Monthly Archives: June 2009

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.

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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.

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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).

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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.

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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.

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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.

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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.

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Beijing Mulls Easing FDI Rules

Worried by eight consecutive months of falling foreign direct investment, Beijing is considering relaxing the FDI rules, according to the China Times. Forty-two rules covering tax, foreign exchange, other regulatory supervision, has been submitted to the state council for approval, the paper says. Most notable among the changes would be greater access to the high-tech sector. The June 2007 anti-speculation restrictions on property investment would also be eased. China attracted $34 billion in FDI in the first five months of the year, 20.4% less than in the same period a year earlier. Keeping that pump primed.

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World Bank Raises China Growth Forecast

The World Bank has raised its forecast for China’s economic growth this year from 6.5% (its March forecast) to 7.2%. That is shy of the magical 8% Beijing is shooting for but a sign of how last year’s four trillion yuan stimulus package is boosting economic activity, at least more than the Bank had expected.

Reflecting concerns that a lot of the money being pumped into the economy is finding its way into asset inflation, the Bank says that “it is too early to say a robust, sustained recovery is on the way”. The Bank can’t see a recovery in exports, but it notes that “following a spectacular surge in the first quarter, lending moderated in the second quarter.” It also notes that “government-influenced investment has soared,” while private investment lags.

There are limits to how much and how long China’s growth can diverge from global growth based on government influenced spending, given that China’s real economy is relatively integrated in the world economy. Meanwhile, market based investment is likely to continue to lag for a while because of the squeeze on margins amidst spare capacity in many manufacturing sectors. Prospects for real estate activity appear reasonably good, but consumption is unlikely to pick up speed.

The Bank says it is expecting the same rate of growth to carry over into 2010 and reiterates that Beijing needs to pursue structural adjustments to make the economy more domestic demand led.

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Beijing Hints At Flexing Its New Antitrust Muscles On Behalf Of Jilted Chinalco

There was obviously some wounded pride following the collapse of Chinalco’s proposed $19.5 billion investment in Rio Tinto. But to add insult to injury, Rio is now proposing an iron-ore joint venture with BHP Billiton in Western Australia.

Such a combination would account for 80% of the exports from one of China’s main sources of supply, Australia. To Chen Yanhai, who heads the raw materials department at the Ministry of Industry and Information Technology,  “The potential deal has an obvious color of monopoly. The joint venture is likely to have a big impact on the Chinese steel industry as China is the world’s biggest iron ore importer” (from CCTV via Reuters). “The deal should be subject to Chinese anti-monopoly law,” Chen adds.

That sting in the tail will raise some eyebrows among international M&A bankers. China’s anti-monopoly law says the ministry has to approve business combinations if the joint global revenue of the companies involved exceeds 10 billion yuan ($1.5 billion) or 2 billion yuan in China if two or more of the firms involved each cross a threshold of 400 million yuan of revenue in China during the previous accounting year. Both BHP and Rio have blazed past that. In the year ended June 30, the former’s revenue in China was $11.7 billion while the latter’s was $10.8 billion.

It is unclear what remedies would be imposed if the Rio-BHP deal was found to be monopolistic by Beijing (or even if it could apply such a ruling), but Chen indicated aid to domestic miners could be one. There have already been discussions around this between Canberra and Beijing at the diplomatic level, we hear. And BHP says it and Rio would be discussing the potential regulatory issues with Chinese officials, according to Reuters.

Meanwhile, Chinalco has to decide what to do with the stake in Rio it does hold, and whether to take up its allotment of Rio’s rights issue that is replacing its investment. It could dump its stock with a grumpy flourish and take the loss, not do that but not take up its rights issue allotment, thus diluting its stake, or take up its rights and hang in to see what develops. Patience rather than petulance might well be the right virtue in this instance.

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