How binding is an agreement of intent? Not an uncommon question when doing business with Chinese companies. Australian multimillionaire Clive Palmer’s trumpeted agreement with China Power International to sell it coal from the new Galilee Basin coalfield in northern Queensland turns out, it seems, to be more of a framework than a final contract.
Palmer and Queensland Premier Anna Bligh announced at the weekend what they said was Australia’s biggest export contact, worth $60 billion over 20 years. Hong Kong-listed China Power International Development, the named customer, issued a statement on Tuesday denying that it had reached such an deal. Palmer’s company, Resourcehouse, then said had got the name wrong. It had struck the agreement with CPID’s parent state-owned China Power International Holding in Beijing. A CPIH executive then described the agreement as a framework.
Xinhua has reported that the two companies have signed “an agreement of intent” but have not yet started price negotiations. Premier Bligh is reported in the Australian press as saying that she had seen the contract and while it did not mention dollar totals, it did mention tonnages. Resourcehouse is now saying the price will be linked to market prices and casting the $60 billion figure as its estimate over the life of the agreement.
Echoes in all of this of the Australian securities regulators’ failed case against Fortescue Metals Group, which was accused in 2006 of overstating agreements with three Chinese companies to finance its Pilbara iron ore project. (The regulators are still appealing the ruling against them.)
This Bystander’s two-cents’ worth is that a final contract with China Power International will eventually get signed; China needs the coal and there is a lot of construction work for Chinese firms tied up in the deal. But Resourcehouse has clearly jumped the gun, for which there will likely be a negotiating cost. It has also been left with some egg on its face that will need to wiped off before its possible initial public offering in March.
Our man on Mt. Everest — actually that is a bald-faced lie, it is the Asia Society’s man on Everest, mountaineer and filmmaker David Breashears — provides some beautiful and disturbing shots of the melting glaciers of the Himalayas. We’ve noted before the environmental threat to China’s rivers, but on the basis of a picture is worth a thousand words, we thought we’d share. This video was the Asia Society’s entry in an Asian Development Bank video competition on climate change.
Someone always tries to make a buck out of misery. Melamine-tainted infant formula that was meant to have been destroyed following the food-safety scandal of 2008 that killed six children has been turning up in dairy products across the country. Examples have been found in at least six provinces and in Shanghai.
In one of the latest discoveries, authorities turned up at least 170 tonnes of milk powder in Ningxia. Ningxia Tiantian Dairy is said to have repackaged the tainted powder and sold it to factories in neighboring Inner Mongolia and in Guangdong and Fujian. In Shaanxi, three dairy firm managers have been arrested for allegedly selling 10 tonnes of tainted milk powder to a local diary. Three executives from the Shanghai Panda Dairy Company were prosecuted in December for similar offences.
It is not known how much tainted infant formula may be out there, but Sanlu, the company at the heart of the original scandal, had stocks of more than 2,000 tonnes that were sealed before it went bankrupt. The real problem may lie in stocks spread across the multitude of small dairy farms. Since Feb. 1 food-safety inspectors have been fanning out across the country in an effort to stop the scandal reemerging on a large scale. Exemplary punishments seem likely.
A new food safety law was introduced last year that puts more responsibility on food producers to ensure their products are safe. The growing number of cases in recent weeks is a blow to China’s efforts to restore confidence in its dairy products and food safety regime overall.
China’s banks have been on such a stimulus-fueled lending binge since the beginning of last year, it is impossible that there are not some bad loans sitting on their books. The questions of how many and for how much have been exercising analysts for a while. The pessimists say the numbers are large and that delinquent bank debt is the China bubble to really worry about.
Neil McDonald, a Hong Kong-based insolvency partner with Lovells, an international law firm, gives the pessimists cause to be gloomy, telling an Asia-Pacific Loan Market Association conference, that non-performing loans have risen into the “trillions of renminbi” because of poor lending practices, Bloomberg reports.
“We work really closely with SASAC, the state-owned enterprise regulator in China, and there are literally trillions and trillions of renminbi of, frankly, defaulting loans already in China that no one is doing anything about,…At some point there’s going to be a reckoning for that.”
As we have noted before, Beijing is taking steps to rein in lending, and it spent $650 billion over the past decade bailing out the state-owned banks’ bad lending, so knows the potential pain involved. None of that makes the present problem less serious. Banks balance sheets may not be as robust as they seem. A lot of lending over the past year was not only politically or employment motivated but was also pushed off balance sheet,
To make the pessimists even glummer, the Shanghai office of the China Banking Regulatory Commission warned last week that a 10% fall in property values would treble the number of delinquent loans in the city.
It is being billed as Australia’s biggest export contract, but by any measure it is a whopping deal. China Power International Development, an arm of China Power Investment, owner of Hong Kong-listed China Power, has contracted to buy $60 billion-worth of coal over 20 years from privately held Resourcehouse, starting in 2014.
Resourcehouse will be suppling 30 million tones of coal a year from the new Galilee Basin coal field in northern Queensland. The company is reported to be now planning its delayed initial public offering in Hong Kong for March to help fund the $8 billion development of the field. Much of the work will be done by Chinese companies. Metallurgical Corporation of China will build the mine and associated export infrastructure which includes a port and new rail link. Sino Coal International Engineering. China Communications Construction, and China Railway Group will be sub-contractors on the project. Export-Import Bank of China is providing $5.6 billion of financing.
Resourcehouse’s owner, Clive Palmer, who is one of Australia’s 30 richest men with fortune of $420 million, according to Forbes, has previous with China. In 2006 and 2007, he sold iron-ore-deposit leases to Citic Pacific for $415 million.
For all China’s plans to switch to green energy technologies, it is still heavily dependent on coal for power generation. The deal also suggests that relations between the two countries are back on a reasonably even keel following the so-called Rio 4 industrial espionage affair and a number of other points of conflict including Chinalco’s rebuffed attempt to buy into Rio Tinto and the visit to Australia of exiled Uighur activist, Rebiya Kadeer.
Keeping the project a largely all-Chinese affair won’t have hurt it either. But it does raise a question about how many of the expected 6,000 jobs that are forecast to be created by the deal will go to Australians.
China’s relations with the U.S. are going through a nervous-making patch. Beijing has warned that any meeting between U.S. President Barack Obama and the Dalai Lama would be taken as damaging the bilateral relationship. The two are planning to hold the meeting postponed last year so the U.S. president could first visit President Hu Jintao in November.
“If the US leader chooses this period to meet the Dalai Lama, that would damage trust and co-operation between our two countries, and how would that help the United States surmount the current economic crisis?” says Zhu Weiqun, the vice-minister who is Beijing’s point person for dealing with the Tibetan leader.
At the same time, Beijing has restated its intention to impose sanctions on U.S. companies that sell arms to Taiwan, following the Obama administration’s decision to approve a $6.4 billion arms sale to Taiwan. That would hit U.S. companies like Boeing, United Technologies, Lockheed Martin, and Raytheon. China has reacted angrily to U.S. arms sales to Taiwan before – by cutting off military-to-military ties – and has in effect blacklisted some companies, but this is the first time it has threatened sanctions publicly.
This all follows on U.S. criticism of China’s performance at the Copenhagen climate change conference, Beijing’s resistance to strengthening the yuan against the U.S. dollar, and cyberattacks on the American search media firm Google that are alleged to have originated in China. On top of that Wall Street firms like Goldman Sachs are feeling a backlash for selling state-owned enterprises money-losing energy derivative contracts.
Energy, like media, is an industry that the government considers sensitive and which is dominated by politically well connected firms. Taiwan, of course, is one of Beijing’s hottest political hot buttons. So is all this just China being more assertive of its national interests at a moment when Western officials are increasingly sensitive to the inexorable shift of economic power eastwards, or is it overplaying its hand as Chinese officials grow more confident about their country’s role in the world?
Our man in Davos sends word t0day of a CCTV debate on the global dimensions of China’s growth. Moderator Rui Chenggang likened China to a 16 year old Yao Ming, the basketball player, already 2 meters tall, but still lacking the muscle, skills and game experience that he would subsequently acquire and make him a basketball star.
It is an interesting metaphor by which to think of China which is now seen by the outside world, and particularly the U.S. and Europe, as a global power that China doesn’t yet see itself to be. It also helps explain the different expectations that the two sides have of what should be China’s appropriate global role and responsibilities.
Our man at the World Economic Forum’s annual meeting in the Swiss ski resort of Davos (this Bystander rarely moves in such rarified circles) sends word of a seminar there on U.S.-China relations. The point that caught our man’s ear was an unconsidered consequence of China’s urbanization. An estimated 60% of the population will live in cities by 2020. Urban lifestyle diseases such as strokes and heart diseases along with the aging of the population could help double the country’s health care spending to 8% of GDP within 15 years.
Bank of China’s announcement that it is to raise 40 billion yuan ($5.8 billion) of new capital through a convertible bond issue is the latest example of the authorities moving to sop up the stimulus-feed liquidity slopping around the economy. The big state-owned banks have to told to get back in line with their minimum capital requirements after last year’s 9.5 trillion yuan lending spree (with Bank of China at the forefront). They have also been told to rein in new lending, a message repeated again last week after previous strictures apparently fell on deaf ears and an estimated 1 trillion yuan was lent out in the first two weeks of this month. Regulators are worried by the risk of lending fueled property and stock bubbles going pop, nascent signs of inflation and the possibility of banks being left with bad loans on their books (and they have seen in America what happens when that occurs).
At the end of September, Bank of China says, its capital adequacy ratio was 11.63%. As it needs an estimated 140 billion yuan over the next two years to maintain the required 12% ratio, this may not be its last capital raising exercise. And expect the other big state-owned banks to follow suit.
The 2009 GDP figures are a triumph for central planning, or at least central spending. At the start of the year, Beijing adjudged 8% growth for the year as necessary for social stability. It delivered 8.7% thanks to the massive stimulus program that flooded into jobs-creating infrastructure investment via state bank lending. Fourth quarter growth was 10.7% — double digit growth like we were back to before the global financial crisis hit.
Now has to come the hard work of mopping up the excess liquidity to prevent inflation taking hold and the swelling bubbles in the property and stock markets from going pop. Consumer prices rose 1.9% in December over a year earlier after falling for much of the year, which will have rung some political as well as economic alarm bells. State-owned banks have been told to rein in new lending, their reserve requirements have been raised and an interest rate rise seems a sure bet. And as we have noted before, there is still the need to turn stimulated demand into the self-sustaining variety.
As for which is the world’s second largest economy after the U.S., this Bystander thinks it is still too close to call between China and Japan. Even stripping out the exchange rate factors, the margin of error, to put it politely, in the calculation of China’s GDP is too broad to provide a definitive answer while the headline numbers (and Japan’s is still an estimate) are still this close. No doubting that it is also a question of when not if, though.
