Volkswagen certainly is not alone in its enthusiasm. Strong GDP growth and the allure of growing domestic consumption make China attractive for a range of foreign investors. Indeed, foreign direct investment (FDI) surged in April to US$7.3 billion, up from nearly US$6 billion in April the previous year, bringing the total for the first four months of 2010 to US$31 billion, an 11.3% increase on 2009. All the more striking is that relatively speaking, FDI in China was already relatively robust, falling less than 3% last year compared with an average worldwide decline of nearly 40%, according to the United Nations Conference on Trade and Development.

Yet amid this rosy news, there’s a cloud hanging over foreign investors in China. Events in recent months — see-sawing regulatory decisions, hints of economic nationalism and direct legal confrontations with foreign executives — might give jittery, inexperienced foreign companies operating in the country reason to believe the investment in climate is souring. Is that indeed the case?

Not everyone believes so. Nick Cham, a Beijing-based partner in tax and business advisory at Deloitte, says the last thing China wants to do is alienate foreign companies keen to invest in its economy. “Foreign investment is still a very important pillar to China’s economy,” he says, citing the importance of foreign-invested enterprises (FIEs) to the country’s economy. According to Cham, nearly 700,000 FIEs have received approval from the government to operate in China. Combined, they account for about 28% of national industrial output, 23% of tax revenue and 56% of exports, as well as providing around 45 million jobs.

While the welcome mat might not be the same one the government put out in earlier times, many foreign investors certainly aren’t complaining. As Helen Zhang, a partner at Zhong Lun law firm in Shanghai, notes, “even if the government doesn’t provide preferential treatment to foreign invested companies like it might have done 20 years ago, the promise of domestic demand will offset this.”

Regulatory Haze

That’s not to say the concerns aren’t well founded. In it latest annual research on the state of U.S. business in China, the American Chamber of Commerce (AmCham) led Christian Murck, AmCham China president, to conclude that overall, “as we look to the future, there is less certainty in the business community. And we see many actions that suggest the bargaining power [of business with the Chinese authorities] will begin to narrow.” Among the chief concerns cited by AmCham’s members is “inconsistent regulatory implementation” — from region to region as well as between foreign and domestic firms.

This has, in fact, been a perennial issue among foreign investors, but has been in sharper focus as firms expand into new areas, according to Matthew Estes, president and CEO of Babycare, a Beijing-based firm that sells nutritional supplements to expectant mothers and infants throughout China. “When [foreign firms] were only operating in Beijing and Shanghai, people didn’t notice,” he says. “But now that companies are operating across the entire country, we’re beginning to see more and more concerns raised about inconsistency and local favoritism and that is a problem that needs to be resolved.”

Other items are new on the list of concerns. For example, in a push to encourage “indigenous innovation,” the government issued new rules last November to qualify for its massive procurement program, which would require companies selling high-tech products to prove that the relevant patent was solely developed in China or its trademark first lodged in China. After the U.S. and European Union cried foul, however, the Ministry of Science and Technology, which issued the rule, retreated in April, clarifying that the relevant patents and trademarks must only be registered in China.

More Bark Than Bite?

Two months later, the State Administration for Industry and Commerce (SAIC) and the Ministry of Public Security introduced changes to how the Representative Offices (ROs) of foreign firms are overseen. ROs in the past have been a popular route for foreign businesses to get a foothold in the country, with many ROs going beyond their authorized representative duties and employing far more staff than legally allowed. The new rules aim to curb their expansion. Changes include reducing the duration of registration certificates from three years to one year, requiring on-site inspections of new ROs and increasing oversight of staff numbers.

While these rules increase the administrative and cost burden of ROs, Deloitte’s Cham asserts there is a silver lining to the changes: In the long run, formalizing the RO rules will “help foreign businesses improve how they structure their activities in China.” He also sees the changes as an opportunity for foreign investors to “review their existing presence in China and perhaps consider expanding activities under a more appropriate vehicle, such as a wholly owned foreign enterprise or joint venture.”

Regardless of the type of investment vehicle, however, some foreign investors feel unfairly put in the limelight, a sentiment highlighted following the recent sentencing of executives from Australian mining firm Rio Tinto after being found guilty of bribery. Yet observers such as Yan Jinny, an economist at Standard Chartered Bank in Shanghai, believe that foreign firms should expect more high-profile cases like Rio Tinto’s. “We’re going to have more strict rules and further investigations,” he predicts. But foreign firms shouldn’t feel unfairly singled out, say observers. China is applying the same strict treatment to domestic firms, as was clear with the sentencing in early May of Huang Guangyu, once China’s richest man and former chairman of home appliance giant Gome Group, for insider trading and bribery.

Olive Branches

But the government appears to be at pains to calm tensions. In April, the State Council, the chief administrative authority of the PRC, released a pronouncement — known generally as “Opinions” — reiterating the country’s intention to expand liberalization and encourage foreign investment in “priority areas,” such as high-end manufacturing, high-tech industries, and environmentally friendly enterprises, while restricting environmentally unfriendly ones.

A key part of the Opinions is an increase in the ceiling by which local governments are allowed to grant approvals to foreign investment projects from US$100 million to US$300 million, which should speed up the red tape that many FIEs have long bemoaned. Furthermore, it will be easier for FIEs to move from eastern China to less-developed areas in the country’s central and western regions by streamlining registration and approval procedures and tax administration.

Lester Ross, a partner at WilmerHale law firm in Beijing, notes that while “the details remain to be seen, the Opinions represent positive policy developments in multiple respects for foreign investors in China.”

“We applaud those developments in general as constituting further steps toward the development of China’s economy,” says Ross. However, he adds, “the next and increasingly urgent challenges are ensuring transparent, uniform and impartial implementation.”

Choosier by Choice

That could happen as part of a broader change of attitude toward foreign investors. Zhang of law firm Zhong Lun notes that previously, China needed foreign capital to help its economy grow. Now, “the Chinese government is more experienced,” she says, which is why it is targeting particular sectors, such as clean energy or services. “It welcomes foreign investment but it wants to know what you are bringing. It wants knowledge and high-tech engineering so [companies] can help upgrade industries. But you’re not welcome if you are just here for cheap labor and your products are not environmentally friendly.” Although she doubts that the Opinions will make much immediate practical difference, it “sends out the signal that the government welcomes investment and is improving procedures.”

Yan of Standard Chartered Bank notes that while these changes are positive, their impact won’t necessarily be felt immediately. “Everything needs to go through the National People’s Congress, so we’re talking about years, not months, for the right legislation to be enforced,” he says. “In the meantime, China needs to improve how it enforces its current policies so as not to dampen interest in the market.”

Until then, however, most foreign investors know where the buck stops, says Estes of Babycare. Rather getting caught up with government incentives, policies and procedures, he says China’s most successful investors — foreign and domestic — will stay focused on the “key factors” — that is, “how big is their market today and how big will it be in the next five to 10 years?” In other words: Growth, growth and more growth.

When my friend and I set off for a relaxing walk along the Great Wall, we thought it would be an easy day free from pollution and profit seekers. But I should have known that wherever you go, the money-makers will be there to get you.

Ben and I boarded a bus to Miyun, from where we planned to take a second bus to Jinshanling, the starting point for a walk along the Wall to the tourist spot, Simatai.

At Miyun we tumbled out onto the side of a huge, busy road. Immediately a gaggle of taxi drivers were upon us. “Simatai, Simatai?” they crowed. We wanted to get a bus, so we pushed our way through the group.

We didn’t know where the bus stop was, so we went into a nearby hairdressing salon to ask. Just at that moment a wild-looking taxi driver burst through the door. When we explained that we wanted to get a bus to Jinshanling, the hairdressers and the taxi driver shook their heads. “No bus today,” they said.

We were suspicious, assuming the taxi driver just wanted our custom. But, admittedly we were clueless and therefore easy prey. The canny taxi driver knew this and pursued us when we walked off down the road.

He said he could give us a very good deal, and set about proving this by writing complicated equations on a cigarette packet, trying to prove that given the petrol cost and the distance, he was offering us the “best price”.

We gave in and took the taxi. The chain-smoking taxi driver sped to Jinshanling, overtaking all other cars en route, with the radio blasting all the way.

We arrived in one piece at Jinshanling and set out on the walk. It was a clear day and there were few people around. It appeared we had escaped the pollution.

We had not escaped the profit-seekers, however. At each fortress along the way, there was a wizened old person ready to ply us with Coke and beer and sell us retro red-starred caps.

The persistence of these elderly folk matched that of the taxi driver. One old man, in a long green coat and green cap, asked us if we wanted a drink. We refused but chatted with him and discovered he was 72. I wondered how he got up here with all his coke and beer. I was puffing at less than half his age.

We walked on but just moments later there was a patter behind us and we turned to see the 72-year-old, arms outstretched, with a can of coke in one hand and a beer in the other. Wheezing, he offered us a drink once more. Fearing he might actually keel over from the effort, we hurriedly dug out our money and bought the cans.

Back in Simatai we met a man who said we could get a bus to Miyun. He also said that there were buses running from Miyun to Jinshanling and we should have been able to get one that morning.

It seemed our taxi driver had lied. We were wondering whether to ditch him and take the bus, but hesitated because he had already taken us half the journey and we’d paid him nothing. As we pondered our next move, our taxi driver suddenly appeared, grinning.

Feeling a bit uncomfortable and a tad guilty, we piled into the car.

I had had a fun day and concluded the fare was not enough to worry about, whether there had really been a bus alternative or not.

It certainly doesn’t help matters much that there’s uncertainty and tensions brewing on a number of fronts. Among the foreign IT industry, for example, the ugly exchange between Google and China, and a new rule that stipulates sellers of high-tech goods must contain Chinese intellectual property as part of an “indigenous innovation” campaign, have rattled nerves.

Yet despite all this, experts say there’s much that’s working in China’s favor. Costs are still low and the skills level is high. Meanwhile, the pent-up demand of a potentially huge domestic market combined with improving IT, infrastructure and regulatory regimes all put China well ahead of other low-cost countries.

While the recent announcement of China’s first trade deficit since 2004 makes it unlikely that the renminbi will be allowed to appreciate against the U.S. dollar much soon, March’s $7.24 billion deficit is also a sign of the fast expansion of China’s domestic market. The auto sector, for example, was up 170% in March from the previous month.

China’s burgeoning domestic market is indeed a very important allure for many firms, according to the latest China Manufacturing Competitiveness Study published by the American Chamber of Commerce (AmCham) and management consultants at Booz & Company. More than 80% of 202 manufacturers surveyed said their primary motive for being in China is to provide products for the Chinese marketplace, up from 71% two years ago.

While booming local markets are key, there are other reasons for China’s appeal, including political stability. A couple of years ago, companies were hedging their bets and adopted a “China plus one” strategy, so that they set up operations in China and in one other nearby country. Many chose Thailand as the second country and the current strife is bad news for businesses there.

The stable currency has also been helpful, adding an element of predictability to budgeting and keeping costs down. Two years ago, the AmCham study found that the rising RMB was the most serious worry for the companies surveyed, but since then government policy has calmed those fears. The AmCham study also notes that “although factories in China are generally still in the early stages of implementing innovative manufacturing practices, these lean techniques and processes are even less prevalent in surrounding low-cost countries.”

Lian Hoon Lim, partner and manufacturing expert at AT Kearney consultants, says companies are benefitting from what he calls “the cluster effect,” The big three clusters in China are the Yangtze River Delta region around Shanghai, the Pearl River Delta region running from Hong Kong to Guangzhou, and the region around Beijing and its neighbor Tianjin. In these areas companies have access to a  “skilled labor, an experienced local managerial workforce, material and component supply, and good infrastructure,” says Lim. “If you took those four factors and looked at the countries in Asia, including in the subcontinent, you would find that quite a lot of them lack one or more of these four points.”

People Power

Yet China continues to grapple with one of its trickiest growth challenges: Attracting and retaining top employees. The drop in global demand for exports from China during the economic crisis meant layoffs and a softened labor market. But by the end of 2009, as China’s economy re-accelerated, labor was again in short supply. In the fourth quarter of 2009, labor demand growth in major cities outpaced supply for the first time since the second quarter of 2008, according to JP Morgan Global Watch Data. As a result, manufacturers have had to hike wages to attract workers. 

“The increasing costs and tightened labor market are driving companies to consider other options for their lower cost, export-driven operations,” observes Stephen Li, a principal at Booz.

The AmCham study found that in 2009, the costs of labor and logistics as well as labor availability were viewed as less competitive in China than they were than two years ago. Yet 28% of the companies surveyed last year said they plan to move or expand within China in the next five years, compared to 17% in 2008. Cities in southwest and central China, such as Chongqing, Chengdu, Wuhan and Zhengzhou, are among the new destinations cited. For companies considering moving outside China, more than half said they wanted to stay in Asia, identifying India and Vietnam as their top choices. Latin America and Eastern Europe ranked a distant second and third.

But for companies staying in China, the study shows that they are readjusting their arsenal of tools to attract and retain staff, offering higher pay and training. Most respondents — 79% — said they are providing training and career development rather than relying on compensation to attract and retain workers.  “Leading companies are recognizing that attracting and retaining talent in the post-downturn [environment] will mean refreshed value propositions incorporating growth and development opportunities,” says Li.

Case by Case 

But despite all of China’s appeal, foreign companies are right to exercise caution, weighing up the advantages and disadvantages of being based in the country accordingly. AT Kearney’s Lim says that of the six clients he has worked with over the past three years, only two gave the country a vote of confidence. 

Lim reckons that the business case for investing in China has changed for many companies in recent years. “If a firm wanted to expand in 2007, it was a ‘no brainer’ to go to China.” Along with the rising costs, he notes the “viability of long-distance supply chains” as having “prompted a rethink” in how firms view China as a potential manufacturing location.

One of the six — an industrial-goods firm — wanted to set up a joint venture but couldn’t agree on the terms with the potential partner so did not go ahead. Another — an aerospace components manufacturer — set up shop elsewhere due to intellectual property concerns in China. A third client, who was in the medical industry, decided the return on investment in China would not be worth the effort, while a fourth didn’t go ahead with an investment in China, for undisclosed reasons. However, a plastics manufacturer did because of the high demand for its goods in China, as did a maker of industrial equipment because it expects China to be a hub for its sector in the future.

China is competitive for textiles, says Lim, but less so where the value-added and complexity is low, such as bed linen. Men’s shirts, on the other hand, are “quite complex; you need to cut many different pieces, the stitching and sewing is complex, and you have cuffs, buttons and collars, and many different sizes.”

Then there are white goods and consumer electronics. According to Lim, the competitiveness is a function of the combination of labor costs that are relatively low but at skills level that is relatively high. “A company could set up elsewhere — say, Cambodia — where the cost of labor is very low,” says Lim. “But the productivity and familiarity with the industry is not there, and most of the raw materials would have to be imported.”

Made in China

The catalyst causing many companies to re-thing their China strategies started when oil went from $40 to $150 a barrel. Suddenly, transportation costs for goods from China to Europe and America became markedly more significant. Despite the fact that the price of oil has stabilized, “people are more sensitive to the risk of it spiking again” says Lim.

To address the challenges, companies are devising “long-term strategies, which focus on product competitiveness and their supply chain,” says Li.

But whatever the sector or supply chain, another on-going challenge, meanwhile, will be to please China’s consumers, who are unpredictable and have varied tastes. As Edward Tse, chairman of Greater China at Booz, writes in the analysis of the study, “Although China’s markets are open to global products, they are also extraordinarily local, rooted in traditional customs and tastes, with extreme variations from one region to the next…. With markets and tastes continuing to change, it is difficult to predict what kind of path China’s consumers will follow.”

The result, he says, means that “companies seeking to take advantage of the Chinese market cannot be complacent but must upgrade processes, retain talent, keep a tight reign on costs and get to know their customer.”

Take getting around the city. Look at a map of Beijing and you see an organized grid-style road network. But then when you undertake an excursion, chaos ensues. Crossing a road is like running a gauntlet. Bikes, cars, minivans, and even the odd horse and cart compete for space. People yell at each other and cars constantly beep their horns. 

Another battleground is the supermarket. Queues are an alien concept. I stand politely waiting to pay for my goods and a withered old man is suddenly in front of me paying for his. I have to stop daydreaming and focus on the competition on hand, even if that means fending off the elderly.

But it seems the city is as good at clinical efficiency as it is at disorganization. I noticed this when I recently went for my medical examination that all foreigners have to undergo when they come to China.

The HR lady at our company took me to the hospital. The test took place in a big hall with numbered rooms at the sides. It was busy with foreigners, standing in long queues at each room and gathered at the front desk. There were a few rows of tables where I sat to fill in the form, which I picked up from a clearly labeled desk.

Once the form was signed I had to visit each room to have various checks done. I was impressed at how thorough the test was. I had my eyes checked, my lungs x-rayed, my blood pressure taken, and was weighed and measured. I even had my blood extracted and an ultrasound scan.

Every test was carried out with such rapidity that I barely had time to register what was happening.

In the height/weight room I walked into, I was ushered onto a raised platform, and ushered off and out of the room within seconds.

For my eye check, I only had time to figure out that I was supposed to tell the direction of the symbols on a lit box about 4 m away before I was whisked on to the second part of the test.

For the ultrasound test, the nurse ordered me to lie on the bed and lift up my shirt. She then proceeded to smear cold jelly on my tummy and sides with a cold metal applicator, which made me wince. She peered at a screen in front of her, assessing my insides. I wondered how many other people had spent their morning looking at the internal organs of hundreds of people.

“Ok?” I asked. “Normal,” she declared, before patting me on the shoulder in a signal to wipe myself off, and leave.

The only hiccup occurred when I had my blood taken. Luckily the pace of events slowed somewhat as the nurse tried digging a needle into my arm. However, even though she took a little more time than the other doctors and nurses, she couldn’t quite get it right. Eventually enough vials were filled but I left the room with plasters on both arms and bruises.

When I was done, most of the rooms had cleared too, and the nurses and doctors began to emerge from their rooms for a well-earned break. I felt I needed a rest too as I was so taken aback by the sheer efficiency of the whole operation.

In a joint symposium held at the Peking University campus in Bejing on March 10 and organized by both schools, finance professor Xinzhong Xu of Guanghua assessed property values in China and concluded that China may well be inflating a real estate bubble. Wharton real estate professor Susan M. Wachter also said she saw the warning signs of a bubble, but suggested that China may be taking steps to prevent a major disruption.

China’s Property Problem

While the United States undergoes the most severe contractions in housing prices since the Great Depression, the housing market in China, with prices soaring up, appears to be the mirror image of the U.S. According to many observers, China may be on a path towards the kind of boom-bust housing market that has plagued the U.S. One measure of the run-up in house prices in China: Between January and August of last year, house prices jumped by 70% in Beijing and 47% in Shanghai.

Prices were climbing swiftly in China’s housing market despite a brief slowdown in country’s economy over the last year. “Last year, China suffered heavily as in other countries,” said Xu. However, “two industries still did very well indeed — one is online gaming, and the other is the property market.”

Today, Xu said, house prices in Beijing and Shanghai “are comparable to London and New York. If you compare property prices in Manhattan with those within Beijing’s second ring road, they are only about 3% different.” Given that GDP per capita in China is far below that of the U.K. and U.S., this makes housing unaffordable for most Chinese. The average household income to average mortgage ratio far exceeds 100% for the country’s four big cities — 143 in Beijing, 151 in Shanghai, 111 in Shenzhen and 167 in Hangzhou. Of the top ten biggest cities, “the only place in which people can probably still afford to buy is in Chongqing [of Central China Sichuan Province], where household income to mortgage ratio is 48%,” said Xu.

What Is Behind Soaring Prices?

Why — and how — are people still scooping up houses in China? “In the U.S., you have three-year mortgages,” said Xu. “In China, you have three-generation mortgages: Yourself, your parents and your grandparents. Because of the one-child policy, you have five families covering one mortgage.”

What is more, local governments in China have every incentive to drive property markets and push up prices. This is partly a result of 1994 fiscal reforms to raise local government revenues, which were falling despite overall GDP growth. The reforms sought to replace the old, discretion-based system of revenue sharing between central and local government with a rule-based revenue sharing arrangement.

The overall success of the change is debatable since certain discretionary powers remain with central and provincial governments. Nevertheless, “By most estimates, land sales and taxes account for between 40% and 60% of local government revenues” now, said Xu. In 2009, proceeds from land sales alone amounted to RMB 1.5 trillion, some 40% of local government income, and the property sector contributed 2% of all GDP growth. Local government encouragement of high property prices is underpinned by loose monetary policy. According to Xu, loans to property developers and for mortgages accounted for about 40% of all loans last year.

In order to reduce the upward pressure on house prices, Xu recommended localized urbanization. “China’s cities become larger every year and we say we want to create international mega cities.” The problem this creates is that people only want to live in the mega cities where quality of life is better, and so there is a rush to purchase housing in places like Beijing and Shanghai. Many people living far from these cities still buy a flat in a mega city if they can afford it. This results in many empty “ghost apartments” that people never use. “This trend has a cascade effect in the property markets in second tier cities,” Xu said. “As prices go up in Beijing, prices go up in other cities, too.”

That is why China needs to revive its small cities and stop promoting mega cities, Xu said.

Another way to increase housing affordability, according to Xu, is to make property taxes progressive so that middle and lower income homeowners will pay less tax.  Finally, housing should be provided to the poorest citizens in society, Xu noted. Here, there is a glimmer of hope. The budget approved at the close of the National People’s Congress on March 14 included a 10% boost in spending, including more money for low-cost housing.

“As for the future, I am not optimistic,” said Xu. There are too many institutional players with an incentive to keep prices high. And in addition to local governments, there are others with vested interests in holding property values up. Banks provide 40% of their loans for the property market, for example, and they would be hurt if property prices fell. Yet, if a bubble is growing, the consequences for banks could be far worse. “So, here are our lessons: Japan in 1989, Hong Kong in 1997, the U.S. in 2007 and China, 2017?”

Echoes of the U.S. in 2007?

Following an epic collapse in property prices in the U.S. since 2007, the U.S. real estate market remains gloomy. Some 2.8 million U.S. homes were repossessed in 2009 and there is a surfeit of bank-owned foreclosed houses going for rock-bottom prices.

Wachter noted that household debt had been growing in the U.S. since 1975. Starting in 2000, the growth in that debt, which far outpaced the range of growth in government or corporate debt, accelerated as a percentage of GDP. At the same time, the house price index was rising and people continued to accumulate more mortgage debt while home ownership rates continued to increase.

So why has this situation gone beyond a rational reversal point and been allowed to become a bubble? Wachter said household debt consisted “not just of mortgage debt, but mortgage debt of specific types. Mortgage debt became far riskier to households than had ever been produced before.” Non-prime, unregulated mortgage debt rose quickly, for example. “At the height of the bubble in 2006, non-prime had gone from almost zero to nearly 50% of mortgage originations,” Wachter noted. As the bubble emerged in 2004 to 2006, new toxic types of mortgages came onto the market, such as interest-only and pay-option mortgages.

Meanwhile, over the same period the price of risk was dropping, which was a sign of trouble ahead, according to Wachter. “We can now see that over time the risk premium for non-prime mortgage debt securities declined. While we did not know this at the time, we can retrace these numbers after the fact.” So, people could more easily get mortgages — lending terms eroded while house prices accelerated. Later, they plummeted by 30% nationally on average, said Wachter.

Compounding these difficulties was what Wachter termed the “pro-cyclical creation of risk” – where regulatory agencies were racing to deregulate both the mortgage market and the mortgage-backed securities market in the recent years. Since many of these securities traded in a way that allowed them to avoid strict market discipline, the process created risky mortgage-backed securities that weren’t accurately valued.

U.S. Market Remains in Danger

When the housing market collapse came, it took three forms: “a collapse in housing prices; a collapse in balance sheets of borrowers whose mortgage payments accelerated two or three times beyond their incomes, and a collapse in the banking sector as a whole,” Wachter said. That led to “the credit conditions which undermined the entire economy.” According to Wachter, there had been a “break in the normal pricing connection between an investment product and a borrower’s product.

Today, “foreclosures and under-water mortgages abound, despite the rescue effort.” And, according to Wachter, the “unprecedented massive intervention” by the U.S. government saved the world from “the potential great cataclysm of a second great depression.”

But a catastrophe avoided doesn’t mean trouble averted altogether. Though critical, the stimulus spending has led to U.S. debt — as share of GDP — to soar from 57% in 2001 to 70% in 2008. The mortgage system has been federalized so that nearly all mortgages are provided through Fannie Mae and Freddie Mac, and the banking sector remains challenged. Ultimately, Fannie Mae and Freddie Mac will have to be reformed and the massive federal deficit will have to be tackled.

“It is a waiting game,” said Wachter. “We need to restructure, rebuild and rethink our financial architecture.”

Will China Follow in the Footprints of the U.S.?

Going forward, the first job is to identify and evaluate an asset bubble before governments can decide how to act. “These are hotly debated issues,” said Wachter. In the U.S. a few years ago, [Fed] Chairman Ben Bernanke said that it is not the role of the Federal Reserve to monitor asset bubbles. Things are changing and “there is an evolving consensus that we should attempt to identify bubbles,” said Wachter. “Especially as it becomes more clear that taking care of them afterwards involves overwhelming costs to the economy.”

The U.S. bubble was not unique and many banking crashes have been triggered by real estate bubbles before, Wachter pointed out. She believes the key cautionary signal is when asset price increases are not correlated with economic fundamentals, but are correlated instead with a decrease in the cost of debt. As the debt premium charge decreases, the asset bubble increases.

“Clearly in China, there are cautionary signs,” she warned. “We have lessons to learn from the U.S. Firstly, regulation has a role to play and undermining regulation in a way that allows risk to spread unchecked is unhelpful.” She added that when it appears a crisis is brewing, leverage should not be increased. “What we did in the U.S. was allowing loan-to-value ratios to increase as house prices increased. My understanding is that China is going in the opposite direction and that is certainly to be recommended.”

Xu agreed that the signs of a bubble are there, even though there is no simple yes or no indicator. He added: “The more difficult question that nobody can answer is: When is this bubble [in China] going to burst?”

Babies toddling around in split pants, small dogs dressed in colorful coats with matching booties, and elderly people walking backwards at the crack of dawn are all sights that make a curious foreigner like me stop and stare.

But, of course, there has to be a bit of give and take, and I myself, with short peroxide blonde hair, blue eyes, and a tendency to wander around less popular parts of Beijing “exploring”, receive my fair share of gawking from locals.

Sometimes such attention can be flattering. On Christmas day, I went to Chongwenmen church. Nestled in Hougou hutong, this uniquely shaped building is a gem. The church was crammed with people who had braved the freezing night to worship and celebrate.

Upon spotting a lonesome foreigner, one of the ushers hurried over and found me a seat, despite it being so busy. The elderly lady I sat next to beamed at me, crumpling her wisdom-lined face into a prune. I was just getting comfortable when the usher returned, pulled me up and gave me a place right at the front of the church. I had a perfect view of the pageant of carols and music that followed.

At other times looking different is plain annoying. A few summers ago, when I was one of the few Westerners on a 25-hour train journey from Guangzhou to Kunming, I was inundated with offers of conversation from people who wanted to improve their English. I succumbed for a while, but after hours of labored talk with one person after another I was rather exhausted.

Sometimes one is asking to become a spectacle. This happened on a weekend when I went running in the northwestern corner of Beijing with the city’s Hash House Harriers.

Hash running groups are prevalent in cities worldwide. It was originally devised by a group of British soldiers based in Malaysia who met to run, socialize and drink beer. The idea is that one or two people lay a trail marked by symbols drawn in chalk. Then the runners follow the trail. There are a couple of stops for refreshment along the way.

At the end of the run the whole group gathers to drink beer, sing songs, introduce newcomers and make fools of one another.

The trail we followed meandered through hutong alleys, zigzagged over a dried out river, and passed over a hill where a Hollywood-styled sign read “protect the woods from fire” in huge red characters.

When the run was over, 23 of us stood shivering in a circle. We looked a motley crew. Europeans, Americans, British, Chinese, men and women ranging in age, chugging beer and singing songs in the freezing air. After about 40 minutes we had pulled in quite a crowd.

Elderly men on bicycles stopped in their tracks and peered at the goings-on. A couple of little girls pointed and squealed, edging closer in curiosity, as their mothers tried to control them. Middle-aged men puffed on their cigarettes and stared, bemused. A couple of security guards glared, poised for action.

We all lived in the same city, but at that moment it was as if our circle and the spectators were worlds apart. Happily, both participants and observers let each other be and when the circle dispersed so did the crowd.

Sometimes I see people act in ways that are new to me and I have to stare, but I wouldn’t dream of interrupting. I just look, and having satisfied my curiosity wander on. So, when I get a little attention, however unwanted, I realize it’s just part of the deal, and as long as you let people get on with it, a little give and take of staring helps us all learn a bit more about each other.

Ever since I discovered that a sea cucumber was definitely not a vegetable, I pledged to do away with my preconceptions about anything in China even if I thought it was something with which I was already familiar.

Foolishly, I forgot this as I sat on the coach this weekend, bound for Lianhuashan ski resort north of Beijing. I indulged myself with memories of long days in the Alps, maneuvering over moguls, gliding over glaciers and skiing down endless different runs.

The day’s program showed we were to hit the slopes at 11 am, stop for a Chinese banquet at 12:30 and then be off the mountain by 4 in order to hand our kit in by 4:30.

A banquet? In the midst of a day out skiing? My friend and I balked. Lunch on European slopes was a quick sandwich grabbed between trying to cover all the routes.

When we arrived, we could make out one large slope and perhaps five short runs. “I expect there’ll be more round the other side,” I said.

In the kit room, an army of workers distributed everything we’d need, from skis to clothing.

Luckily, we were not in St Moritz and this was no fashion parade. I donned my sickly pale blue jacket, elbows threadbare from decades of wear, over newer but no less nauseating, iridescent lime green salopettes. I felt like an 80s jumble of disco-ball and shell suit.

Prepared, we rushed to the chair lift, which was to take us up to the main slope. The lift operator refused to let us on because we hadn’t practiced on the preliminary slopes, which were packed. After some persuasion, we piled on.

Within half an hour, I knew the contours of the one slope, and was getting used to the sight of the shepherd and his sheep in the field adjacent to the run, below the lift.

By 12:30, I was cold and bored, and welcomed the idea of a sit down meal. The food was abundant and we munched on juicy prawns, stir fried vegetables and beef, washed down with Tsingtao beer.

I’d been watching the hordes on the smaller slopes and concluded I must be missing out on something. Other people hadn’t rushed to the biggest slope after a few goes on the small runs as I’d expected.

I stopped pretending I might be in the Alps and decided to muck in with the crowds. I nudged my way into the throng waiting for the lift on one of the smaller slopes, ski poles braced lest anyone dare try and get in front of me.

I grabbed my lift and swayed and teetered to the top. I was nearly taken out by the schemers who stood right next to the lift’s path looking to grab any spare lift that someone at the bottom had been too slow to catch. I grunted and stuck out my poles.

From the top it was another gauntlet to descend. Ski classes, mid-slope picnickers, and unpredictable children were all obstacles to negotiate.

I enjoyed the experience so much that I tried another two easy runs before returning, with a new philosophy, to the big slope.

On the way up I photographed the shepherd. I stood at the top watching the ant-like skiers below. I decided that skiing in China is as much about the journey as the destination, so I launched myself down and focused on weaving a smooth wave down the slope, rather than speed.

At the end of the afternoon, I didn’t hit the bar for schnapps to quell my adrenalin rush after bombing down every slope at 160 kph as I would have in Europe. But I did feel happy and refreshed after a fun and novel day out.

And I reaffirmed my pledge to do away with those unhelpful blinkers: Preconceptions.

This is good news because this meaty mushroom is delicious. Also known as Porcini, the scientific name for this mushroom is boletus edulis from the Latin stem bolet meaning “superior mushroom” and edulis, meaning edible.

Slice and cook with potatoes or fry with shallots, salt and pepper. Yum.

Ba at Foix

I was introduced to Tony Smith. He used to be an excellent runner. He also used to be married. He is now neither and lives in a quaint house up in one of the valleys surrounding Moulis and spends his time helping Rose with the market and enjoying the laid back lifestyle. Paula Radcliffe lives nearby.

Tony had a friend visiting called Paul and Paul’s thirteen year old twins. I spent Saturday with them and on Sunday the four of us went to an African musical festival in the town of Foix hosted by Ingenieuse Afrique.

Be alive

Hot, sweaty drummers mmm...

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