China’s border with Myanmar has long been pretty porous. Kokang, an enclave in Shan state on the Burmese side, has acted as a buffer zone between the two countries. The Wa who live there are ethnic Han and Mandarin speaking but, unlike other semi-autonomous minorities in Burma, threw in their lot with the ruling regime after the collapse of Communist rule two decades ago.
All of which makes the recent outbreak of fighting between the government and Kokang militia unexpected — and a surprise to Beijing, too, which was not informed in advance that Burmese military forces would be moving against Kokang in order to establish the regime’s control in Shan ahead of elections next year, and force all the semi-autonomous minorities to participate. The fighting, which seems to have been relatively short lived in that the Kokang fighters were quickly overrun though only eight were said to have been killed, sent 37,000 Kokang residents fleeing into southern Yunnan, where they have been housed in makeshift tented refugee camps in the border town of Nansan. Xinhua reports that, now the fighting appears to have died down, the refugees are starting to return.
However, one Chinese citizen was killed and two others injured by three shells fired into the Chinese territory, Xinhua says, while a second Chinese citizen was killed and 13 more injured on the Burmese side of the border. Beijing has issued a rare rebuke to the Burmese military regime. It likes its buffer zones to be stable. Nor is trouble among anyone’s ethnic minorities to its taste.
The cutback in steel and and cement production that Beijing has ordered can be read to mean that the economic planners are confident the re-acceleration of growth is soundly based. Or it can be seen as continuing concern that the over lending that has fueled this year’s growth needs to be reined in further still. Fixed-asset investment increased by a third in the first half of the year as banks made a record $1.1 trillion of new loans. Some of that money flowed into swelling industrial inventories. Steel production hit record levels in July, though the world is still in recession. China produces nearly half the world’s steel, but tons are being stacked uped in yards and on docks unsold, and depressing prices. The output curbs on steel and cement companies, as well as parts of the coal, glass and power industries, called for by the State Council is the demand counterpart to the supply constrictions being imposed directly on the banks.
Rain and artificial rain making have brought some relief to the parched grain-growing provinces of north China that have been suffering drought since July. Officials said the affected area of farmland had shrunk to 126 million mu, 65 million mu less than the peak figure.
Oops. Toyota is recalling 690,000 cars made at two of its joint ventures, Guangzhou Auto and Tianjin FAW because of faulty electrical window switches. That is more cars than it sold in China last year. Though not a safety threatening defect, the recall is big, and an embarrassment. Not only is it the biggest autos recall in China since 2004, it also highlights Toyota quality/reliability/durability standards and follows a recall of Camry’s earlier this year because of faulty brakes. Models affected by this latest recall include Camry, Corolla, Vios and Yaris.
The recall won’t do much for Toyota’s idling sales in China, either; the Japanese carmaker hasn’t matched the recent success of America’s GM among the foreign manufacturers, largely because it has a limited range of compacts, and so hasn’t been able to capitalize as much on government tax incentives for small cars.
More than 4.5 million people are now left short of drinking water as the severe drought in the north spreads, Xinhua reports, while a new hot dry spell to the south threatens new water shortages in Hunan and Hubei in central China. More than four million head of livestock are at risk and 133 million mu (8.7 hectares) of crops have been effected by the worst drought in 60 decades. In Liaoning, one of the worst hit provinces, half of all arable land has dried up,
Securities regulators have given China CNR the go-ahead for its proposed 6.5 billion yuan ($1 billion) initial public offering for up to 34% of its equity. The company, which along with China South Locomotive & Rolling Stock (CSR), is one of the two leading railway engineering groups, plans to use the money to upgrade its production and technology capabilities to compete in the world’s fastest growing large railway market and in which the government is spending big to expand the high-speed inter-city network.
Regulators have been concerned that the recent wave of IPOs and proposed IPOs risked flooding a stock market that was showing signs of correcting after having risen 90% since the start of the year. China International Capital Corp (CICC), Huatai Securities and Huarong Securities will be the joint lead underwriters of the China CNR offering. China CNR’s shares will be listed on the Shanghai-A market. CSR is already listed in Shanghai and Hong Kong.
We have previously noted that while Japan’s path to rapid industrial growth involved making cheap export goods by raising productivity and taking labour out of manufacturing, China reversed the process and kept costs low by putting labour in. That was never going to be sustainable in the long run if China is to move up the technological ladder, as Beijing aspires. China is now flipping another Japanese-popularized concept on its head, just in time inventory management.
China is practicing what John Taylor, chief investment officer of FX Concepts, dubs just in time growth management. Instead of lean inventory, Japanese style, Chinese plants are stuffing themselves with all the inventory they can hold, both raw materials and unsold product. They are doing this because Beijing has mandated 8% growth this year for political reasons. In an economy dominated by state-owned banks and industries, supply can be divorced from demand. But the quota is fulfilled.
Why this goes beyond incidental curiosity is that growth in China’s economy is being held out as the beacon of hope for the world’s. Yet China’s system less drives demand than it does supply. Trouble is, just now, as Taylor notes, the world is long supply, and short demand.
Measures to increase domestic demand, will take time and arrive slowly. The best that can be said for now is that Beijing’s stimulus efforts are inflating domestic assets rather than priming exports, but that only mitigates the worldwide deflationary pressures the system imposes.
And it carries risks of its own. Cognizant of those, Beijing is already reining in lending and starting to audit the state-owned banks’ loan books to stem the flow of loans going to bubble inflating real estate and financial assets. No W-shaped recession please, until American and European consumers rediscover their demand, demand that China also needs for its sustainable growth. That’s the challenge for just in time growth management.
The smelter scandal is starting to echo last year’s melamine-tainted infant formula in that it is spreading out of control. A third plant within a month is being closed because children living near it are falling ill. In this case it is a manganese smelter in Wenping in Hunan. More than 1,300 local children are suffering from lead poisoning. Two executives from the plant have been detained, Xinhua reports, though its general manager seems to have fled.
State media say the plant has been running for more than three months without environmental approvals. A kindergarten, primary school and middle school are within 500 metres of the smelter. As with the Dongling smelter in Shaanxi, parents in Wenping have been staging violent protests, China Daily reports, blocking roads and upending a police car. Meanwhile South China Morning Post reports that another toxic smelter in Hunan has also been closed for causing lead poisoning.
PetroChina is to buy 2.25 million tons a year of liquefied natural gas from ExxonMobil’s part of the Gorgon gas field off Australia’s northwest coast (Release). The 20-year deal is valued at $41 billion and shows the growing economic ties between China and Australia despite the current political tensions over the Rio Four spying case and Uighur activist Rebiya Kadeer’s forthcoming visit to Australia that prompted Beijing to cancel a senior minister’s trip to Canberra. “China needs us, we need China,” Trade Minister Simon Crean said after the signing in Beijing of he largest-ever trade deal between the two countries.
The deal tops the 1.5 million tons a year of LNG India said it would buy from the still-to-be-developed Gorgon field last week. Chevron and Shell are the other energy majors involved. Gorgon is still awaiting final environmental clearance from Canberra, though these deals suggest that will be a formality, to the chagrin of Australian greens.
China is building more than 10 LNG terminals on the east coast to meet a five-year target to double its use of natural gas by 2010. PetroChina will open its first LNG terminal in Jiangsu in April 2011, and has plans to build another in Dalian and a third in Tangshan.
Typhoon season may be battering the coasts, but northern China and Inner Mongolia are parched for lack of rain. Between Aug.1st and Aug.16th, the area had just 50 mm of rain, with some places getting less than 10 mm as hot, dry weather carried on from July. Liaoning, Jilin and Inner Mongolia are experiencing the worst drought conditions in nearly 60 years with rain fall at 10%, 20% and 40% of normal levels respectively. Moderate drought areas are turning into serious ones in western Jilin, eastern and central Liaoning and southeastern Inner Mongolia.
Xinhua reports that emergency drinking water supplies are being shipped in for the 1.5 million of the region’s 3.9 million inhabitants worst affected. Authorities are also irrigating 47 million mu (3.13 million hectares) of crops. Late last week, the Ministry of Agriculture said 125 million mu of crops were at risk. Along with Heilongjiang and Shanxi, Liaoning, Jilin, and Inner Mongolia produce about a third of the country’s winter grain.
Update: There is rain in the forecast for the next few days.