Snow Storm

The worst snow storms in half a century have shown up the fragility of the country’s infrastructure, particularly for transport and power generation.

In 14 provinces in east, southern and central China, roads and railways have been overwhelmed, unable to move the estimated 179 million people expected to be traveling for New Year or to carry the coal needed by power stations. Two weeks of ice and snow have also brought down power lines, leading to black outs in many cities and the closing of mines, factories and businesses, and the destruction of crops. That in turn has created shortages that are stoking inflation, already high and politically sensitive.

Despite putting 450,000 troops to relief work, the leadership initially underestimated the severity and longevity of the bad weather and was slow to respond. With millions of people still stuck in temporary shelters, and Prime Minister Wen Jiabao belatedly visiting affected areas, this is stating to feel politically a lot like Hurricane Katrina in the U.S. did for the Bush administration.

Shrinking The Surplus

Cheng Siwei, vice-chairman of the National People’s Congress and thus an economist who carries more political clout than most, forecasts that China’s surplus will shrink this year as the yuan is allowed to appreciate against the U.S. dollar and continue its (very) long march towards convertibility.

That prediction brought more than one raised eyebrow from an audience gathered at the annual meeting of the World Economic Forum at Davos in Switzerland, where Cheng was on a panel discussing the degree to which the slowdown in the U.S. economy would affect the rest of the world.

It also brought the retort from one of Cheng’s fellow panelists, C. Fred Bergsten, an economist who runs the Institute for International Economics in Washington, D.C., that on a trade-weighted basis, the yuan hadn’t appreciated at all, nullifying the trade impact of the 15% appreciation against the dollar since Beijing loosened its peg with the greenback in July 2005.

Cheng also forecast that China’s economic growth will slow a tad this year, but still be as near as 10% as makes no difference.

The Bystander’s man among the good and the great tells us that there was a lively discussion on whether China’s and India’s growth in 2008 would be vigorous enough to prevent the U.S. falling into recession. Bergsten argued that it would be, and so all the doom and gloom about the U.S. drawing the world economy down with it, was both overdone and misplaced. He also offered a contrarian view that fears of protectionism taking greater hold on the U.S. congress were misplaced.

Those are brave words in a U.S. presidential election year — almost as brave a predicting China’s surplus will shrink this year, though Cheng did say Beijing plans a crack down on the hot money flooding into the country which has helped swell its foreign exchange reserves, so he might know something we don’t.

Bear Country

With this latest sell-off, the Shanghai stock market index has now fallen 20% this year. That is the classic definition of a bear market. Only question is, has all the froth been blown off or is there still more to go? This bystander suspects the second.

CIC Welcome

While the electioneering U.S. takes China’s and other sovereign wealth fund’s capital but frets about foreigners buying America, the U.K. is courting it. British prime minister Gordon Brown, now visiting Beijing, told his counterpart Wen Jiabao that he would like the China Investment Corp. to set up an office in London as a base from which to invest some of its $200 billion.

True, this is part of London’s continuing battle to one-up New York as the world’s financial capital, but the U.K. has clear attractions for China as an investment front door into the EU. China has an interest in buying into companies with expertise in financial services and with technologies it needs to develop its 20 champion industries. Europe has both, and on the tech side, green technologies in particular. Plus at a time of economic uncertainty, there are companies there going cheap, just as there are in the U.S.

As former Citibank chairman Walter B. Wriston said, capital goes where it is needed, but stays where it is welcome.

All That Glitters

China is now the world’s biggest gold miner. South Africa had boasted that title since 1905. But no longer. China mined 4 tonnes more in 2007 (276 tonnes vs 272 tonnes), says London precious metals consultancy GFMS, enough to vault it into top spot.

It is already the world’s leading producer of aluminum, zinc and lead; the second largest of tin; and among the top 10 in copper, nickel and silver.

China and South Africa mined 22% of the world’s yellow metal last year between the pair of them. Though China’s gold production has grown 70% in the past decade, South Africa’s has halved, Stricter safety regulations and rising production costs have made it a tougher business, even though price of gold has hit record levels. The same is true for other leading producers, such as Australia, Canada and the U.S., one reason that world gold production fell 1% last year.

China, meanwhile, has a large number of small-scale mining operations that are not over-troubled by safety regulations. Silicosis in miners from uncontrolled silica dust and arsenic and cyanide waste run offs from the mines are chronic problems.

GFMS notes that demand for gold, particularly for jewelry, grew strongly in China last year. And on the investment side, the Shanghai Futures Exchange has just launched the country’s first gold futures contracts, which should give Chinese companies even more influence over world gold prices.

Slam Dunk

More Chinese capital is backing a household American name. But this isn’t troubled Citigroup or Merrill Lynch. Its the prospering National Basketball Association. And the money is going to set up NBA China, which is hoping to launch a basketball league after this summer’s Beijing Olympics.

Chinese investors include Hong Kong tycoon Li Ka-Shing, Bank of China, computer maker Lenovo’s parent, Legend, and the investment arm of the China Merchants conglomerate. Between them they will hold a 6% stake, valued at $138 million. Disney’s ESPN will take a further 5%.

NBA China will oversee all of the NBA’s sports, marketing, licensing and media business in China, Hong Kong, Macau and, intriguingly, Taiwan. NBA China will be run by Tim Chen, the former head of Microsoft in China, and who is Taiwanese-born.

It is nearly 30 years since the NBA staged its first exhibition game in Beijing. Since then basketball has become hugely popular and the NBA well entrenched. NBA games were watched by cumulative television audience of 1.2 billion in China last season, up 19% from the previous year, the league says. Chinese television shows more live NBA games than those of the state-run Chinese Basketball Association, whose most famous alumni Yao Ming now plays for the NBA’s Houston Rockets.

The other interesting aspect to this is that the NBA will be going head to head with the CBA with its league. No joint venture. “I think the NBA and the CBA can expand upon our past cooperation to further develop basketball in China.” says CBA secretary general Li Yuanwei. Given past frosty relations between the two associations, perhaps not. But this is the rare case where the foreigner is the slam dunk.

Employers Paradise

There are 200 million migrant workers in China’s cities, with a potential backup pool of 100 million more waiting in the countryside. They see themselves treated as second class citizens at best, according to a survey by Shanghai’s Fudan University, working long hours that make them accident-prone from tiredness and too weary to study for the qualifications to get a better job. Compounding their misery, inflation is more than chewing up rising earnings.

Not that much of that is news. But this is one of the first surveys to be published since a new labor law came into effect at the beginning of this year, even though the survey’s field work was probably done last year.

The new law is meant to protect worker’s rights, simplifying a hodgepodge of laws, regulations and judicial decrees. One loophole closed is the one that let employers deny workers rights by the simple expedient of not issuing the employment contract in which the rights were enshrined; workers now get an employment contract by default.

Donald H. Straszheim, who runs the China practice of Roth Capital Partners, writes in Forbes:

What we are already seeing is the creativity of employers to find ways to circumvent the new rules to avoid being saddled with higher costs.

We are seeing new labor contracts, two half-time shifts, the use of outside “staffing companies,” the creation of “new companies” to do the same work, so-called voluntary resignations before year-end 2007 only to be rehired on Jan. 1, 2008, and the like. Talk about creativity. Not surprisingly, employers have more power than workers–even in China.

The old rules made China an employers paradise because they were laxly enforced in the extreme, especially in the private sector (state and foreign-owned enterprises largely played by the book). Will the new ones, drawn up partly in response to foreign criticism of China’s labor rights, and partly in response to growing labor unrest, fare any better? It will all come down to enforcement.

Hewers Of Death

Three thousand seven hundred and eighty six were killed in coal mining accidents in China in 2007, Xinhua reports.

Even after two years of 20% falls in fatalities and the closing of 11,115 small operations, China’s coal mines are still the most dangerous in the world. This statistic was published in the China Daily in 2004, but gives a sense of the scale of the problem:

China produced 35 percent of the world’s coal last year, but reported 80 percent of the total deaths in coal mine accidents, according to statistics with the State Administration of Work Safety (SAWS).

Today, two-years into a safety crackdown, China’s bigger coal mines are no safer than those in India and Poland and the small ones ten times more dangerous, says Li Yizhong, director of the State Administration of Workplace Safety. Not a record to be proud of.

And it continues; six miners were killed in a coal mine fire in eastern Jiangxi province this weekend, while five bodies were recovered from a flooded mine in Sichuan province on Thursday.

Trade Worries

Today’s monthly trade figures out of Washington will do little to calm the protectionist spirits in the U.S. America’s trade deficit in November hit its highest level in 14 months, the AP reports, a larger than expected 9.3% increase to $63.1 billion.

Beijing’s friends in Washington will point to a sharp increase in America’s oil import bill as the main cause and note that China’s share of the deficit dropped, albeit slightly, to $24 billion.

Indeed, true. But Beijing’s foes will counter that the smaller deficit with China followed October’s record high of $25.9 billion, when American retailers were shipping in Chinese-made toys, games and video equipment to stock their shelves for the holiday sales season — product safety recalls not withstanding.

America’s exports continue to surge, benefiting from the fall of the dollar against the currencies of most of the U.S.’s trading partners. The greenback’s decline is the market’s way of adjusting the world’s huge imbalances, namely Asia’s trade surpluses and America’s deficits. It makes U.S. exports cheaper and imports more expensive.

That’s working as the textbooks say it should on the export side. But it is a different matter on the other side of the trade ledger mainly because China is America’s main supplier. Beijing is letting its currency appreciate slowly against the dollar and other Asian suppliers to America keep their currencies in line with the dollar-yuan rate so as not to disadvantage themselves against China in the U.S. market.

And there’s the rub for the U.S. Congress. Over the past 5 years, the dollar has fallen by a third against a weighted basket of the currencies of America’s trading partners and by nearly half against the euro. But the yuan has appreciated only 8% against dollar since China loosened peg in July 2005.

Some in the U.S. Congress are paving the way for economic sanctions on China if it does not allow its currency to rise in value more rapidly against the U.S. dollar in response to the contention of some of their constituents — or their constituents’ lobbyists — that Beijing is manipulating the yuan to its own manufacturers’ benefit, keeping it undervalued by as much as 40%.

Certainly much of Chinese manufacturing is in no shape to withstand a sudden and rapid appreciation of the yuan. Beijing is fully away of the social unrest that could be unleashed away from the East coast if it let that happen. Equally, as the recent inflation figures and new price controls show, it is having an ever harder time sterilizing the inflationary impact of its trade surpluses.

Even if Beijing took the highly improbable step of letting the yuan appreciate by 40%, it is equally as unlikely that that would bring China’s trade with the U.S. back in to balance.

The U.S. is not alone in facing a barrage of Chinese exports. The country’s trade surplus with the world rose by 47.7% to a record of $262.2 billion in 2007. Total trade exceeded $2 trillion for the first time.

The Bush administration prefers to deal with the issue by taking trade cases one by one to the WTO. Trade jaw-jaw rather than trade war. But this is a Congress increasingly spoiling for a fight.

Plus there is a ring. It is election season in the U.S. Immigration is a hot issue, especially as the campaign moves south. It is a short hop in many voters minds from illegal immigration to China trade via “lost” manufacturing jobs, and a discouraging number of presidential candidates encouraging them to make the connection.

All politics is local, even though globalization is not.

Control Failure

It has been two decades since China started to scrap price controls on food and consumer goods, a process given a sharp shove forward in 2001 by China joining the World Trade Organization.

Now the State Council has reimposed some as part of its effort to dampen inflation. The new controls are vague: enterprises producing general necessities will be required to register wholesale and retail price rises with local price bureaux which will adjudicate on whether they are reasonable.

It is unclear which enterprises are covered, what counts as a general necessity, how large a price rise is unreasonable and what enforcement powers the price bureaux have. Earlier this month meat, milk and animal feedstock producers were told to register price rises of more than 5% or cumulative rises of 8% since last October. Meanwhile, prime minister Wen Jiabao has announced that energy prices will be frozen, along with public transport fares.

The measures are said to be temporary. History says temporary price rises tend to linger, and that they don’t work in the long-term. They just delay the natural adjustment of supply and demand by distorting price signals. The widespread diesel shortages and rationing that forced Beijing to allow oil refiners to raise their (state-set) prices last November should have been a sharp reminder of that lesson.

Inflation is a hot button for Beijing. It is running at 6.9%, an 11-year high, with food prices rising at a much faster rate. It is another sign of how difficult Beijing is finding it to sterilize the inflationary impact of its huge surpluses. Controlling food, energy and transport prices hits the  key components of the consumer price index, so the official inflation number is likely to be wrangled down. But resorting to administrative measures to tackle inflation is a step backwards in market reform.