a moderate slowdown in growth, which is what the data showed.

None of this means China’s data is free from problems. Difficulties measuring a big and fast growing economy, combined with continued imperfections in the statistical system, mean the margin for error in China’s GDP numbers is higher than it would be in the U.S. In some areas, the shortcomings with China’s own numbers have been made up by alternative data sources. Mr. Scissors’ own data set on China’s outbound investment is one such example.

But for now, convincing evidence that the latest GDP numbers are being fabricated, or the NBS is exaggerating the growth rate, remains thin on the ground. The doubters will have to do more to make their case.

Tom Orlik is the author of “Understanding China’s Economic Indicators“

On Rod Laver Arena, the same location of their most recent meeting 51 weeks ago in the 2011 final, Clijsters overcame a left ankle injury and saved four match points on her way to victory.

The Belgian, who fell in the seventh game and limped to her chair in visible pain, said the thought of retiring crossed her mind but she did not want to prematurely conclude her last Australian Open campaign.  The 28 year-old intends to retire at the end of the 2012 season to expand her family.

“I knew if I could just try to let the medication sink in or if I could get through the first twenty minutes, half hour, the pain would go away a little bit and then maybe with the adrenaline I could just fly through it… I’m happy that I didn’t give up,” said the eleventh seed, acknowledging she was in pain throughout the remaining two hours of the match, though the throbbing subsided.

After winning six consecutive points at 2-6 to claim the tiebreak, Clijsters began to believe she could win.

“She started making a few easier mistakes I think, especially in the beginning of that third set…after having those match points I think maybe it got to her a little bit,” said the four-time Grand Slam winner.

Li, who broke down in the Chinese portion of her post-match press conference, said she was happy with her performance. The fifth seed landed 39 winners to Clijsters’s 20 and made only five more  unforced errors than her opponent.

“I think I play okay today, I mean, not worried about technique,” she said in English. “Maybe 6-2 up in the tiebreak I was a little bit shocking,” Li admitted, adding nerves took over during the tiebreak, in which she made two forehand errors before Clijsters landed a volley winner, then a crucial lob.

China’s highest ranked female  and reigning Roland Garros champion, who rued four match points in her loss against Clijsters’s countrywoman Yanina Wickmayer in Dubai last year, said the two occasions were unrelated.

Clijsters – who had her ankle elevated during her post-match press conference to alleviate swelling – will be monitoring her injury ahead of her quarterfinal clash against world number one Caroline Wozniacki, a player she has never lost to.

Third seed Victoria Azarenka and eighth seed Agnieszka Radwanska booked a quarterfinal meeting following straightforward victories against Iveta Benesova and Julia Goerges respectively.

Azarenka, a Belarusian, has won seven of the duo’s ten career meetings.

China’s last title contender Jie Zheng takes on Italy’s Sara Errani in the fourth round on Monday.

European Pressphoto Agency

To some, China’s GDP numbers just don’t smell right.

China reported that GDP growth slowed substantially in 2011 to 9.2%, compared to 2010’s 10.4%. But maybe it slowed more – a lot more.

That’s the suspicion voiced by China analyst Derek Scissors of the Heritage Foundation in Washington DC, who has long maintained that Chinese stats are about as reliable as the Boston Red Sox during a pennant run.

“China’s economic statistics are usually inconsistent, occasionally wildly inconsistent, and do not seem to be improving in quality,” Mr. Scissors writes. He says in 2011, Chinese authorities are “very likely exaggerating growth.”

His evidence: Growth in auto sales plunged . Orders for news ships, a big export item, fell even harder. Meanwhile, oil imports increased just 6%, compared to 17.5% in 2010.

Add to that a fall in foreign exchange reserves in the fourth quarter of 2011, which, he says, suggests that Chinese investors find a “sluggish world economy being more attractive than China’s own.”

Mr. Scissors says that bad data leads to bad policy. The faster the Chinese economy is seen to grow, the less incentive there is for Chinese leaders to try to shift their economic growth model to rely more on domestic consumption – a move that’s been urged by government officials around the world and a slew of economists.

Things are so bad he calls for the U.S. Department of Commerce to compile its own estimates of Chinese economic indicators.

But Tom Orlik, a Wall Street Journal columnist and author of “Understanding China’s Economic Indicators,” thinks the China-is-lying case is itself exaggerated. Chinese collection of statistics “is not perfect,” he writes in his book. “Some data points are more reliable than others. But neither is it a farce.”

– Bob Davis

Douglas Paal, the former director of the American Institute of Taiwan (AIT), said in a television interview Thursday that both the U.S. and China would “breathe a huge sigh of relief” if Mr. Ma wins Saturday’s election, arguing that many in Washington are uncomfortable with the opposition Democratic Progressive Party candidate Tsai Ing-wen’s policy outlook on China.

Mr. Paal led the AIT, the de facto U.S. embassy in Taiwan, from 2002 to 2006.

Mr. Paal said Ms. Tsai’s proposed “Taiwan Consensus,” which seeks to forge a domestic agreement in Taiwan on how to characterize and develop ties with China, was “not possible” due to deep division about China within Taiwanese society.

Mr. Ma and the KMT have used the so-called “92 Consensus,” — which holds there is only one China, with each side able to interpret what that means — as a basis for a historic thawing of cross-strait relations. Basically an agreement to disagree about conflicting viewpoints on Taiwan’s sovereignty, the 92 Consensus has allowed Mr. Ma to bargain for direct cross-strait flights, reduce investment and trade restrictions, and open up Taiwan to Chinese tourists.

“The assurance given about the management of cross-strait ties in Tsai’s administration were too vague to make Washington comfortable,” Mr. Paal said according to local media, adding that the U.S., would quickly send a delegation to help ensure Ms. Tsai is able to keep up stable cross-strait ties.

The AIT was quick to distance itself from Mr. Paal’s comments, restating its position that it does not take sides in the election. But the remarks hit a sore spot, with many analysts arguing the U.S. has tacitly given Mr. Ma the nod by recently making Taiwan a candidate for visa-free travel and sending Deputy Secretary of Energy Dan Poneman, the highest ranking U.S. official to visit Taiwan in more than a decade.

Holding a press conference on Friday, Frank Murkowski, former Alaska governor and head of the International Committee for Free Elections in Taiwan, said, “I do challenge the credibility of Mr. Paal’s statements to speak for me or for my government or for the vast majority of Americans who have great admiration for the advancement of democracy in Taiwan.”

He went on: “To come in two days before the election with such a sweeping interpretation of what U.S. policy is, I find basically unacceptable in a sense of fairness and I think it slights and confuses and perhaps puts fear in the residents of Taiwan who are going to be voting that somehow the United States does not really support neutrality but something in between and I don’t think that’s the intention of the U.S. and I don’t think it’s an honorable position to communicate to Taiwan.”

Y.C. Lin, a dual U.S.-Taiwan citizen who works in the financial services industry in Taiwan said he didn’t think Mr. Paal’s remarks would have a great influence on the election.

But he said the remarks do “send mixed signals to Taiwan, whose democratization process, while far from perfect, has often been showcased as a success story that has been consistent with the publicly stated goals of the U.S. government.”

For their part, Taiwanese voters remain divided on Mr. Ma’s approach to China.

At press conference on Friday, for instance, Cher Wang, the founder and president of the smartphone company HTC, came out in support of the 1992 Consensus. “As an entrepreneur, I believe a moderate society, a stable society is a vital condition for innovation. My company has had four years of growth, we’ve had four years of mild policies and orderly development…I truly treasure the current mild cross-strait relationship, and I also treasure the 92 Consensus,” she said.

But others think Mr. Ma has moved too fast to open to China and worry that Taiwan is losing its sovereignty even as it gains economically from better ties.

Analysts are divided over how well Ms. Tsai would handle the relationship with China. By DPP standards she has struck a moderate posture toward China, and academics say China would likely take a “wait-and-see” approach to gauge how Ms. Tsai would guide cross-strait relations. But in September a spokesman for China’s Taiwan Affairs Office said Ms. Tsai’s Taiwan Consensus “will make cross-strait negotiations impossible to continue, and cross-strait relations will once again become turbulent and unrestful.”

Whatever the U.S. government thinks of Ms. Tsai’s candidacy, that’s not exactly music to Washington’s ears.

– Paul Mozur. Follow him on Twitter @paulmozur

Agence France-Presse/Getty Images

Yi Jianlian hugged teammate Liu Wei after China defeated Jordan during the Asian Basketball Championships in Wuhan in September.

Chinese basketball star Yi Jianlian is looking to continue China’s decade-long legacy of keeping players in the National Basketball Association.

The 6-foot-10 forward is set to sign a one-year contract with the NBA’s Dallas Mavericks, according to reports from media company Sina Corp. (in Chinese) and ESPN.

The deal will likely be done within the next two days, after all health checks are passed, Sina cited Mr. Yi as saying in a phone interview.

The defending champion Dallas Mavericks got a good look at the Chinese player last year, when he stepped off the Washington Wizards’ bench and scored 14 points against the Mavericks. It was a season high for Mr. Yi, who averaged 5.6 points and 3.9 rebounds with the Wizards last season.

When finalized, the deal will restore China’s presence in the U.S. sports world. Mr. Yi has been China’s main connection to the U.S.-based basketball since its most well-known player, Yao Ming, retired this past year.

Tennis star Li Na, who made history in Paris last June as she became the first Chinese and first Asian to win a Grand Slam singles title, has become one of China’s main hopes in propelling the country into the global athletic scene, but her career has been up and down over the past year. Mr. Yi offers China another shot at global fame.

The 24year-old Maverick-to-be has four seasons of experience in the NBA, playing for Milwaukee, New Jersey and Washington. But he has been a free agent since suffering a knee injury playing for the Chinese Basketball Association’s Guangdong Southern Tigers in November.

Injuries cost Mr. Yi a contract with the Wizards, who declined to re-sign him after he sat out 19 games last season. Few teams have been willing to pay the $5 million to $6 million price tag Mr. Yi wanted, the Sina report said.

No financial details of the Mavericks deal were mentioned in the Sina report.

The ESPN report said Mr. Yi will rehabilitate, playing for the Mavericks’ D-League affiliate, the Texas Legends.

The Mavericks were the first team in NBA history to sign a Chinese player, bringing on Wang Zhizhi in 2002.

–Laurie Burkitt; follow her on Twitter at @lburkitt

European Pressphoto Agency

China’s central bank cuts its bank reserve ratios for the first time since 2008 on Wednesday night, signaling a decisive shift in focus toward growth and away from inflation. On Thursday, China’s official Purchasing Managers Index showed a contraction in manufacturing activity for the first time since 2009. Analysts weigh in:

The markets have been handed a powerful one-two combo, in the form of a shocking PMI print and an aggressive [reserve requirement ratio] cut. The message is clear: the economy is slowing much faster than expected and the government has stepped into the ring. The loosening campaign has begun… Risks of a policy error remain extremely high because authorities are loosening against a backdrop of a deteriorating euro zone, a rocky real estate market, stressed local government balance sheets and capital flight. – Alistair Thornton, IHS Global Insight

The immediate impact of [the] cut to the required reserve ratio (RRR) is to ease constraints on bank lending. We estimate that the cut has an impact on banks’ ability to lend equivalent to the injection of RMB400bn ($63bn) of base money…More important is the signal the move gives to markets and to investors. The People’s Bank (PBOC) could have achieved the same end of loosening constraints on credit growth quietly through its open market operations. The fact that it chose to act in this more public way is a signal not only that policymakers are loosening but also that they want to be seen to be doing so. Accordingly, we see the reserve requirement cut as a decisive shift in policy stance. Maintaining growth, rather than tackling inflation, is now the primary focus. – Mark Williams, Capital Economics

PMI dropped 1.4 points to 49.0, lower than market and our expectations…We expect growth to slow further to 8.5% in [the fourth quarter] and slightly below 8% in [the first quarter of] 2012. [The People’s Bank of China] initiated the first RRR cut in three years yesterday, signaling a shift of policy focus from fighting inflation to growth stability, and government readiness to take more measures if necessary to avoid [a] sharp fall [in] growth. The possibility of further easing should help stabilize expectation[s] and reduce downside risks to the economic outlook. – Shuang Ding, Minggao Shen, Daxue Wang and Serena Wang, Citibank

Liquidity did not seem particularly tight in recent days, possibly because fiscal deposits were quickly deployed. The timing of the RRR cut is then a bit earlier than expected, suggesting that the government is sending a clear signal to the market about its intention with monetary easing. We think the worsening euro zone debt crisis and rapidly decelerating inflation may be two key factors behind the sooner-than-expected RRR cut…The improved liquidity conditions should help market sentiment, which is positive for the Chinese equity market. The RRR cut should also help to improve banks’ profitability at the margin. – Tao Wang and Harrison Hu, UBS

We believe weak external demand growth probably was the main contributor to the weak manufacturing activity growth and we expect exports data to be released on December 10 to show a significant deceleration. On the other hand, domestic demand probably received more support from the looser domestic policy…Headline growth going forward face a significant level of uncertain as it will be the result of a tug of war between weaker exports growth and domestic policy loosening though there are incrementally more risks on the downside. On the other hand, domestic demand growth, and especially fixed asset investment growth, undoubtedly will benefit under this situation. – Yu Song, Goldman Sachs

– compiled by Josh Chin and Aaron Back

Associated Press

Former Denver Nugget J.R. Smith

The Chinese Basketball Association has started its season off with a bang—thanks in part to high-scoring NBA stars—but still ended its first night on a low note with J.R. Smith, formerly of the Denver Nuggets, suffering a knee injury.

Mr. Smith, known as “J.R. Shimisi” in China, scored 20 points on Sunday night before getting injured in the fourth quarter, according to local media, and is now in a disagreement with his new team over the injury. The team, the Zhejiang Golden Bulls, fell to the Guangdong Southern Tigers, 111-78.

It’s unclear how severe Mr. Smith’s injury is. Zhao Bing, the Golden Bulls’ general manager, said the player repeatedly declined medical treatment from the team and arranged his own treatment in Beijing instead. “We warned him that he’s not allowed to go to Beijing without a proper medical check,” Mr. Zhao said, expressing his displeasure at Mr. Smith’s disobedience. “He just wouldn’t listen.”

Mr. Smith is “an experienced basketball player and a big name in NBA,” Mr. Zhao said. But “I think he should have been aware that CBA is not an easy game to play either.”

Mr. Smith is one of a number of NBA players who have gone overseas to play in the wake of disagreements with the American league over issues including revenue sharing that resulted in lockout on July 1. But while in other leagues, players have been able to negotiate opt-out clauses in their contracts, the CBA has required that NBA players complete a full season in China.

China has many basketball fans—300 million, according to the NBA—but was not known for attracting star players to its own league before this year, in part because of formerly low salary caps and quality of play.

There have been some exceptions. Last year, Stephon Marbury became the biggest name in American basketball to join the CBA when he signed with Shanxi Zhongyu for the end of the 2009-10 season. Known as“Ma Bu Li” in Chinese, Mr. Marbury defied expectations that he wouldn’t enjoy his time in China. He is now in his third season in China and thrived in the CBA in term of his popularity.

Mr. Marbury was named MVP of the CBA all-star game in 2010, and has nearly 143,000 followers on Twitter-like microblogging service Sina Weibo, where he posts messages in English declaring his affections for China and his fans respond with professions of love and gratitude. He is playing this season with the Beijing Jinyu Ducks, the team to which Steve Francis was signed for just two weeks in the 2010-11 season before his contract was terminated.

Mr. Marbury scored 29 points for the Jingyu Ducks, which won 103-90 over the Jilin Northeastern Tigers on Sunday night.

Other NBA players who’ve arrived in the CBA this season due to the lockout include Wilson Chandler, formerly of the Denver Nuggets and New York Knicks, who scored 43 points for his new team the Zhejiang Lions, leading them to a 118-115 victory. Kenyon “Kenyang Mading” Martin has joined the Xinjiang Flying Tigers, which didn’t play on Sunday, and Aaron “Bulu Kesi” Brooks is expected to play for the Southern Tigers. Former Washington Wizards forward Yi Jianlian, who is from China, scored 17 points for the Southern Tigers in their victory over Zhejiang.

The Golden Bulls are likely hoping Mr. Smith follows Mr. Marbury in embracing the Chinese game, though the conflict over his injury is more reminiscent of Mr. Francis’s tenure in Beijing.

“We would like to improve ourselves through learning from the NBA players,” Zhejiang’s Mr. Zhao said of his star player’s refusal to heed the team’s medical protocols. “That was just the first game of the season. He really didn’t have to behave like this.”

Mr. Zhao posted a warning to Mr. Smith on Sina Weibo on Monday afternoon, saying the player should return to team as soon as possible “or face the consequences.” Mr. Smith responded in English less than an hour later, “My main goal is to get healthy! If you can’t understand that then maybe you should pick another profession!”

He added that his goal is “not to leave! My goal is to win!”

– Loretta Chao with contributions from Yang Jie

Getty Images

From Overheard:

More signs of a tilt toward loosening policy in the third-quarter Monetary Policy Report from the People’s Bank of China, released Wednesday.

First up, the percentage of bank loans issued above the benchmark lending rate edged down from a high of 68.67% in August to 67.19% in September. That’s not a major shift, and most borrowers are still paying above the benchmark for credit. But the first downward move since the end of 2010 is a sign loans may be easier to come by.

Next, deposits held on reserve at the People’s Bank of China are now 1.4 percentage points above their required level, up from an all time low of 0.8 percentage points at the end of June and the first increase this year. If the banks have a bit more spare cash on reserve at the central bank, that could support stronger lending in the fourth quarter.

On the evidence of October’s loan data, an easier monetary stance, with the banks pushing a few more loans out the door, is already underway. But with continued concerns about inflation, a more substantial shift toward stimulus is not on the agenda.

Despite a fall in the consumer price index in the third quarter, the central bank’s own survey shows households’ inflation expectations are on the rise.

China’s monetary policy makers conclude that “the basis of price stability is not yet secure” — and that limits the scope to turn the lending taps back on.

– Tom Orlik

Bloomberg

A man delivering unfinished shoes in Wenzhou.

As workers stretch long lengths of leather behind her, a small-time Wenzhou shoemaker explains the trap her company is in with nonbank borrowing.

Analysts worry China’s recent explosion in informal credit – money lent privately, not through banks – raises potential threats to the country’s overall financial system.

Nowhere is China’s informal financial sector more established than in Wenzhou, the cradle of China’s entrepreneurial system, where a lack of trust – between manufacturers and government-owned banks – is a two-way street. Here, nonbank credit has always been part of the fabric of business, rooted in a system of pooling friends-and-family money around the mahjong tables. Think “The Joy Luck Club.”

Official numbers from the local arm of the People’s Bank of China suggest nearly 90% of Wenzhou individuals and 60% of its companies have a finger in the nonbank sector, and that their activity represents 5.6% of the country’s total lending.

“While Wenzhou’s economy comprises of just a small portion of China’s overall economy, the immensity of the private capital controlled by Wenzhou means that the risk could spread through financial and property market transmissions,” according to a recent report from IHS Global Insight senior economist Xianfang Ren.

This year, Fitch Ratings highlighted the possibility of a downgrade for China’s domestic-currency credit rating partly based on such risks.

As lending rates in the informal sector soar into double-digit, loan-shark levels, new challenges are posed for the bank loans, property values and other parts of the economy that are inevitably linked to the gray market.

The Wenzhou shoemaker says she isn’t fearful of loan sharks or a crackdown on the nonbank sector. Nor does she put much stock in Beijing’s promises that formalized finance – bank loans – will be directed toward tiny businesses like hers.

The shoemaker, who employs fewer than 100 mostly temporary workers, says she is dependent on Wenzhou’s informal credit sector, and expects to remain so.

It’s a question of cash flow.

Dealing with her traditional European shoe buyers leaves her chronically short of cash – and running to secure short-term credit. She typically faces 45 days of contract negotiations, out-of-pocket expenses for materials and worker salary and no payment until three or four months after the finished shoes hit European shelves. By then, the yuan’s value has often increased enough to ensure a big pinch to her margins.

Domestic buyers are somewhat easier to deal with, the shoemaker says. They pay half up front, usually supply basic materials and don’t represent an exchange-rate risk. But, she said, Chinese orders are smaller and less frequent. Again, however, she needs to borrow to cover salaries, as little as 80 yuan ($12.59) per day that gets paid before the sale revenue ends up in her accounts.

How money flows into China’s informal system – and beyond Wenzhou – can be seen in a five-page document provided by a wealthy property owner in Shanghai, one of many such offers to lend the property owner has received in the past year from loan brokers. While the uncomplicated document doesn’t offer details about lending amounts or interest rates, the collateral requirement stipulates that the borrower must temporarily register his apartment under the lender’s name with the local government-run property-deed registry.

Royal Bank of Scotland analysts put the size of total nonbank lending in China at 12 trillion yuan, with underground lending around 4 trillion to 4.5 trillion yuan, compared with total bank loans outstanding in August of about 52.4 trillion yuan. The impact on banks, the analysts said, depends on how strenuously Chinese authorities and the country’s banks try to put a stop to the business. “While we don’t wish to down-play the problems, there are pockets of over-anxiety on this issue,” the report said.

Analysts, including Yiping Huang of Barclays Capital, say in reports that any unraveling of the shadow banking system could result in the kind of crisis that followed the 1999 collapse of Guangdong International Trade & Investment Corp. Mr. Huang points out institutional investors received only 12.5% of their original money when Gitic went down.

In a timely report late last month, the Bank for International Settlements highlighted shadow finance as a potential source of systemic risk around the world. Yet, the BIS didn’t cover China in its study.

Instead, it points fingers at investment bankers, particularly in the U.S., as funding the world’s biggest shadow banking system, one with $24 trillion of the $60 trillion in global assets. The BIS includes financial derivatives among its tally of shadow banking assets and says globally they have soared in recent years, from $27 trillion in 2002, as the investment-banking industry undertook creative financing.

It’s different in Wenzhou. As one factory owner there put it, “the only way to go is informal financing.”

– James T. Areddy. Follow him on Twitter @jamestareddy

Reuters

Lawsuits over the use of pirated software from companies like Microsoft and Adobe Systems are likely to ramp up in China in the next year, the head of the Business Software Alliance, an industry advocacy group, said Monday.

The remarks come as software makers continue to suffer large losses in China due to rampant piracy in the country, despite frequent campaigns by the Chinese government to stamp out intellectual property abuses.

Lawsuits launched by BSA’s member companies or by BSA on their behalf are likely to become more common as piracy becomes a bigger problem in China, the group’s chief executive Robert Holleyman told reporters in Beijing.

“The problem here is getting bigger and there are more instances of piracy” occurring, as growth in China’s personal-computer market outweighs the country’s gradually falling piracy rate, Mr. Holleyman said.

BSA estimated that 78% of the PC software installed in China last year was pirated, down from 82% in 2006. Despite that, growth in the Chinese PC market means piracy is occurring more often overall. “The dollar loss, the lost opportunity, is really exploding,” Mr. Holleyman said.

Microsoft and other software makers have for years used lawsuits to combat piracy of their products in China. Mr. Holleyman declined to elaborate on how much more common he thought they might become.

Microsoft and Adobe didn’t immediately reply to requests for comment. Other BSA members include Apple and design-software maker Autodesk.

Mr. Holleyman said he hopes China can reduce its piracy rate by 10 percentage points within four years. He urged China’s government to take further measures to fight piracy, including updating the country’s copyright law and publicly highlighting the computer-security dangers of pirated software, which is more susceptible to problems like computer viruses.

China in the second quarter surpassed the U.S. to become the world’s biggest PC market, according to market research firm IDC. But highlighting how little the Chinese PC market’s growth has boosted software makers, Microsoft CEO Steve Ballmer in May said the company’s revenue in China this year would only be about 5% of what it gets in the U.S., due to widespread piracy.

Mr. Holleyman also raised concerns about barriers to market access in China for foreign software makers. “I continue to hear concerns about what is happening at provincial levels or municipal levels, where statements are being made that governments should only acquire domestic Chinese software,” he said.

China since last year has taken various steps to ease restrictions in its controversial policies on government procurement, but some concerns remain among foreign industry and government officials about limits on foreign companies.

– Owen Fletcher. Follow him on Twitter @owenfletcher

Sue Ogrock/Associated Press

The NBA’s Wilson Chandler (with ball) playing for the Denver Nuggets in a playoff basketball game in Oklahoma City, Sunday, April 17, 2011.

China’s pro basketball league has signed its first NBA lockout defector: former Denver Nugget Wilson Chandler. The 6-foot-8-inch forward, who has four years’ experience in the NBA, signed a one-year contract with Zhejiang Guangsha of the Chinese Basketball Association, ESPN reported Tuesday.

His agent didn’t specify the terms of the deal, but reportedly said it was worth less than a $3.1 million offer Denver had made to retain the 24-year-old, and more than the $1.7 million offer that had been reported elsewhere.

Mr. Chandler’s move is especially significant because he is the first NBA player to sign with a Chinese team following the league’s Aug. 19 adoption of new rules governing contracts for players who are locked out of the U.S. league due to a labor contract dispute (report in Chinese).

The usual autumn start to the NBA’s regular season is in jeopardy as owners and the players’ union engage in a heated dispute over how to split the league’s profit. Over the summer the owners locked out the players, effectively suspending the league until an agreement is reached—which optimists say could come early in 2012, and pessimists say could lead to a cancellation of the entire season.

That led to speculation that U.S. pros might sign with Chinese franchises eager to fill their arenas with headline stars. A few have already sought refuge with European teams, leaving many to wonder when basketball-mad China would enter the market.

But a CBA summit in Shenzhen in mid-August put the brakes on any mass exodus of NBA stars to China. The league decided at the conference to adopt two rules that would deter overseas talent from trying to establish a pied-à-terre in its market. First, any player under contract to an NBA team would be barred from signing with a Chinese team, and second, Chinese teams would be prohibited from offering opt-out clauses allowing players to return to the U.S. if and when the NBA lockout is resolved. New Jersey Nets point guard Deron Williams reportedly signed a $5 million deal in July with a Turkish club that would allow him to return to the NBA when the league gets its act together, but the CBA has demanded a full season’s commitment from prospective pros.

As niubball.com’s Jon Pastuszek pointed out, that ruling was a hit to NBA players, who were denied not only the chance to play in China while school was out, but also effectively lost some leverage in their negotiations with U.S. team owners. (Just how much leverage is open to dispute.)

Thus Mr. Chandler—who has a career average 13.9 points per game and spent four of his five years with the New York Knicks, the team that drafted him 23rd in 2007—has truly committed to China, at least for one season. He won’t be able to return to the NBA, and its more lucrative contracts, if the season begins this year or even early next year, a decision that some have questioned.

“Maybe I’ll lose out,” Mr. Chandler told ESPN. “But I think it can be a great experience. I haven’t been in any [labor negotiation] meetings. I can’t call it. I’m just taking a risk, at the end of the day.”

He also said that he was looking forward to what many decry as the grueling pace of the Chinese league, where teams regularly play three games a week and travel by bus—rare in the NBA—and in fact preferred the more frequent pace to the Italian league, where he was also offered a contract. Mr. Chandler said he was also swayed by Zhejiang’s hiring of coach Jim Cleamons, a former assistant on Phil Jackson’s championship teams in Chicago and Los Angeles. The Zhejiang team, which plays in the eastern Chinese city of Hangzhou, will have a distinctly American flavor this season.

Whether the CBA will manage to bring in any more NBA talent remains to be seen, but the rules adopted in August certainly present obstacles. The new policy would go a long way toward dispelling rumors—since denied—that the CBA has landed stars on the level of Kobe Bryant.

– Miguel Gonzalez Jr.

Everett Collection

Harry Potter and crew, now in Tibetan.

Harry Potter’s latest—and last–cinematic adventures have ascended the pinnacle of the global box office. Meanwhile, his past exploits are making their way to the rooftop of the world.

Timed to last weekend’s debut of “Harry Potter and the Deathly Hallows—Part 2,” the final chapter of the movie franchise, Chinese state media have spotlighted Tibetan translator Norgy Puchunggal’s translations of the first two titles of the Harry Potter saga into his native language.

The Harry Potter books have already been translated into more than 60 languages. Additionally, the series has sold about 450 million copies worldwide, Neil Blair, author J. K. Rowling’s literary agent, told the Associated Press earlier this year. And those figures don’t even count the pirated translations and companion novels that have appeared despite Rowling’s publishers’ diligent attempts to stop them. These include titles such as “Harry Potter in Calcutta“, “Harry Potter and the Overseas Chinese Students at the Hogwarts School of Witchcraft and Wizardry”, “Rich Dad, Poor Dad and Harry Potter”, as well as the ever-popular “Tanya Grotter” series (now with more than 3 million books in print).

It’s a safe bet, though, that not many of the languages Harry Potter has appeared in previously are spoken by as few people as Tibetan. Most native Tibetans remain fluent in their mother tongue, but some have voiced concern that it is under threat by growing use of Mandarin Chinese in the region. An effort to increase reading options could help enhance interest in its preservation.

Director of the Tibetan Editorial Office for the “Tibetan Youth Daily,” Norgy Puchunggal says in the preface for his edition of “Harry Potter and the Philosopher’s Stone”, that his principal goal for translating the series is to offer the availability of Tibetan reading materials for any interested youth.

However, merely producing translations isn’t enough. Puchunggal has noted that many children in the rural regions of Tibet cannot afford to buy his books, at a reported 28.8 yuan each, or about $4.45. Reportedly, Puchunggal is working with the Tibetan Youth Foundation in a search for sponsors who can help supply books to rural children. According to Xinhua, he earns little money for his efforts, and translates out of enthusiasm for the series.

Puchunggal also wants to make his translations relevant to a public that on the surface seems to have little in common with either the wizards or the muggles of Harry Potter’s world. During a business trip to Shanna, a fairly wealthy region of Tibet, Puchunggal discovered that several parents refused to buy the books, as they did not feel they were relevant enough to children’s’ studies. “In comparison to other children’s books, “Harry Potter” is very deep and sophisticated. The books express concepts like loyalty among friends, braveness, and keeping a positive spirit when facing adversity,” Puchunggal explained to China’s Xinhua news agency. In 2003, when he started translating the novels, “there were few people in Tibet who even knew about Harry Potter,” he said.

Puchunggal’s initial attempts at translating the Potter series took him two years to finish the first volume, and one year for the second. At a reported 5,000 copies published, it would appear that his efforts have been reasonably well-received. As of late, translators such as Dreling Wangdu and Phunnor have also brought the works of Shakespeare as well as Grimms’ Fairy Tales into Tibetan.

Puchunggal’s translation of the series is, in fact, a translation of the Chinese translation. He ranks the Chinese translation of one of the volumes among his favorite books, and compares the series to one of China’s four classic stories, “Heroes of the Marshes,” also known as the “Water Margin.”

Literary critics fluent in both Tibetan and English are perhaps fewer even than literary translators who speak both, so it’s unclear if anything key has been lost as a result of the double translation. But Chinese media have already reported that Puchunggal “cleverly changed Potter to Podder”—which, in the Tibetan language, means “brave” and “live by fortune.”

– Melissa Powers

European Pressphoto Agency

The People’s Bank of China (PBOC)

Economists generally expect that China’s central bank is done raising interest rates this year, although a significant minority predicts one further rate hike, a Dow Jones Newswires poll showed Thursday.

The People’s Bank of China raised benchmark lending and deposit rates by 25 basis points Wednesday, in its third such move this year, to counter rising inflation.

The tightening came before China is set to unveil June inflation data, likely Saturday, which are expected to show that the consumer price index rose by more than 6% from a year earlier.

Many economists expect, however, that inflation will peak in June or July, and then start to fall, reflecting stabilizing food prices and a comparison with elevated prices a year earlier. The widely shared view that inflation is set to fall underpins expectations that not much additional monetary tightening is in store.

Out of 13 economists polled, eight said they see no further interest rate hikes this year. Five said they expect one more rate hike of 25 basis points this year, generally in the third quarter.

“As June inflation may mark the peak for the year, the recent hike may buy China more time for its headline inflation to self correct,” OCBC economist Tommy Xie wrote in a note. “Therefore, we think yesterday’s rate hike was more symbolic rather than a sign of further tightening.”

However, comments by a prominent central bank adviser on Thursday suggested that more rate hikes may be in store. Li Daokui, an academic adviser to the central bank, wrote on his personal micro-blog that reversing negative real interest rates is a key task.

With one-year deposit rates at 3.50% after the latest rate hike, they remain far below the rate of inflation, which hit 5.5% in May–the fastest pace since July of 2008.

Several economists declined to give a forecast for how much higher the PBOC may raise the reserve requirement ratio, another of its policy levers that affects the amount of liquidity in the banking system.

UBS economist Wang Tao said it would depend on how much foreign funds flow into the country, requiring the central bank to mop them up.

Of the nine that gave forecasts, two said they expect two more 50 basis-point hikes in the reserve ratio, two said they expect one or two such hikes, four said they expect one more hike, and one said he expects no more hikes at all.

– Aaron Back. Follow him on Twitter @AaronBack

Reuters

China ‘s long-running campaign to tighten monetary policy may have a little more life in it with economists expecting the People’s Bank of China will raise interest rates at least one more time this year, a survey of economists by Dow Jones Newswires showed Wednesday.

Six out of ten economists polled said they expected China’s central bank will likely raise the benchmark lending and deposit rates by a further 0.25 percentage point each this year to combat high inflation. The other four forecasters predicted between one and two hikes through the end of the year.

The People’s Bank of China is also likely to raise banks’ reserve requirement ratio by 50 basis points next month, continuing its pattern of raising the ratio once a month so far this year, according to the survey. But economists expect the pace of such increases to slow later in the year.

“With inflation staying relatively high, the authorities are unlikely to relax policy tightening in the short term,” CICC economist Peng Wensheng said.

The PBOC has raised interest rates four times since October in the current tightening cycle, with the last rate hike taking effect April 6. The central bank has also raised banks’ reserve ratio five times so far this year, with the most recent hike taking effect Wednesday. The PBOC hiked the ratio six times last year.

The latest inflation data showed that China’s consumer price index rose 5.3% from a year earlier in April, down slightly from March’s 5.4% rise but still well above the official full-year target of around 4%. Many economists expect inflation to peak in June.

– Liu Li

Zhang Chunlei/Xinhua/Zuma Press

With new numbers showing China’s consumer price inflation continuing to accelerate, the People’s Bank of China on Sunday announced a 0.5 percentage point increase in the share of deposits banks must hold in reserve, otherwise known as the reserve requirement ratio. It was the fourth such move so far this year and came less than two weeks after the central bank raised benchmark interest rates. Analysts weigh in.

Beijing did not take long to respond to the strong inflation number on Friday. Governor Zhou [Xiaochuan] also struck a hawkish tone in comments made over the weekend, so this move comes as no surprise. We revised up our forecast for policy rates in response to the inflation data, and now expect another increase in the benchmark lending rate this quarter, in addition to the one we were already forecasting for later in the year. Today’s move suggest that another increase in interest rates is on the way soon. – Brian Jackson, Royal Bank of Canada

PBOC has maintained the pattern of monthly RRR hikes since last November…. Interestingly, PBOC has maintained the pattern of increasing benchmark interest rates every other month since last October. It has become clear that liquidity normalization is not a substitute for interest rate normalization. As CPI inflation continues to rise and become more broad based, PBOC is expected to raise interest rates further to manage inflation expectations and total financing of the society, especially those not under its direct control. We maintain our call for two more benchmark interest rate hikes (50 basis points) for the rest of the year. – Shuang Ding, Ken Peng, Minggao Shen and Ben Wei, Citigroup

Why the RRR hike? First, the interbank liquidity is abundant, indicated by the low money market rate. Seven day repo rate dropped to the lowest level since Nov 2010 at 1.95% in the mid of last week and only rebounded to 2.36% on April 15, as market speculated on a RRR hike after Premier Wen voiced his concern on abundant interbank liquidity…. Hot money inflows and domestic conversion of forex to RMB have quickened on expectations of strong RMB appreciation and higher interest rates. China’s FX reserves reached US$3045 billion at the end of March, up US$198 billion in the first quarter, of which US$139 billion could be “unexplained inflows” according to our estimates. – Lu Ting, Bank of America-Merrill Lynch

Looking ahead, we expect China’s policymakers to continue normalizing overall monetary conditions steadily, especially as the CPI inflation rate is expected to stay elevated in the coming months. In terms of the forecast trajectory, we expected headline CPI to stay elevated in the near term, peaking around June or July at about 5.6% oya, and to stay above 5% oya through August. On the policy front, we see one more RRR hike as likely, and potentially two more interest rate hikes (to boost the currently negative real interest rate) for the rest of the year, as well as further CNY appreciation (with the year-end USD/CNY forecast at 6.3), with these policy actions largely front-loaded. – Grace Ng and Lu Jiang, JP Morgan

–compiled by Aaron Back. Follow him on Twitter @AaronBack.

On Friday, the bureau is scheduled to issue economic data for the first quarter, and for the first time it will include a measure known as the quarter-on-quarter seasonally adjusted annualized rate of growth of gross domestic product.

Why does that matter? Well, GDP is the most complete measure of the size and growth rate of the Chinese economy, and China’s GDP growth rate—which has consistently hit 10% or more a year—has been the most potent symbol of its rapid rise. But till now, the growth rate of China’s GDP each quarter has not been measured in a way that is comparable with that of the U.S. or other major economies. That’s because the statistics bureau has compared the size of GDP in a given quarter to its size in the same quarter a year earlier—a “year-on-year” measurement—whereas the U.S. Bureau of Economic Analysis, for example, compares GDP in a given quarter to the one immediately preceding it, adjusts it to take into account seasonal factors, and multiplies it by a compound growth formula to come up with an “annualized” figure.

That might sound more than a little technical. But the differences between the two approaches have serious implications for understanding the state of the world’s second biggest economy.

With the year-on-year numbers that China has been using, if the statistics bureau says, for example, that China’s economy expanded 9.8% in the fourth quarter of 2010, what they mean is that total output in the fourth quarter of 2010 was 9.8% higher than total output in the final quarter of 2009.

With the adjusted quarter-on-quarter number the U.S. and others use—and which China will start reporting from Friday–when the Bureau of Economic Analysis says the U.S. economy expanded at an annual rate of 3.1% in the fourth quarter of 2010, what they mean is that from the third quarter of 2010 to the fourth quarter of 2010, the U.S. economy grew 0.7%. Multiplying that by four to get the annual rate gives a figure of 3.1%.

There’s an extra wrinkle, though. To get an accurate picture of the growth rate, it’s important to compare like with like. In the year-on-year calculation, that’s easy enough. The first quarter of this year typically has the same number of working days, weather, and other variables that might affect output as the first quarter of last year.

In the adjusted quarter-on-quarter calculation, however, comparing like with like is considerably more difficult.

In the U.S., Thanksgiving falls in the fourth quarter of the year. Workers eat into turkey and turkey time eats into working days relative to the third quarter. In China, there are also national holidays—notably a week-long national holiday for the Lunar New Year that falls in January or February—that make it more difficult to compare the quarters. It’s not just the holidays themselves that can distort the data: different working patterns in the days before and after as factories gear up and wind down can also have a marked impact.

To correct for these seasonal biases, statisticians look at the pattern of historical data to try and work out the variation between quarters that is caused by seasonal effects (changes in working days and so on) and the variation that is caused by genuine changes in the rate of growth. Using these observations, they can seasonally adjust the raw data for the current quarter to get to the true rate of growth. (Actually, because these calculations are complicated, the statisticians have written computer programs that do the math for them.)

The Instant Noodle Economy

Sound tedious? The thing is, the two approaches to calculation actually produce results that are radically different. The year-on-year calculation is a glance into the distant past of the economy, a comparison of today with a year ago. The adjusted quarter-on-quarter calculation is a reflection of the current momentum of the economy, a comparison of today with yesterday.

A stylized example illustrates the point. For the sake of simplicity imagine an economy that only produces bowls of instant noodles, and that from the third quarter of 2007 to the second quarter of 2009 the output rate was as shown in the table below. Now, let’s look at the growth rates for 4Q08 calculated according to the two different methods. According to the year-on-year (or YoY) calculation, in 4Q08 the Chinese economy grew at a slightly sluggish but not particularly alarming 6.8%. But according to the quarter-on-quarter, seasonally adjusted annualized rate (or, ahem, QoQ SAAR). growth in the Chinese economy slowed to 0%.

The quarter-on-quarter calculation can also show the peaks and troughs in growth appearing at different points from the year-on-year data. In the noodle economy, the QoQ SAAR data shows the trough comes in 4Q08 with the economy grinding to a complete halt, and the rebound starts in 1Q09. The YoY data, in contrast, shows the trough in 1Q09.

The Real Economy

As it happens, the People’s Bank of China has been calculating the quarter-on-quarter figure for China, which is included in the central bank’s quarterly report on the macro-economy. A comparison of its data with the year-on-year data produced by the statistics bureau shows that our noodle-bowl economy example is not far from reality. As shown in the chart below, the QoQ SAAR data calculated by the PBOC shows growth hitting a trough of 3.7% in 4Q08, before rebounding strongly to 6.4% in 1Q09 and 14.9% in 2Q09. The YoY data from the NBS shows the economy hitting a trough of 6.5% growth in 1Q09, and recovering only slowly in the following quarters.

The different growth rates have far reaching implications for the markets and for policy makers. For the markets, the steady rapid growth shown by the year-on-year data has been fundamental to shaping perceptions of the China investment story. Would the jagged ups and downs traced out by the quarter-on-quarter data–suggesting the Chinese economy was veering wildly between overheating and overcooling–have inspired the same level of confidence?

For policy makers, the focus of attention should be the current momentum of the economy, shown by the quarter-on-quarter data. The Chinese government kept the economic stimulus in place way into 2010, claiming that the recovery was not yet stable. The quarter-on-quarter data, which shows the economy rebounding sharply from 2Q09, calls into question the wisdom of keeping the economic punch bowl spiked with stimulus loans for quite so long.

Lies, Damned Lies and Statistics

The publication of the quarter-on-quarter figure will be a definite step forward for China’s economic data. But it could also reignite controversy about the reliability of the statistics.

The calculation of seasonally adjusted data includes a larger role for judgment, and different assumptions can generate wildly different results. In one poll of investment bank economists conducted by The Wall Street Journal on the state of the economy in 1Q10, 12 of Hong Kong’s finest were equally divided on whether the Chinese economy had expanded or contracted.  The PBOC’s data on the quarter on quarter growth rate shown in the chart above, which is taken from the report on the macro-economy in the second quarter of 2009, was also revised in subsequent reports as the Central Bank changed its view.

With faith in China’s official data low, there will be inevitably be questions about whether the NBS is abusing that scope for judgment to tweak the data in a harmonious direction. If, in 2008, the NBS was already publishing QoQ SAAR data, would they really have been willing or able to disclose that the economy was growing a socially destabilizing annual rate of 3.7%? Cynics assume the answer is no, but when the NBS roles out its new data set on Friday 15th, it will have a chance to prove them wrong.

–Tom Orlik. His book “Understanding China’s Economic Indicators” will be published in August

Out of 10 forecasters polled, eight said they expected one more increase this year, of 0.25 of a percentage point, to benchmark one-year lending and deposit rates. One forecaster predicted two hikes this year, while another predicted none.

Six of the ten economists indicated they expect the rate increase to come by the end of June.

“With inflation yet to peak–we believe that will be sometime in May or June–Standard Chartered Bank expects one more interest rate hike by 25 basis points in the second quarter,” said Standard Chartered economist Shen Lan.

China Tuesday raised benchmark interest rates for the fourth time in less than six months. The increases, effective Wednesday, take the one-year yuan lending rate to 6.31% and the one-year yuan deposit rate to 3.25%.

It has also raised the benchmark reserve requirement ratio for banks three times this year, reducing their pool of loanable funds.

Economists differ more widely on the outlook for reserve requirements. Economist Mark Williams from research firm Capital Economics expects no more interest rate increases, but four more hikes in the reserve requirement ratio, bringing it up by 2 percentage points by the end of the year. Economists from Singapore bank OCBC and Chinese brokerage Shenyin Wanguo Securities expect just one more increase of 0.50 of a percentage point.

In a previous survey before the lastest rate hike, four out of ten economists predicted one more hike, five out of ten predicted two more, and one economist said there would be one or two more hikes. The pool of economists surveyed was slightly different from the most recent poll.

–Aaron Back. Follow him on Twitter @AaronBack

European Pressphoto Agency

Take two; they’re small.

More than 250 of China’s richest citizens flew in to Hainan island from all points across the country on Friday afternoon, arriving on a fleet of private jets at Sanya International Airport in the resort town of Sanya before zipping off in a parade of chauffeured BMW of various models including the four-door version of the M3 and the 5-series Gran Turismo.

Hainan, an island off the south coast known for its warm climate and laid-back attitude, has been designated by Beijing as the country’s tourism hotspot for the rich. The wealthy visitors are here for Hainan Rendez-Vous, an annual four-day extravaganza of luxury living that is now in its second year. (The Wall Street Journal is a media partner of Hainan Rendez-Vous.)

The event, started by a group of four French private investors, takes place at Sanya’s Visun Marina near the town’s center. Almost 150 exhibitors are displaying their yachts, private jets and other luxury toys. Sponsors include Martell Cognac, BMW and Chopard. The show is open to anybody who will pay a 180 yuan fee ($27), but many of the visitors have been invited by the exhibiting brands — some of the elite guests, known as “jet VIPs,” were flown to the resort by private charter plane.

Continue reading on Scene

Reuters

Despite government efforts to rein in inflation, China’s consumer price index in February rose 4.9% from a year earlier for the second straight month–well above the government’s target of 4%–the National Bureau of Statistics said Friday. China’s producer price index, a measure of inflation pressures in the pipeline, rose 7.2% from a year earlier, up from January’s 6.6% rise, while value-added industrial output grew 14.1% and fixed asset investment outside rural areas grew 24.9%. Analysts weigh in:

Inflation is yet to peak in China. First of all, from a statistical point of view, the carryover effect is to strengthen in the coming months. Additionally, the full impact of the oil price shock is yet to reveal itself as the government has been behind the curve in raising the retail gasoline prices. On the demand side, output remains robust—as reflected by the strong industrial production growth. Additionally, despite a slight February pull-back, bank lending remains rampant and liquidity strong. This will continue to feed into the CPI, most likely in sustained non-food price gains. With that, we believe inflationary pressure will remain quite high over the next couple of months. More tightening measures are in the pipeline, with a focus on mopping-up liquidity and complemented by cautious interest rate moves. – Alistair Thornton and Xianfang Ren, IHS Global Insight

February’s CPI reading fell just short of market consensus. We expect the CPI growth will moderate in the second half of this year, provided the current tightening efforts are sustained over the next few months. We still expect full-year inflation to hover around 4%. The results of previous macroeconomic adjustments are already visible. The People’s Bank of China might just do one more interest rate hike, but there is still room for increases in the reserve requirement ratio. – Ma Xiaoping, HSBC

Though robust FAI and IP data could alleviate some concerns on the misleading sharp fall of trade growth in Feb, investors might nonetheless be concerned that robust IP/FAI and high inflation could lead to more tightening measures…Actually, though we don’t think inflation will be out of control in China, it’s time to be more cautious because CPI inflation will most likely rebound to around 5.5% year-on-year in March…Last year food prices dropped 1.5% month-on-month from Feb to March, but this year food prices could be at best flattish from Feb to March. Since food accounts for 30% of the CPI basket, you need to add about 50 basis points [.5%] to the headline Feb CPI inflation data to get the March reading. — Ting Lu, Bank of America–Merrill Lynch

Despite the fact that neither the [year-on-year] growth of CPI and PPI inflation fell in February, their sequential growth have clearly moderated from the levels in [the fourth quarter of] 2010. Slower sequential activity growth and lower sequential inflation suggest the Chinese economy is cooling down gradually which is clearly welcoming news. –- Yu Song and Helen Qiao, Goldman Sachs

–Josh Chin

When they should be confident, the critics say, Beijing’s leaders instead appear to unnecessarily apprehensive.

A message posted recently on Sina Weibo, China’s most active microblogging service, illustrates one reason for their angst: the country’s tumultuous history with inflation.

On Tuesday, a staff member at China Merchants Bank posted the following teaser for the more than 200,000 followers of its verified Sina Weibo account: “A different age, the same pressure. A newspaper from 1989…”

Attached beneath the message was a photo of a newspaper clipping with the headline, “Housing Prices Skyrocket, Must Be Controlled,” and the date circled in red: February 20, 1989—less than four months before the government violently ended protests in what’s known as the Tiananmen Massacre.

According to the clipped article, officials had decided to clamp down on misreporting of costs and “profit-seeking” that had caused commercial housing prices in Beijing to jump to as high as 1,900 yuan a square meter – or roughly $9,100 at today’s exchange rate (not accounting for inflation) for a small two-bedroom apartment.

The idea that anyone in Beijing might consider 1,900 yuan per square meter expensive is almost laughable these days. The current average price of an apartment in Beijing is roughly ten times that. But the complaints in the article resonate with today’s aspiring Chinese homeowners: “From the time he starts work, a college student scrimping and saving every day,” the article explained, “would need a hundred years before he could afford the two-bedroom place.”

The situation today is starkly different in one important way—though not one that gives China’s rulers any added comfort. In early 1989, China was just a couple of years into very tentative experimentation with private home ownership in which it offered “commercial housing” in a series of unsuccessful auctions. All but a tiny fraction of urban Chinese got housing distributed through their government work units. Today, more than a decade after full-fledged housing privatization kicked off in 1998, most urban Chinese either own their own homes or expect to buy—which is why soaring housing prices in big cities have been such a hot issue.

Some readers have suggested the article is fake, or at least exaggerated, pointing to the paucity of home ownership at the time. It isn’t entirely clear where it comes from—the publication’s name doesn’t appear on the image of the clipping–though an Internet search reveals an excerpt of what appears to be the same article, attributed to People’s Daily, in a collection of old media reports on housing inflation published on the website of the Dongfang Daily in October (in Chinese).”

An official in China Merchant Bank’s general office, which oversees the company’s Sina Weibo account, said the staffer who posted the article saw it on another website and copied it to the company’s account. He said they weren’t sure which publication the piece came from.

Among those who take the article as genuine, some seem to have taken comfort from it, in a misery-loves-company kind of way. “Waiting for policy to control housing prices isn’t realistic,” Sina Weibo user MARK-WHK wrote in the comments under the China Merchants Bank post. “You just have to work harder!”

Other comments, however, had a far more ominous tone: “And then what happened?” wrote one Sina Weibo user. Another asked “You’re not afraid of being blocked?”

Still another user was even more direct: “A few months later was June 4th”—a reference to the Tiananmen Square crackdown.

While the Tiananmen Square protests have been remembered as a student-led struggle for democracy, they were arguably just as much about soaring prices—though primarily for food, rather than housing. Anger over persistent inflation, which approached 20% in 1989—was one reason so many non-students ended up participating in the protests, which lent weight to the students’ demands. (The revolt in Egypt, too, was at least partly about inflation.)

As one Sina user responding to the property post points out, China’s current rate of consumer price inflation—4.9% in January—is nowhere near what it was in the 1980s or even the early 1990s.

Nevertheless, in a country where buying a house is often a prerequisite to marriage, where local officials are routinely implicated in illegal (and sometimes violent) land seizures, and where frustration is rising over the failure of government efforts to stop the housing prices from rising, Beijing has reason to be nervous.

The majority of the comments on the China Merchants Bank post visible on Sina Weibo Tuesday night have since been deleted, including those that draw a link between the newspaper clipping and the Tiananmen crackdown. “We should apply more caution in terms of managing our Weibo content,” said the China Merchants Bank official.

Among the deleted comments: “If you go back and read the old newspapers, you’ll realize the Celestial Government never does what it says. It’s basically all just crap,” and, “History is always repeating itself.”

While few observers in or outside China expect real estate to launch a revolution any time soon, China’s leaders, no slouches when it comes to studying the past, appear willing to go to great lengths to keep history from coming back to haunt them.

– Josh Chin. Follow him on Twitter @joshchin

Consumer confidence fell four points to an even 100 in the fourth quarter of 2010, its lowest level since 2009, signaling that many are really beginning to worry about inflation and the affects it’s having on their salaries, according to a new survey from the China Economic Monitoring and Analysis Center and media research firm the Nielsen Company.

The two firms surveyed 1200 consumers across China, asking about their current levels of confidence. Numbers above 100 indicate degrees of optimism, while numbers below point to pessimism, Nielsen says. Chinese consumer confidence was highest in the second quarter of 2010, coming in at 109.

Housing and food costs, particularly fruits and vegetables, have been climbing over the past year and now consumers are beginning to realize that their paychecks are diminishing, said Pan Jiancheng, Deputy Director General of the China Economic Monitoring and Analysis Center, at a press event Wednesday. “Consumers are showing a greater reluctance to spend money,” Mr. Pan said.

The cost of food has become the country’s third largest concern, behind income stability and health, Mr. Pan said, adding that 84% of consumers believe food prices will continue to climb in the next 12 months. China’s consumer price index rose 4.9% in January, up from 4.6% in the month earlier. January’s food prices jumped 10.3% from December.

The world is expecting Chinese consumers to pick up their spending and to start mimicking their American counterparts, who have long been the drivers of global economic growth, but China’s shoppers have a long way to go before the build up anything close to American-style appetites. In 2007, households tucked away a stunning 22% of GDP. While some economists have predicted Chinese savings rates will start to decline, rising inflation and continued concerns over issues like housing and medical care could slow that trend.

Boosting domestic consumption, which the government is prioritizing this year, will be tricky. Beijing is also trying to dampen inflation and is doing so by pulling back access to liquidity. The People’s Bank of China hiked lending and deposit rates earlier in February, which is triggering more people to save, said Mr. Pan.

If the government doesn’t control food and housing prices, consumers will pull back spending—namely on luxury, home appliances, dining, and entertainment, the survey said.

That said, China’s consumers may still be the best hope for the global economy. Inflation jitters here haven’t yet affected retail sales, which climbed 18% to 15.5 trillion yuan, or roughly $2.35 trillion, in 2010, according to the National Bureau of Statistics. Fast-moving consumer goods, such as shampoo and laundry detergent, haven’t been hurt either.

A global survey of consumers in 52 countries, also conducted in the fourth quarter of 2010, resulted in a rating of 90–well into pessimistic territory.

“Chinese consumers may be losing some confidence, but they are still more optimistic than the rest of the world,” said Mitch Barns, President of Nielsen Greater China.

– Laurie Burkitt. Follow her on Twitter @lburkitt.

The median estimate in the Journal’s poll put growth in China’s gross domestic product in the fourth quarter at 10.1% over the previous quarter on an annualized, seasonally-adjusted basis—the way that most major economies measure growth. That’s down from the median estimate of 10.7% growth for the third-quarter.

China’s statistics bureau reports GDP growth in year-on-year terms, and the difference can be significant. It said last month that the nation’s GDP grew 10.7% in the fourth quarter from a year earlier, a growth rate that accelerated from the third quarter’s 9.1%. Even before those strong numbers were released, China’s central bank had already signaled a new and tougher stage in policy by starting a series of increases in banks’ reserve requirements, measures that reduce funds available for lending.

But at turning points like these, year-ago comparisons aren’t that helpful: they just show us China’s economy is now doing much better than it was during the depths of the financial crisis in late 2008. What’s more important is how the economy is doing now relative to a few months ago. That’s why the U.S. and most other big economies also use the quarter-on-quarter, seasonally-adjusted measure (Ma Jiantang, the head of China’s National Bureau of Statistics, has said his agency will start publishing such estimates this year.)

The Journal has been trying to help fill this gap by regularly polling economists who make their own estimates of quarter-on-quarter, or sequential, growth. In the latest poll, eight of the ten economists who responded thought growth in the fourth quarter was slower than in the third quarter, and most are forecasting a further gradual slowdown over the rest of 2010 to around 9%.

China’s policymakers are well aware that year-on-year comparisons will flatter current growth rates. The importance of using sequential estimates of economic growth was recently highlighted by Premier Wen Jiabao himself.

“We must take full account of the base effect from last year, strengthen the sequential analysis of major economic indicators and closely follow changes in market demand, in order accurately appraise the trend and make macroeconomic policies more targeted and effective,” Mr. Wen said at a State Council meeting on Jan. 19, according to a government statement (in Chinese: here)

But on which set of sequential estimates will the government base its policy? As with our previous surveys (in November and July), economists’ estimates varied widely—a sign less of sharp professional disagreements than of the incomplete data they have to work with. The difficulties were aggravated this time by the National Bureau of Statistics’ recent revision of GDP estimates for 2008, which the bureau has yet to fully reconcile with previously-published figures.

Complicating the picture further are newly-revised quarter-on-quarter growth estimates from the People’s Bank of China (in Chinese: here). These show a remarkably smooth trajectory: After bottoming at 4.3% in the fourth quarter of 2008, annualized growth had recovered to 11.4% by the second quarter of 2009, eased to 11.0% and then picked up again to 11.3% in the fourth quarter.

That’s quite different from what most economists in our poll think happened: a growth surge in the second quarter last year as the stimulus hit, and then a gradual slowdown as its impact waned (see chart). While the central bank’s previous estimates had been within the range of figures that other economists had come up with, several private economists told us they did not understand how the central bank had arrived at its revised figures.

If policymakers are focusing on the acceleration shown in both the headline year-on-year growth rates and in the central bank’s quarter-on-quarter estimates, they could be more willing to take aggressive measures to slow economic growth. But many analysts believe China’s economy is already cooling off: authorities have been slowing down new bank lending since the second half of 2009, and growth in new infrastructure projects and real estate sales is also down.

The respondents to our latest survey include economists on the staff of Bank of America-Merrill Lynch, Capital Economics, China International Capital Corp., Citigroup, Deutsche Bank, J.P. Morgan Chase, Morgan Stanley, the Organization for Economic Cooperation and Development and Standard Chartered Bank, as well as the independent economist Albert Keidel.

– Andrew Batson