Another Day, Yet Another Food Safety Scare

IT IS AN embarrassment for a company that says “food safety and quality assurance are guiding principles in delivering products that go above and beyond our customers’ requirements” when it is accused of supplying meat to fast-food chains that has gone past its sell-by date and other food safety violations. The Shanghai Municipal Food and Drug Administration is investigating Shanghai Husi Food, the local unit of OSI Group, a food supply group based near Chicago in the United States, for the “alleged use of expired raw food material production and the processing of it in food.” The allegations were first made in a report on Dragon TV.

McDonald’s and KFC’s owner Yum, the two top brands in China’s $174 billion fast-food market, are among the global fast-food franchises that OSI supplies in China. McDonald’s buys beef, chicken and lettuce from Shanghai Husi. Like KFC, it has immediately stopped buying from it.

For both chains, it is another food-safety setback following one in 2012 involving chicken pumped with excessive amounts of antibiotics. KFC’s owner Yum has also hand to contend with the reputational challenge of an outbreak of bird flu. This Bystander also recalls Wal-Mart being caught up in an incident in 2011 involving out-of-date duck meat. And we won’t even mention the case of fox allegedly being passed off as donkey meat.

OSI says it is dealing “directly and quickly” with what it says it believes is “an isolated event”. Most of all, this latest food-safety scare highlights the difficulty for any multinational in enforcing strict processes to assure quality and product safety along its supply chain when that chain is dependent in large part on local staff.

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China’s Second-Quarter GDP Growth Exceeds Expectations

CHINA’S SECOND-QUARTER growth came in at a slightly better-than-expected 7.5%. That is 0.1 percentage points up on the first quarter. Thank a series of targeted stimulus measures for that. Both retail sales and industrial production rose in the quarter.

With the stimulus effects likely to carry over to the third quarter, the official target of 7.5% GDP growth for the full year is back on track. Additional stimulus is unlikely for now except in the slowest growing provinces, where local authorities are still spending heavily, old school.

Low inflation leaves Beijing with some monetary policy flexibility, but cutting interest rates or banks’ reserve requirements to help business get more credit has to be balanced against reigniting asset prices, particularly property.

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A Beijing Boost For China’s Electric Vehicle Makers

CHINA SEES ELECTRIC vehicles as the way to leapfrog its way to leadership of the global car industry. Promoting green technologies will also help the country tackle its widespread and worsening pollution, even though the impact of electric vehicles will mostly be in mitigating the problem from getting worse.

Despite government backing since 2009, production is currently modest, to say the least. The goal is to be building half a million electric vehicles a year by the start of 2016 and twice that number by 2020.

To that end, the government has announced an industrial-policy boost. Central government departments and municipal administrations will have to allocate a third of their annual vehicle procurement to “new energy” vehicles. That covers hybrids as well as vehicles powered by hydrogen cells, but in practice means electric vehicles. Local authorities are also instructed to install charging stations — one for each electric vehicle on the road.

Some financial incentive for officials to follow these new directives seem inevitable, given the increasing pressure on local-authority budgets now land sales are a less readily available honeypot. Any subsidies will have to be carefully structured to ring fence them from any potential international trade disputes.

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Filed under Energy, Environment, Industry

Trade Drives Shifting Alignments Of Northeast Asia

LET US LOOK at President Xi Jinping’s visit to Seoul and Japan’s embryonic rapprochement with Pyongyang in the hard light of commerce. To this Bystander, it is that more than politics that is reshaping the alignments of the region.

China has been South Korea’s leading trade partner for the past decade. It now accounts for a quarter of South Korea’s trade, and a larger share than that of the U.S. and Japan combined. China-South Korea trade will if anything grow, as a result of a forthcoming free trade agreement between the two countries and a new agreement to make more yuan and won directly convertible.

In raw numbers, China-South Korea trade is more than 40 times greater than China’s trade with North Korea, $247 billion vs. $6.6 billion, even though the latter has trebled since 2007 as Beijing has sought to ease Kim Jong Un’s regime back from the brink of Beijing’s nightmare — an economic collapse of the North triggering a flood of refugees across the border into Jilin and Liaoning provinces.

A new generation of leaders in Beijing views Pyongyang differently than its predecessors. More than half a century on from the end of the Korean War, unwavering support of comrades-in-arms just seems outdated and especially now China, South Korea and Japan have become economic powers in their own right. Beijing wants to distance itself from Pyongyang, though not by so much it allows room for Tokyo and increasingly Moscow to step in. It is telling that Xi’s recent visit to Seoul was his fifth meeting with his strongly pro-U.S. South Korean counterpart Park Geun-hye since becoming president though he has yet to visit Pyongyang.

Japan’s latest promise to ease some minor sanctions against North Korea in return for Pyongyang re-investigating abductions of Japanese nationals by North Koreans in the 1970s and 1980s is a sign of how Tokyo is working the new folds in the regional landscape. Continuing concerns about Pyongyang’s nuclear programme in the unpredictable hands of Kim Jong Un will limit how far Tokyo will want to carry its rapprochement, and Washington won’t let it go too far for the same reason.

The North’s nuclear ambitions remain the elephant in the room for China, too. Xi is unlikely to push Kim as hard on this as Park would like. In Seoul, he avoided any sign of support for Park’s criticism of the programme and stuck to Beijing’s line of calling for the denuclearization of the peninsula.

Nor will the U.S. want relations between one of its two main Asian allies and China to become too cosy. On that front, it will take some comfort in the fact that Park rejected Xi’s proposal of a joint celebration of next year’s 70th anniversary of Korea’s liberation from Japan at the end of World War II. Every leader in the region has a middle against which he or she needs to play two ends. In contrast to the dangerous eddies of northeast Asian geopolitics, the course of commerce runs swiftly and truer.

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Gauging Hong Kong

THE TURNOUT FOR Hong Kong’s annual July 1st rally in support of the territory’s continuing autonomy was the largest in a decade.

This year’s protest had added appeal as a way for Hong Kongers to show their distaste for Beijing’s recent white paper on the former British colony. This was read as foreshadowing tighter political control from Beijing and a less independent judiciary in a more-rapid-than-expected convergence of the two systems in the “one country, two systems” arrangements that now prevail.

Such proposals do not suggest that Beijing has a sure feel for Hong Kong’s political pulse. Hong Kong’s ultimate destiny is to be just another big city in southern China. Getting there will be bumpy unless Beijing demonstrates a more deft political touch.

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Filed under Hong Kong, Politics & Society

Xi Jinping’s High-Stakes Tiger Hunt

GEN. XU CAIHOU, one of the PLA’s most senior officers, is not the first “tiger” to be trapped by President Xi Jinping’s anti-corruption drive. He joins Wang Yongchun, deputy head of state energy giant China National Petroleum Company (CNPC), and Jiang Jiemin, former head of the state asset regulator, in being newly expelled from the Communist Party for corruption and abuse of power — a fate also expected to befall former Politburo Standing Committee-member Zhou Yongkang, who once presided over the state’s security apparatus. Were Zhou to be put on trial for corruption he would be most senior leader to face such charges since the Communists took power in 1949, and a significant escalation from last year’s prosecution of former Chongqing Party chief Bo Xilai who was merely a Politburo member.

Nor is Xi’s anti-corruption drive the first to be undertaken by a new leader. His appears to have more legs to it it than those of his predecessors. There have by this Bystander’s best count been some 180,000 cases of actions against officials, military officers and state-sector corporate executives big (“tigers”) and small (“flies”).

Not only has Xi to consolidate his power and make his mark in the  faction-riddled internecine warfare of China’s internal politics, but he also is determined to clean up the image of the Party and to push ahead with economic reform. He believes the first is necessary if the Party is to retain the fast-evaporating trust of ordinary Chinese, on which the Party’s claim to monopoly rule hinges, and the second is necessary to deliver the continuing rise in living standards that are also an essential part of the bargain that allows no political competition to the Party.

There are lots of powerful people in the three most important and tightly interlocked strands of Chinese political life, the Party and the government, the military and the state-owned enterprises whose wealth is far from clean and who have a vested interest in retaining the economic status quo that has provided the opportunities for them to gather that wealth. Xi is both taking out highly symbolic kingpins as well as their underlings who are fast losing the political patronage that has hitherto protected them.

Xi needs to do this if he is to be serious about regenerating trust in the Party and pushing through economic reform. He has to create large breaches in the old guard through which he can drive the forces of change. But he faces three risks. First, he has broken the taboo against going after the families and wealth of the inner circle of China’s leadership; that may provoke a backlash against him. Second, there is a question of how much damage the Party’s reputation can sustain; how many bad apples can be thrown out before the whole crop is considered rotten? Third, he fails to put in place in the Party, government, the military and the state corporate sector systemic mechanisms to regularly detect and prevent corruption in the first place, backed up by an independent judiciary and a free press.

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China-India Relations In The Modi Era

THE INITIAL FOREIGN policy focus of India’s new prime minister Narendra Modi has been on his country’s regional neighbours. Though China is one of them, it has received the least public attention despite recent talk of “a new age of co-operation” between the two, as Xu Changwen, a researcher at the Ministry of Commerce-affiliated think tank, the Chinese Academy of International Trade and Economic Cooperation, recently described it.

Beijing’s initial reaction to Modi’s landslide victory was muted if respectful. A degree of awkwardness for the world’s largest non-democracy in congratulating the world’s largest democracy on a successful transition of power would have been inevitable, even if China and India weren’t both competitive neighbours. Nor would have the eviction from office of the faction-riddled and corrupt Congress Party after a long run in power been an event on which the leadership of the Party in China would want to linger.

However, Beijing does see an opportunity to reset relations between the two countries now the world’s largest democratic election has put in office a politician who while India’s most controversial is also its most business-friendly. The hope is that the change may open the door to progress on trade and investment relations that could offset years of diplomatic strategic mistrust of Beijing on Delhi’s part.

Modi’s campaign promises set high expectations that he will push ahead the economic reforms that had stalled under the previous coalition government. He will have the advantage of not having to worry about coalition partners, but he will find the structural constraints, corruption and slow global economy just the same as his predecessor left them. Nor will Modi be in any hurry to abandon India’s aspirations to be a regional power. Significantly, Modi’s first foreign trip as prime minister was to Bhutan, a former Indian client state that has its own long-running territorial dispute with China.

Modi is a nationalist. His foreign policy rhetoric will continue to reflect that even as he seeks to advance India’s economic interests. The hardline against Pakistan he pursued as a candidate will continue to prove domestically popular. That is what he is most likely to speak about for now as it will take some time for European nations and the U.S. to rehabilitate him diplomatically, though Washington is expected to expedite the process by inviting him speak to a joint session of the U.S. Congress during his visit to the U.S. for the U.N.’s general assembly in September. However, getting his posturing on Pakistan right will be a difficult balancing act. He risks pushing Pakistan more towards China if he gets the tone wrong.

Modi’s nationalist leanings — and the even more pronounced ones within his party — could also trigger stronger posturing on India’s direct territorial disputes with China. Last February, during a campaign trip in Arunachal Pradesh, over much of which which China claims full sovereignty, Modi criticised Beijing’s “expansionist mindset” and reiterated India’s territorial claims over the state. Nonetheless, this Bystander feels that, given the overwhelmingly domestic focus of his campaign, Modi in office is likely to be more pragmatic and less ideological in foreign policy than Modi on the campaign trail. Nonetheless, the new Modi government has allocated $830 billion for infrastructure development in Arunachal Pradesh.

That suggests, at best, a degree of cautious cooperation with China. The litmus test may come in the proposed visit of President Xi Jinping to Delhi later this year, which will be closely watched for signs of a start on the work to strike a grand bargain to settle bilateral territorial disputes.

More immediate rapprochement is likely over trade and investment, and especially at the state level to which Modi wants to devolve more central government powers. That would be a particularly wrenching change for Delhi’s small — India’s diplomatic corps is one-fifth the size of China’s — but tight-knit foreign policy elite. Traditionally it has had neither the time nor taste for advancing India’s commercial interests. India’s multinationals, when entering new foreign markets, have not had enjoyed the cheap credit and diplomatic support their Chinese state-owned counterparts expect.

When Modi was running Gujarat, China was one of three countries he visited in 2011 (Indonesia and Japan were the other two) to pitch for inward foreign investment in his state. Much of China’s $900 million of direct investment in India has gone to Gujarat. A national Modi government is likely to encourage more Chinese investment in sectors such as energy and infrastructure, but it is likely to be states such as Gujarat and West Bengal that cut the deals.

One sticking point will be India’s growing trade deficit with China, now running at an annual rate of $27 billion on total trade of some $65 billion. Beijing is more likely to use that as a lever for more direct investment by Chinese firms in India for local production that would be a substitute for Chinese imports of manufactures. The proposed low-tax special economic zones and manufacturing hubs that the Modi government has just approved in principle would be a step in that direction.

There are also global issues on where the two countries will make common cause, notably climate change and international trade rules. There will, though, also still be plenty of areas of competition between the two regional powers. Both will compete for influence in South Asia and resources in Africa to fuel their economies. We expect Modi to be more assertive on territorial disputes than his predecessor and to seek closer ties with Japan and South Korea, if only to increase Delhi’s leverage with Beijing.

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