Riot In Urumqi After Uighurs Protest Guandong Beatings

It isn’t at all clear how what seems to have started as a peaceful protest erupted into a riot in Urumqi on Sunday. But events, according to state media, left three Han Chinese dead, and, according to exiled Uighur activist groups, one demonstrator dead and dozens arrested.

Police used batons, fire hoses and tear gas to disperse what had started out as a gathering to demand an investigation into a brawl last month between Uighur and Han Chinese workers at a toy factory in Guangdong in which two Uighurs were reportedly beaten to death.

Flash points are many given the continuing tension between the Muslim minority and Chinese, and police efforts to disperse the crowd, which had swollen from 300 to nearly 1,000i were met by attacks on buses, cars being set alight and police barriers overturned. Photos on Twitter show several blazes in the city, though it id impossible to tell what is on fire.

The riot subsided after two hours, and hundreds or reinforcements, police and army, were drafted into the city overnight to start mopping up operations. This is far from the first violent incident between the authorities and the Uighurs, who complain about the Hanisation of their region. We expect the usual pro-indepence suspects will soon be detained and castigated for their terrorism.

Guangzhou Auto And Fiat To Sign Strategic Alliance

The Italian business newspaper Il Sole 24 Ore is reporting that Fiat will sign a strategic alliance with Guangzhou Automobile Industry Group this week. The Italian carmaker’s chief executive Sergio Marchionne had previously signaled that a deal that goes beyond the two companies’ existing joint ventures was in the works.

Marchionne is on an expansion push, taking over  Chrysler and going after GM’s Opel division. Guangzhou Auto is one of the eight carmakers Beijing has designated for leading roles in the inevitable consolidation of the auto industry; President Hu Jintao is expected to attend the signing ceremony along with Italian President Silvio Berlusconi.

Guangzhou Auto, which also has ties to Japanese carmakers Toyota and Honda, replaces Nanjing Automotive as Fiat’s partner in the passenger car market, an alliance that broke down a couple of year’s back. It has already taken a one-third stake in Fiat’s transmission plant in Hangzhou. The pair are expected to start construction in August of a new plant in Guangzhou announced in May able to produce 140,000 vehicles (initially Fiat’s Linea) and 220,000 engines a year.

Purchasing Managers Index Rises In June For Third Straight Month

The monthly Purchasing Managers Index for June makes for a third successive increase, and a further sign that the economy has turned. June’s 51.8 is up from May’s 51.2 and its highest since July 2008.

Two aspects caught this Bystander’s eye: first, export sales rose for the first time since July last year, and there was an increase in manufacturing employment; both rises modest, but rises; second, inventories of finished goods were on the rise. The latter is, if not worrying at this point, at least a number to keep an eye on as it is untypical and puts at question the sustainability of the renewed growth if that, as rising inventories would suggest, is being driven by stimulus spending flowing through to construction rather than real domestic or foreign demand for manufactures.

A Building Falls In Shanghai

A block of apartments under construction in Shanghai just fell over, as if it had been built out of Lego bricks and toppled with the flick of a finger. There is nothing much else to say, or at least until someone finds out why, but the pictures are remarkable.

Reality Check Advisory

When the figures are released for June, power generation is expected to show its first monthly increase in eight months. A sign of recovering economic activity, or a byproduct of the hot weather that parts of the country have been experiencing? Calibrate your economic optimism meter carefully.

Zhou Bangs On About The SDR As World Currency

The People’s Bank of China has found a drum and continues to beat it. In its annual financial stability report, the central bank again calls for a super-sovereign currency to replace the dollar. The bank’s head, Zhou Xiaochuan, has been a cheerleader for this course of action, and caused a stir earlier this year when he said the dollar could eventually be replaced as the world’s main reserve currency. As well as using the SDR in that role, the PBOC report recommends that the International Monetary Fund  manage a portion of its member countries’  foreign reserves.

We heard a similar thumpty-tee-thump ahead of the BRICs summit in Yekaterinburg earlier this month, though in the event not much policy to that end. China feels acutely the weak dollar’s diminishing of its large and largely dollar-denominated foreign exchange reserves (though it would face a similar problem under an SDR regime if it continued to run huge surpluses). However, the  PBOC has the luxury of seeing the policy remedy to its current dollar bugbear through a purely economic lens, without the realpolitik filter the top Party leadership must employ. (Yves Smith has more detailed discussion of the economics at Naked Capitalism).

Beijing Starts To Play By WTO Rules. Good.

There was a time when Beijing quietly settled WTO trade complaints against China.  In the first five years after joining the organization in 2001, it didn’t contest a single complaint against it. No longer. It says it will contest the newly lodged complaints from the U.S. and the E.U. that it unfairly limits exports of raw materials in a way that subsidizes local steel and manufacturing companies. And it has launched a tit-for-tat complaint against the U.S. over poultry. Similarly it countered Buy American provisions in the U.S.’ stimulus package with Buy Chinese ones of its own.

Does all this amount to a ramping up of protectionism. To this Bystander’s mind, not as much as the doomsters would have us believe. China is learning the rules of the WTO game, and starting to play it. Better by far for the rest of the world to have Beijing on this particular field than off.

Google and Baidu, Pornography and Protectionism

Is Beijing’s reining in of Google trade protectionism–or a shake down?

The FT reported that Google has ben ordered to stop users of its Chinese-language service accessing overseas web sites. The directive is to suspend foreign searches and a feature that automatically suggests multiple search results once typing commences in the search window, according to the report. The FT suggests that

the move against Google appeared to be an attempt to deflect attention away from the domestic censorship uproar by redirecting concerns about pornography against a foreign company.

Authorities say Google is being “punished” for linking to pornographic content.

But Baidu, a domestic search engine that holds a 59% market share, is not subject to the same restrictions, according to Digital Beat. The site also suggests that CCTV has been less on Baidu’s back since it started throwing some sponsorship dollars the state broadcaster’s way.

Anglo American Next In Chinalco’s Sights?

The consolidation of the global natural resources industry in response to the bursting of the the commodities bubble of the early years of the decade and the subsequent global recession means one of two things: more joint ventures such as the one between BHP Billiton and Rio Tinto in iron ore or more combinations within a limited group of companies who need global economies of scale.

The collapse of Chinalco’s proposed $19.5 billion investment in Rio earlier this month makes it a potential bidder for either Anglo American or Xstrata, who have embarked on a merger dance of their own. Anglo’s iron ore, platinum, coal and copper assets make it the better prize for Chinalco. Xstrata’s scrappy entrepreneurial management style would sit uncomfortably with the state-controlled giant, making the Swiss-based company a more natural partner for Brazil’s Vale. Chinalco would also be better placed to circumvent the labour and monopoly concerns the South African government has raised that any bidder for Anglo will have to deal with.

Chinalco, though, will have to come up with a deal that values Anglo at somewhere upwards of $45 billion. Anglo shareholders have already rejected Xstrata’s no premium bid, and a 30% premium is the benchmark for successful mining industry mergers. Anglo’s current market capitalisation is $35 billion. Nor would Chinalco be likely to be able to squeeze out the $700 million-1.5 billion of cost savings (taxed and capitalised worth $3 billion-6 billion) that Xstrata sees in Anglo that could justify a lower bid price.

Reports of Beijing Selling Off Its Treasuries Are Misplaced

Brad Setser’s Follow The Money blog on the Council On Foreign Relations site is always worth the read for anyone following  global capital flows, and especially his post questioning whether China sold down some of its Treasuries in April as U.S. Treasury’s monthly data on total foreign holdings of long- and short-term Treasuries suggests.

Setser says that what actually happened was that China shifted from bills to short-dated notes rather than reduce its overall Treasury portfolio, but the way it buys its longer-term notes, through London, isn’t accurately reflected in the U.S. monthly data as some of China’s purchases get allocated to the U.K. Setser says the past five surveys of foreign portfolio investment in the U.S. have all revised China’s long-term Treasury holdings up (in some cases quite significantly) even as they revised the U.K.’s holdings down.

So what Beijing has been doing is shuffling its dollar-denominated assets not reducing them.