Monthly Archives: October 2010

U.S. Defense Dept. Not Worried By China’s Rare-Earths Grip

Beijing’s promise not to use rare earths as a diplomatic weapon, made during the East Asia Summit in Hanoi, was an easy assurance to give. As we noted earlier, China’s current near monopoly on the supply of these metals that go into so many high tech products including weapons is most likely a passing one. Now, Bloomberg reports, the U.S. Defence Dept. has concluded that China’s grip on the market poses no threat to U.S. national security. America’s military needs account for less than 5% of the U.S.’s rare-earth consumption. The Pentagon has apparently decided that new sources of supply that will be coming on stream will be sufficient to meet its needs.

The Pentagon’s report has yet to be made public, but Bloomberg adds:

The study recommends, among other steps, an examination of how the Defense Department could aid companies such as Molycorp, which has applied to the Energy Department for $280 million in U.S. government loan guarantees to help finance restarting its open-pit, rare-earths mine in Mountain Pass, California, in the Mojave Desert. The mine once met almost all the world’s demand for rare- earth metals. It shut down in 2002 due to competition from cheaper Chinese supplies. Molycorp plans to resume production by the end of 2012.

That would potentially remove the issue from the realm of superpower security scares and put it back in the more familiar territory of a subsidies trade dispute.

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China, the U.S., Japan: Spot The Honest Broker

U.S. Secretary of State Hillary Clinton has been playing the peacemaker in the dispute that won’t go away between Beijing and Tokyo. She proposed hosting a trilateral meeting with her Chinese and Japanese counterparts to discuss the two testy neighbors’ territorial dispute in the East China Sea and to try to ratchet down the tension, which has remained grouchy, to say the least, at the East Asia Summit in Hanoi which has brought them all to the same table, or at least corridors. Clinton’s proposal has got a gruff brush-off from Beijing behind the usual diplomatic language pledging to “make concerted efforts to contribute to a positive, cooperative and comprehensive China-U.S. relationship in the 21st Century.” Perhaps that is because Clinton said during the Japanese leg of her Asian swing that the U.S. considers the disputed islands in question, the Diaoyus to Beijing, the Senkakus to Tokyo, which now administers them, within the scope of the U.S.-Japan defense alliance. That scarcely leaves the U.S. as an honest broker.

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Regulators Take Aim At Commodities Speculation In Anti-Inflation Drive

With inflation hitting a two-year high in September, China’s economic policymakers are taking steps where ever they can to stall the rise in prices, particularly of food and property. Securities regulators are now pushing for curbs on commodity futures trading in the hope of damping down excessive speculation (the ever-present bugaboo when commodity prices rise). The Shanghai Futures Exchange is raising its margin requirements on natural rubber contracts to 11% from 8% while the Zhengzhou Commodity Exchange has already raised margins for rice, wheat, rapeseed oil and sugar to 8% from 3% or 4%. Rice and rubber futures hit record prices this week. along with those of cotton.

The new margin requirements follow the central bank’s surprise rise in benchmark interest rates earlier this month, and a raft of measures over months and months to let down the property price bubble inflated by the liquidity the government pumped into the economy in the wake of the global financial crisis. We would expect central controls on commodities trading if the self-regulation of the exchanges fails to drive down prices.

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China Expands Fleet To Protect Maritime Rights

In a move that is unlikely to calm any neighboring anxieties, China says it is increasing the size of its fleet that patrols the seas around its shores. A new high-speed surveillance cutter was launched this week, with three dozen more ships to follow, according to state media. That will boost the size of the Marine Surveillance fleet, a paramilitary agency of the State Oceanic Administration, by more than a third, as best as this Bystander can tell. The picture above shows the new vessel at anchor at Guangzhou, home port of the Marine Surveillance flotillas covering the South China Sea; the East China Sea flotillas are based in Shanghai and those for the Bohai and Yellow Seas in Qingdao.

Xinhua says that China has fallen behind countries like Japan and South Korea in its ability to protect its maritime rights. Beijing and Tokyo locked horns in September over a Chinese trawler detained by the Japanese Coast Guard in disputed waters of the East China Sea. China has already increased the number of fisheries patrol boats there in the vicinity of the Senkaku Islands that it claims as the Diaoyu Islands and off which lie rich fishing grounds and potentially richer undersea oil, gas and mineral deposits.

China also has maritime claims around the Spratly and Paracel islands in the South China Sea that are disputed by Vietnam, the Philippines, Malaysia, Taiwan and Brunei. These claims were prominent durning Prime Minister Wen Jiabao’s trip to Vietnam, where he urged a “proper handling of the South China Sea issue”. The newly launched patrol ship, which will be the fastest in the fleet, a 77-meter, 1,290 ton cutter equipped with satellite technology, is headed for those waters. Hanoi will be looking on with interest bordering on concern. Washington will be watching this new watcher, too.

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When Rare Earths Are Not As Rare

It was always thought that paper, particularly dollar-denominated securities, was the Doomsday device that Beijing could hold over the U.S. Turns out it is not paper but rare earths, 17 metals used in a vast range of high-tech products, including weapons. And it works not just on the U.S. but Europe and Japan, too. But even Doomsday weapons have half lives.

China controls 90% of the world’s current supply of rare earths. Japan has already said supplies were cut off to its companies during the recent dispute between Beijing and Tokyo over a Chinese trawler captain detained by Japanese coast guard in disputed waters in the East China Sea. (Beijing denies it stopped exports but admits patriotic companies might have shown their disapproval of Japan’s actions in this way.) Washington and Brussels have long been concerned something similar could happen to them, especially as Beijing has been saying since 2006 that it will scale back exports as it cuts production to protect the environment and lengthen the life of its rare-earth reserves, which are mainly in the mineral deposits of Inner Mongolia.

Now German companies, too, are saying supplies of rare earths are getting, well, rarer; government ministers say the economy is being severely affected. Similar sentiments are being aired in Brussels and Washington over what is euphemistically described as a supply crunch in an industry that America owned until a quarter of a century ago. The U.S. has launched an official investigation.

Deng Xiaoping once said, “Arabia has oil, China has rare earth.” Not a happy thought for non-Chinese who remember Opec’s quadrupling of the oil price overnight in 1973 by embargoing exports to the U.S and other western nations to protest, remember, the West’s support for Israel during the Yom Kippur War. Like all cartels, Opec’s political and economic clout waned under the pressure of its members’ internal interests. By definition, a monopolist is a far more cohesive beast.

Consequences of the oil crisis of the 1970s, beyond a devastating recession, were a marked improvement in energy efficiency, the development of alternative fuels, the creation of strategic stockpiles of oil in buying nations and the opening up of previously uneconomic oil and gas fields fields. The same is likely to happen with rare earths if China keeps the “supply crunch” on. Japan is already talking of creating a rare-earths stockpile and expanding recycling plants. China controls 90% of the trade in rare earths but barely half the reserves, so plans are being dusted down to reopen mines in North America, Australia, India, South Africa and Brazil that once looked uneconomic, but no more..

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Little Change In How Corrupt Official China Is Seen

China ranks 78th in the latest index of the perception of corruption in the public sector published by Transparency International, with a score of 3.5. Denmark, New Zealand and Singapore top the list with scores of 9.3 out of a maximum of 10. Hong Kong ranks 13th with a score of 8.4, Taiwan 33rd with 5.8 and Macau 46th with 5.0.

Hong Kong’s score puts it in the company of countries like Canada, Switzerland and Australia; China’s puts it in the same band as Italy, Brazil, Thailand and India. TI’s regional ranking puts Hong Kong at 4th and China at 14th among 33 Asia Pacific countries.

TI, which advocates for the stricter implementation of the U.N. Convention against Corruption, says that nearly three quarters of the 178 countries in its list score below a 5, indicating a serious corruption problem around the globe.

With governments committing huge sums to tackle the world’s most pressing problems, from the instability of financial markets to climate change and poverty, corruption remains an obstacle to achieving much needed progress.

Last year, China ranked 79th out of 180 countries with a score of 3.6. The anti-corruption drive has kept China’s score stable but progress on reducing corruption remains slow at best and as we have noted before the country has an ambiguous relationship to corruption in business.

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Beijing Heeds The Lessons Of Japan’s Yen Revaluation

As G-20 finance ministers and central bankers meet in Seoul to call a verbal truce at least in the currency wars, Bloomberg has a piece noting that China has taken note of what happened to Japan after the 1985 Plaza Accord led to the rapid appreciation of the yen against the dollar.

A short history lesson for younger readers: Following the accord between what was then the G-5 to depreciate the dollar against the yen and the mark, the dollar fell by 51% against the yen between 1985 to 1987. Japan’s exports shrank, unemployment rose, cracking the system of lifetime employment at the large conglomerates, and the economy slowed dramatically — the endaka fukyo, high-yen recession. The cutting of interest rates to get the economy going again led to the asset bubbles which, after they inevitably went pop, left the country mired in debt, which in turn has left the Japanese economy becalmed in the still waters of recession and deflation ever since.

Now Japan made policy mistakes and had a political and social system designed to absorb external shocks rather than effect change when change was needed, so the analogy only goes so far, but Beijing doesn’t want to go anywhere near there in the first place. Hence its determination to let its own currency appreciate only gradually.

There are two other lessons from Japan’s experience in the 1980s that won’t have escaped the notice of China’s leaders. First, it was Japan’s huge current account surpluses that had given it the global buying power in the 1980’s that made the country “No 1″ and raised a scare among developed nations, particularly the U.S., that Japan was taking over the world and would eclipse the U.S as the world’s leading economy. When the current account surpluses disappeared, Japan’s emerging clout on the world stage evaporated with it. Second, what happened to Japan’s economy after the Plaza Accord led eventually to the long-ruling Liberal Democratic Party lose its monopoly grip on power.

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Foxconn Expands Inland Production Capacity

Foxconn, the Taiwanese-owned electronics contractor whose Shenzhen plants were hit by a wave of suicides earlier this year, is to expand its presence in Chengdu with a new assembly plant there, the latest of a number of new inland factories. Foxconn is owned by Hon Hai Group and numbers some of the best known global technology brands among its customers such as Apple, HP, Sony and Nokia.

Since the suicides put the company into the international spotlight it has opened new assembly plants in Henan, Hebei, Shanxi and Hubei provinces as well as raising wages and improving living conditions for workers at its giant Shenzhen operations. The Chengdu plant is expected to produce advanced panels for LCD TVs and tablet PCs. Foxconn has already has started producing Apple’s iPads there and the new plant will let it expand production of these. Hon Hai has reportedly allocated $275 million for investment in six new Chinese plants, most of them inland.

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Lies, Damn Lies And Online Marketing

A leading dairy company, Mengniu, stands accused of organizing a black online PR campaign to smear the product-safety reputation of a rival, Yili. There are, shall we say, several versions of what happened, who was responsible, what documents may or may not be fraudulent, who is under investigation, who has or has not been arrested and even who has been smeared. Mengniu not only denies the charge, but says the accusation is, in turn, defamatory of it. We don’t have any special knowledge with which to disentangle the tale, but it stands as a salutary warning. EastSouthWestNorth has rounded up the coverage. We are not sure you’ll be sure either exactly what happened after reading it, but it is well worth the read none the less.

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