Monthly Archives: December 2007

Chen Deming & China’s Future

In the latest of the slow shuffle of top jobs that takes place in the six months or so between a quintennial party congress and the next annual session of China’s legislature — the hires, fires and retires that signal both the tides of time and the shifting sands of power — Chen Deming has been announced as commerce minister and thus formally introduced to the world as someone who will become a familiar face to American, Japanese and European trade negotiators over the coming years.

Chen, 58, is from Shanghai and had been deputy head of the National Development and Reform Commission since June 2006, holding an energy policy brief. He was formerly governor of the coal-mining province of Shaanxi though his early career was spent in Jaingsu.

Chen is, of course, already known to many of those foreign trade officials and sat in as a minister apparent on recent high-level talks with both Japan and the U.S., where he made a good impression by all reports. Or at least he will be known to the career bureaucrats if not the revolving door of U.S. cabinet secretaries who serve at the whim of the incumbent president. The current U.S. commerce secretary, Carlos Gutierrez, will be gone after next November, as will most likely the Bush administration’s steadiest China hand, Treasury secretary Hank Paulson.

Twenty years ago some Americans worried about the lack of institutional memory on their side in bilateral negotiations with Japan. There are echoes of that concern with China today. These matter more now. The U.S. relationship with China is more complex than that with Japan 20 years ago, and while Japan was a rising economic power then, it was never realistically a political threat to the U.S.’ superpower status in the way that China potentially is.

In the end, economic forces, particularly globalization and financial markets liberalization, neutralized the power of Japan’s esteemed bureaucracy, bending it to their will rather than vice versa. The same will, I believe, prove true in China — and the early signs of that can be seen in the difficulty the center has in controlling so many aspects of economic policy at the local level.

At 58 Chen will be one of those with a ringside seat to that clash of undercurrents – to mangle a metaphor. How well he and his senior party colleague’s manage that transition, if indeed a state can get to a point where political centralism coexists with economic decentralization (“one party, two systems”?), will determine how smoothly China makes the transition to superpower and not just a supereconomy.

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From Steel To Insurance

Baosteel, China’s largest steel maker, is making a measured diversification into financial services in general and insurance in particular. The moves are worth following as a case study in the shaping of a national champion.

This month the company has upped its stake in New China Life, the country’s fourth largest life insurer, to 17.3% from 9.7%, making it the third largest shareholder, reports the People’s Daily. That puts it behind Zurich Insurance (20%, the maximum permitted) and the state insurance protection fund (30.6%), which stepped in last year to bail out the insurance company after financial scandal.

Through its Huabao Investment subsidiary, Baosteel is already the largest shareholder in China Pacific Insurance Co. with a 21.4% stake. It has a small stake in Huatai Property & Casualty, and there are reports from Japan of a joint venture in the offing with Dai-Ichi Mutual Life, Japan’s second largest life company.

Japan’s largest life company, Nippon Life, has had a similar joint venture with Shanghai’s SVA Group since 2003. An earlier proposal for a Baosteel-Nippon Life tie up went nowhere because of Baosteel’s competitive stake in China Pacific, which may get sold if the Dai-Ichi joint venture is approved by regulators as expected. The U.S. private equity firm, Carlyle Group, holds a position in China Pacific, so there is ample scope for deal making.

There are a lot of Japanese firms operating in the Yangtze River Delta while Baosteel is based in Shanghai. The model, though, would appear to be Generali China Life, a joint venture between Italy’s Generali and state-owned energy giant China National Petroleum, that is successfully selling group life insurance policies. Baosteel brings cash flow from its steel-making business and a large customer base for potential group policies should it be tempted to go beyond taking passive investment stakes into more active involvement in the insurance business.

Tempting, too, to see the hand of Beijing at work in the background here, moving a large state-owned firm into an industry that is not only strategically important for China’s economic development, and set to be expanded over the next few years, but that also can play a role as a stabilizing institutional investor in Shanghai’s wild-west stock market, or as a conduit for foreign investment. In the first 11 months this year, Chinese insurers’ investments reached 1.83 trillion yuan ($250 billion), according to the state regulator, China Insurance Regulatory Commission (CIRC).

Baosteel has invested a reported 5.3 billion yuan in financial services firms, even as it works with Beijing to shut down steel mills — only outdated and heavily polluting ones; it is not getting out of the steel business. As well as its insurance investments, it holds stakes in Shanghai Pudong Development Bank, Bank of Communications and Industrial Bank.

Developing Japan put financial firms at the heart of its keiretsu; South Korea, heavy and light manufacturing at the heart of its chaebol. China’s version looks to be being built around giant state owned national champions.

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Poor Rich Country

There are lies, damn lies and statistics, as the old saw has it. Then there is the World Bank’s shrinking of its estimate of the size of China’s economy.

The new number shows gross domestic product at $5.3 trillion in 2005 or 40% lower than previously estimated. It is based on purchasing power, and is intended to provide much needed up-to-date comparative growth data between economies. It still shows China as the second biggest economy after the U.S. (GP of $12 trillion) but with a GDP per capita at $4,091 of only 9.8% of America’s. China’s share of world GDP falls to 10% compared to 15% under the traditional measure, which does currency conversions at prevailing market rates.

The Bank’s president Robert Zoellick, who has been in China this week, says that the bank is drawing no policy conclusions from the revisions. But they could effect everything from China’s voting rights at the International Monetary Fund to how much aid and investment it gets from international institutions because it is poorer than thought — and especially when it comes to the adaption funds discussed at the recent UN conference on climate change in Bali by which rich countries would provide developing countries with finance and technology to help with the practical and social costs of reducing carbon emissions.

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Bali Result: China 1 – 0 U.S.

Those scoring the undercard match between the U.S. and China at the U.N. conference on climate change in Bali would have given it to China on points.

Beijing scored for being seen to be a constructive participant whereas Washington was seen as obstructive. China’s media has been playing up U.N. Secretary-General Ban Ki-moon’s comments about how China has sent a positive signal to the world over climate change. As such Beijing emerged as a leading spokesman for developing countries, especially the fast emerging economies such as itself, Brazil, India and South Korea.

Beijing also saw off U.S. attempts, mainly for domestic consumption it should be noted, to portray the view that climate change is now really China’s fault, and thus China should be pressed into accepting binding numerical targets. The Bush administration, despite its volte face on climate change earlier this year, has no great appetite for binding targets for itself, but it certainly doesn’t want to have them imposed on it but not on China. Plus, the technology, voluntary targets and energy efficiency approach it is pushing promises future business for American companies that sell green and clean technologies, so it wants China and other developing nations to have a reason — and a deadline — to buy them.

This is all geopolitical power jockeying and doesn’t change any of the underlying facts: Per capita emissions in the U.S. in 2004 were about five times higher than China and 16 times higher than India’s. However, China may by now have overtaken the U.S. as the world’s largest total emitter because of its population size, rapid growth and reliance on coal to generate electricity.

And Beijing, too, has a domestic political agenda to be seen as green that goes beyond the environmental need to make the air breathable and the water drinkable. The leadership doesn’t want to cede a power vacuum around the issue into which a future possible rival could step.

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Getting Off The Bottom Rung In India And China

Here is one of those snapshot statistics that throws into sharp relief an entire economy, or two in this case. It comes via journalist Rob Gifford, writing about Hefei in Prospect magazine.

There is one crucial difference between China and India, and a perfect example of it is coated in black tarmac and runs east and west through Hefei. China is a brutal place to live if you are on the bottom rung, but there is an exit. And, just as important, there is a real possibility of a job at the other end. India’s 1.1bn population is rapidly catching up with China’s 1.3bn. But India has only about 10m manufacturing jobs, compared with about 150m in China. So there are simply more opportunities in China to improve your life.

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Slowly Spreading Jam

The latest Strategic Economic Dialogue meeting between China and the U.S. has concluded with a long study list for the two governments and few parting gifts from Beijing in the form of more financial markets opening.

Foreign firms will be allowed to invest again in domestic securities companies, though a cap of a maximum 33.3% stake will stay in place for a while. However, Beijing said as long ago as May that it would resume licensing securities joint ventures later this year after a two-year hiatus. Foreign banks and other companies that do business in China will also be allowed to issue debt and equity in the domestic markets if the capital raised is to be used for expanding their Chinese businesses.

What the Americans didn’t get was freedom for foreign companies to take bigger stakes in Chinese financial firms and for Chinese-foreign joint ventures to be allowed to undertake a wider range of businesses. That is jam being held back for tomorrow.

In a little dig reminiscent of the product safety row between the two countries, Zhang Xiaoqiang, vice head of the National Development and Reform Commission, China’s top economic planner, called on the U.S. to be more open to Chinese investments and to clarify which parts of the economy were off-limits to foreign investors on national security grounds. Under new U.S. legislation that came into force in October, foreign investments in infrastructure and high-tech and those coming from foreign state-owned enterprises face intensified review. Zhang identified the chemical, medical, mechanical, space and electronic businesses as areas where Chinese companies were interested in investing, but clearly feel they will face discriminatory scrutiny.

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Cut!

Not only is Hollywood having to deal with a writers’ strike, now China has halted the import of its films, according to U.S. Commerce Secretary Carlos Gutierrez, who is in China for the biannual bilateral dialogue talks. The Hollywood trade rag Variety reports that the ban will last for 3 months.

Why isn’t clear, and there has been no comment from Chinese officials, even to confirm or deny the ban.. China imposes an import quota of 20 foreign films a year. Foreign films account for nearly half of China’s box-office revenues, which topped $350 million in 2006. (Global box office receipts are $40 billion by way of comparison.)

This year’s quota may just have been filled, as has happened in the past, Gutierrez says. But it may also be tit for tat retaliation against the U.S. for taking China to the World Trade Organization over intellectual property piracy, including of Hollywood films.

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Dialogue And Departures

A couple of notes ahead of the U.S.-China chinwag later this week that goes under the rubric of the two countries’ biannual Strategic Economic Dialogue.

The first is that this looks likely to be the last of these meetings for Vice Premier Wu Yi. China’s most powerful woman is due to retire shortly. At 68 she was not reelected to the Central Committee in October. Stepping down from government posts follows as night follows day.

Wu was a proponent of the policy of depoliticizing economic disputes and had been in charge of both the contentious trade talks with the U.S. and with cleaning up the product-safety scandals. She also struck a good working relationship with her U.S. counterpart in these meetings, U.S. Treasury Secretary Hank Paulson.

Paulson, too, could be gone within the year following the 2008 presidential elections in the U.S. Which brings me to the second note: China may be waiting for a change of administration in Washington before doing anything serious about revaluing the yuan, a topic that again is likely to be high on the agenda at this week’s talks.

Nicholas Lardy of Peterson Institute for International Economics raises the point that the Chinese expect the next U.S president to be a Democrat. With the Democrats already controlling a Congress unfriendly to Beijing, Washington is likely to become more hostile to China after the election. So the plan would be to hold back from making an more reforms — or concessions depending on your point of view — and to keep them in Beijing’s back pocket until the tenor of the new regime in Washington is clear.

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Tightening The Monetary Policy Wrench

China’s tenth turn of the bank reserves ratio wrench was more vigorous than the previous ones but just as likely to be as ineffective. The People’s Bank of China said today that it will raise from December 25 the proportion of deposits that banks must hold in reserve by one percentage point to 14.5%. The nine previous increases were by half a percentage point.

This tightening of monetary policy will make $47 billion unavailable for lending, by the central bank’s reckoning. The move has been signaled earlier this week and goes hand in hand with five interest rate rises (expect a sixth before year’s end) and a freeze on net new lending for the remainder of this year. Quarterly lending quotas for banks are expected to replace annual ones for 2008.

Policy makers remain worried that the plentiful credit sloshing around the economy is only lifting up share and property prices in a way that can only end in tears — not the crying game that Beijing wants in Olympics year especially.

The central bank has been using increases in the reserve requirements as its main mop for the huge inflows of dollars coming into China from a record trade surplus and foreign direct investment inflows that have exceeded $1 billion a week for the past five years. But that flood of money is coming at it faster than it can mop. Ever higher reserve requirements have done little more than sterilize most of the domestic inflationary impact of the dollar inflows and the PBOC’s management of the yuan’s exchange rate.

But banks still have enough more than enough cash available for lending. So further turns of the wrench seem inevitable. A reserve requirement of 20% by the end of 2008 isn’t inconceivable along with more interest rate rises and administrative measures. But as central banks around the world learn the hard way, deflating a bubble gently is no easy matter.

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Bali High

China is a polluted place but getting less so. That according to Germanwatch, a German environment watchdog that releases an annual ranking of the most environmentally friendly industrialized and developing countries.

Its latest annual Climate Change Performance Index, which covers 56 countries that account for 90% of global carbon dioxide emissions and was released at the U.N. conference on climate change now going on in Bali, puts China at 40th, up four places from last year. For the record, the U.S. and Saudi Arabia are at the bottom of the list.

China’s advance up the ranking has caused some surprise. The report’s explanation:

It can be explained by its recently strong domestic and international engagement for renewable energy, the new climate protection regulations in the transport sector and its nowadays relatively constructive role in the UN climate negotiations.

China’s ranking also owes more to promise than performance. It scores highly on the policy-making component in the Index’s methodology, offsetting to some extent the drag of a poor trends score. Beijing has set a target of generating 10% of its energy from renewable sources by 2010, ordered some industries to cut consumption by 20% and is encouraging the countries vast bureaucracy to stop driving gas-guzzling cars. (A breakdown of China’s score is here.)

This is driven in part by old-fashioned concerns of energy security and worsening droughts, floods and air quality, with the internal political fears that raises for the government.

But China is also winning praise at the Bali conference for the constructive role it is playing in contrast to its past stance. It has taken the lead among developing countries in calling for rich nations to speed up the transfer of cleaner technologies to help shift away from fossil fuels, and for developing nations not to have hard emission-cut targets imposed on them.

As a successor to the decade-old Kyoto agreement is taking shape, China is looking the gloablist and the U.S. the obstructionist.

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