CIC Debut

The state agency set up to invest more profitably some of China’s $1.4 trillion of foreign exchange reserves formally opened for business on Saturday, even though it has already taken a $3 billion stake in U.S. private equity firm, Blackstone Group, back in May. 

China Investment Corporate (CIC) will start out with $200 billion in assets, making it one of the largest state-owned investment funds from the get-go. But more of the country’s foreign exchange reserves will be coming its way, sufficient to double its size, according to some estimates.

CIC has also absorbed Central Huijin Investment Corp., the state agency used to recapitalise China’s big banks ahead of their stock market flotations. The FT says $67 billion of its initial capital will be used for this.

Lou Jiwei, vice general secretary of the State Council and former vice finance minister, will be CIC’s chairman, and Gao Xiqing, the U.S.-educated law professor who is a former deputy chairman at the National Council for Social Security Fund, its  general manager.

Lou’s appointment reflects the outcome of the infighting between ministries for control of this new agency, won by the finance ministry and lost by the central bank which has traditionally controlled the recycling of all China’s foreign exchange reserves.

As well as seeking more international investments such as the Blackstone stake (a portfolio investment intended in part to sidestep possible foreign concerns about Beijing buying companies directly), CIC will be used to sop up some of the liquidity sloshing around China’s financial system. 

Power Shuffle 2

More bloodletting ahead of the party congress next month. The People’s Daily reports that  Fu Wenjuan is no longer vice minister of construction, nor Fan Younian  chairman of the board of supervisors for key large-sized state-owned enterprises, nor Ding Xianjue chairman of the board of supervisors for key state-owned financial organizations. 

Wang Yi, ambassador to Japan Wang Yi has been appointed vice foreign minister.

As noted then, a month ago six ministers were removed from office as the Hu-Wen regime flushes out the influence of its predecessor led by Jiang Zemin and prepares to anoint a new generation of leaders in October. 

Damning Words On Three Gorges

Official China has repeatedly brushed off the environmental-damage warnings of critics of its showpiece Three Gorges dam, the world’s largest hydro-electric project. Which makes it remarkable that a senior official has said the dam threatens to become an environmental catastrophe, and that the remarks have been carried in state media.

Landslides, silting, and erosion above the dam are creating environmental and safety hazards that cannot be ignored, Wang Xiaofeng, director of the State Council Three Gorges Construction Committee, was quoted as telling a two-day forum held in Wuhan on Tuesday. “We cannot exchange environmental destruction for short-term economic gain,” he said.

Environmental scientist Weng Lida, secretary general of the Yangtze River Forum, was quoted as saying, “We thought of all the possible issues. But the problems are all more serious than we expected.”

Fifteen years in the building so far, the dam is already producing much needed electricity and will have the capacity to generate 18,000 megawatts once completed in 2009. 

Wang’s words resonate with those of President Hu Jintao and Prime Minister Wen Jiabao who have repeatedly stressed the need to balance economic and social development. Protests over environmental issues, particularly the poor quality of water and air, are becoming more common.

The dam was started during the time of Hu’s predecessor, Jiang Zemin, whose influence is being systematically flushed out. As the FT notes, “The unusual criticism of such a symbolic project could be politically motivated in the lead-up to the 17th Communist Party Congress”. 

Faking It

As anyone who regularly does business in China will know, Beijing has been stepping up its enforcement of copyright protections and cracking down on counterfeiting of products. The question is, is it doing enough. Washington says no and has taken China to the World Trade Organization over the issue.

The WTO has now launched a formal investigation. The U.S. alleges that its software, music and book publishers are losing billions of dollars as a result of what it calls “significant structural deficiencies that give pirates and counterfeiters in China a safe harbor” – i.e. its intellectual property protection rules aren’t up to snuff, or at least aren’t up to the minimum WTO levels.

The clash over IP marks a  fourth time the U.S. has hauled China before the WTO over its trade practices. It follows complaints about  local content requirements affecting spare parts for cars, tax breaks for Chinese companies, and broadcasting rights.

For its part, Beijing took the U.S. to the WTO for the first time last week by launching a formal complaint over U.S. restrictions on imports of Chinese coated paper. As the two giants of world trade continue to rut, with Washington deep into an election season and Beijing feeling that its efforts to modernize the structure of its economy are underappreciated, we’ll see more of this.

Soft Soap From Japan

Japan’s new prime-minister-in-waiting 71-year-old Yasuo Fukuda is a throwback to the old style of charisma-lite conservative LDP consensus dealmaker.

He stands in contrast to his predecessor Shinzo Abe who, as Japan’s youngest prime minister at 52, represented a younger, and more hawkishly nationalist generation of Japanese leaders. 

Fukuda says he wants more cordial ties with China and to be more flexible towards North Korea, and has promised not to visit the contentious Yasukuni shrine in Tokyo with its direct connection to Japan’s militarism. 

Such soft soap should all help blunt the public edge of the relationship between China and Japan, which had become noticeably sharper during Abe’s brief stint in office. However, as EastWestSouthNorth reported, the vociferous and partizan support by Chinese for the German team playing against Japan in match in the  women’s soccer world cup now taking place in China is a reminder how deep runs the pool of sentiment, and how easily it can be switched on and off. 

Car Day

Today is No Car Day in Beijing and more than 100 cities across the country. The idea is to cut pollution caused by traffic. Drivers in the capital have been encouraged to leave their cars at home voluntarily, though cities such as Shanghai have banned traffic from their center. There are 3 million cars in Beijing now. If the BBC is to be believed, their drivers won’t give them up, even for a day.

Oops, Sorry.

I am confused, to be frank. Mattel now says its shortcomings in product design not those of China’s manufacturers are to blame for the recent spate of recalls of unsafe toys.  

It is good to say sorry and to be honest about one’s problems but this is the same company that when this all first blew up said the fault lay with its Chinese subcontractors and the overleaded paint they were using.

So what’s a consumer to think?

This latest development also provides a cautionary tale for all companies when two cultures half a world apart clash in a global world. 

The apology Mattel’s vice-president Thomas Debrowski delivered to  Li Changjiang, head of China’s product-safety commission in Beijing, was tightly scripted and delivered in the presence of lawyers. The company has operated in China for a quarter of a century and makes two thirds of its products there. So it well understands the necessity to save face — and at the same time to cover another part of its anatomy elsewhere.  

It is not an edifying sight. 

Riding The Rails

China’s $5 billion infrastructure-cum-loans-cum-mining-concessions deal with DR Congo seems to have wrong footed both the International Monetary Fund and a host of western mining companies big and small.

The IMF is concerned that the loan part of the deal will undermine the conditionality attached to its renegotiationi of the $8 billion of debt incurred by the country during the dictatorship of the late Mobutu Sese Seko. The mining companies, awaiting government review of contracts signed hastily in 2003 at the end of a civil war that followed the dictator’s death, fear China may have swept some of the best copper, cobalt, gold and nickel mining  concessions from under their noses.

It is no secret that China’s natural-resource diplomacy in Africa is upsetting some traditional apple carts. But there is another aspect to this particular deal that is less apple cart and more railroad car.

Some $3 billion of the money is going to build a rail link from DR Congo’s Katanga Province, one of the one of the world’s richest areas of copper and cobalt deposit to the ports of the Atlantic  ocean via Angola. The Chinese are already at work upgrading the rail network on the Angolan side of the border. In the other direction, the rail link connects via Zambia to the African east coast Indian Ocean ports of Beira in Mozambique and Tanzania’s Dar es Salaam.

The only other link  from Katanga is the old line that heads  south to Johannesburg. That has lacked for investment for decades and looks set to continue to do so. Meanwhile Chinese ores will eventually be rolling on Chinese built rails to Chinese ships waiting at friendly ports.

Russian Power

Interesting sidelight on the news that Russia’s state utility UES is to ramp up its electricity exports to China from next year: UES’s deputy chairman Leonid Drachevsky said the company was ready to supply power to the Korean peninsula if it could find foreign investors to back the project.

This “could guarantee stability in regional hot spots, including that that are experiencing a deficit of power resources,” he said — a long winded way of saying North Korea.

UES plans to build five new coal fired power stations in the Russian Far East to service the Chinese contract. The utility plans to export between 3.6 billion kWh-4.5 billion kWh a year in the first stage. This will increase by 18 billion kWh a year during the second phase starting in 2012 and by a further 38 billion kWh in phase 3. Phases 2 and 3 will need the generation capacity of the new plants to be built.

That would take the total to 60 billion kWh a year. Power hungry China currently gets 2 billion kWh-3 billion kWh from Russia, according to Xinhua. China generated 2.5 trillion KWh of electricity of its own in 2005 according to BP’s World Energy Review.

Russian president Vladimir Putin has been pushing energy cooperation with China as Russia’s energy hegemony spreads both east and west. Plans for new gas and oil pipelines to China’s northern provinces are on the drawing board. That and the power for North Korea idea being floated inserts Moscow deeper into the region’s power politics.

More On The War Biz

More today, as it happens, on the development of China’s defense industry. Xinhua reports that the state owned enterprises’ monopoly  is being broken to let in small and medium-sized of enterprises. Ditto for mining and natural resources. 

This was all announced at the fourth China International Small and Medium Enterprise Fair in Guangzhou as part of a continuing encouragement of entrepreneurs. Their presence in the defense industry should speed up the transfer of technologies between the civilian and military sectors and the news is potentially significant for the economy as a whole.

Opening up the sector is one thing; small businesses getting contracts is another, especially in an incestuous world as military contracting. In the U.S., 23% of Federal contracts have to be awarded to small business, but sentrepreneurs still complain about the difficulty of winning contracts either directly from the Department of Defense or as subcontractors to the big aerospace companies.