Monthly Archives: December 2010

U.K. Honours China Service

Our man in London with his fingers on the ermine sends us a list of the Queen’s New Year Honours, the U.K. establishment’s annual recognition of its great and good. He notes a dozen on the Diplomatic and Overseas List that are China-related, more than for any other country.

They give an albeit unscientific sampling of what Britain, at least, considers “extraordinary and important service” rendered by some of its citizens in fields as wide-ranging as diplomacy, commerce, the arts and social services. The Shanghai Expo stands out in that regard. Our man’s list excludes honours awarded to U.K.-based officials whose daily round may be directly Sinocentric. Our congratulations (and so you can offer yours, should you so wish, if and when you run into them) to those who are elevated to:

CMG (Companion of the Order of St Michael and St George)

ELLIOT, Ms Caroline Margaret, O.B.E., H.M. Consul-General, Shanghai.

FEATHERSTONE, Simon Mark, lately Director, Shanghai Expo 2010, Foreign and Commonwealth Office.

CBE (Commander of the Order of the British Empire)

MARGOLIS, Richard Paul, Regional Director, North East Asia, Rolls Royce. For services to UK business in China.

OBE (Officer of the Order of the British Empire)

CLARK, Nigel, lately Chairman, British Chamber of Commerce, Beijing. For services to UK/China commercial interests.

HALLETT, Stephen Walter Garnier, Director, China Vision. For services to disadvantaged groups and increasing understanding of disability issues in China.

LEE, Ms Bernice Wingi Yee, Research Director, Energy, Environment and Resource Governance, Chatham House. For services to UK/China climate change co-operation.

SMITH, Nicholas Michael, Director, International Festival Chorus and Peking Sinfonietta. For services to music and to UK/Sino relations.

THOMPSON, Professor Kevin, Director, The Hong Kong Academy for Performing Arts. For services to the Arts and to UK/Hong Kong cultural exchanges.

MBE (Member of the Order of the British Empire)

MILES, Lorna Marie, Mrs., lately Pavilion Director, UK Pavilion, Shanghai World Expo 2010.

OLIVER, Rosalind Stephanie, Mrs., Director, Double Dragon Alliance, Shanghai. For services to the promotion of cross-cultural understanding, particularly between the UK and China.

WAKELING, Susan Jean, Mrs., lately Learning Centre Manager and Teacher, Guizhou. For services to special needs and disabled children in China.

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Passengers Grumble About High-Cost Of High-Speed Trains

For all the hype around China’s blossoming high-speed rail network setting new speed records, inaugurating new services and generally becoming the greatest thing since the Shanghai Expo, there is a groundswell of grumbling from the people who have to pay to travel on these modern transports of delight. Bullet-train fares are double those of regular trains, which on some routes have been completely replaced by the faster services. Passengers are saying the tickets are too expensive and some berths are unnecessarily luxurious.

Earlier this week, the Oriental Morning Post reported that four out of five tickets available on a new bullet train running between Shanghai to Chengdu that will start on Jan. 11 are soft sleepers costing more than 1,000 yuan with the top price for 16 luxury sleepers being 2,330 yuan. That is half as expensive again as the airfare between the two cities and more than a month’s wages for a migrant worker. The paper quotes Sun Zhang, a professor from the Transportation Engineering School of Tongji University in Shanghai, criticizing such “exorbitant prices”. He says the fares will be prohibitive for many migrant workers returning from Shanghai to Sichuan for the annual Spring Festival and who usually find it difficult to get a train ticket as it is.

The Xinhua Daily Telegraph, in an appeal to make high-speed rail travel more affordable, relays a similar tale of woe for students, equally cash-strapped and who are having to resort to bus travel as they can’t afford high-speed train fares. A student fare between Wuhan and Guangzhou used to cost 180 yuan on the regular trains that no longer run. The bullet-train fare ranges from 500 yuan to 800 yuan.

The paper also reports that earlier in the year high-speed trains were cancelled between Hankou and Qingdao and between Beijing and Fuzhou for lack of  passengers. Meanwhile, luxury berths have been selling slowly. The Shanghai Evening Post reports that the number of first-class berths on the Beijing-Shanghai run, which cost 1,470 yuan, will be cut to make room for cheaper seats. Pocket-book democracy.

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China’ Economy Slowing Nicely, But Watch The Pay Rises

Manufacturing continues to expand, according to the December Purchasing Managers’ Index compiled by HSBC (via Reuters), but its pace of expansion has started to slacken for the first time during this recovery. With our usual caveat about a single month’s figures, that may be taken as evidence for the widely held belief (ours included) that GDP growth will slow in 2011.

By how much is the question, of course. While we still believe that the answer will be, by not much, and that absent the implosion of any asset bubbles the economy is in good shape, the extent to which inflation moderates will play into the final outcome.  There are signs inflation may have peaked. One factor will be the success of price and supply controls on food. But we are also starting to look at wage pressures on inflation. Minimum wages are due to rise again in the new year — they will rise by 20% in Beijing for example — and these increases will to some extent work their way up from the bottom rung of the pay ladder. We suspect now that we won’t see any further interest-rate rises until after the January numbers are in and policymakers get a better sight of the inflation-adjusted growth prospects. We are in no doubt though that fighting inflation remains the top policy priority. Monetary tightening by other means will continue.

We also think we are seeing a greater willingness in the meantime to let the exchange rate bear more of the burden of dealing with the excess liquidity that is the root cause of the inflation. That is all relative in the sense that policymakers remain opposed to any rapid appreciation of the yuan, but it is no accident that the currency is closing out the year at a high against the dollar.

 

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China Makes VoiP Services A State Duopoly

China may skirt round a WTO challenge on its rare-earth exports, but a decision to protect its state-owned telecom companies from competition from VoiP providers such as Skype and UUCall seems to be on thiner ice.

The Ministry of Industry and Information Technology says that only the leading telecom companies — that would be state-owned China Telecom and China Unicom — have the right to offer services that link computers and telephones (via People’s Daily). There are no details of when the prohibition would come into effect or what punishments illegal VoiP providers face.

Inevitably, China is the world’s largest market for VoiP services, which are far cheaper than landline calls and are cutting into the state carriers’ duopoly profits. Shutting down the services won’t be easy. So MIIT’s announcement may be a warning to the VoiP providers not to grow too quickly, to give China Telecom and China Unicom time to find a way to live with them or smother them. Market force if not market forces.

 

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Curbing China’s Corruption

No one will be surprised by a first official report on the subject that finds that corruption in China is a “still very serious” problem. Corruption is endemic among rank-and-file officials at all levels of government. A study for the Carnegie Endowment in 2007 estimated that 10% of government spending, contracts and transactions went to kickbacks and bribes or was otherwise syphoned off. That adds up to a staggering degree of illicit wealth redistribution. But a lined pocket beggars another. There is an economic cost to corruption, and at some point even China won’t be able to absorb it, particularly if and when growth slows.

There is a growing political dimension, too. The leadership increasingly sees corruption as a threat to social stability, and thus to its legitimacy to rule. And corruption is affecting a widening circle of issues beyond business where the leadership perceives itself as vulnerable to increasingly voluble public opinion: the environment, education, public health and food safety. Reasonably enough citizens don’t want their land polluted, their children’s schools to collapse, their water poisoned and their diary products tainted because an official is being paid to turn a blind eye.

Corruption is also an increasing obstacle to the policy changes needed to sustain the next phase of China’s economic growth, on which the leadership’s authority also rests. Vested interests, especially in the areas were there is heavy state involvement, have proved adept at keeping the resistance to change well oiled. If Beijing is to be serious about reorienting the economy and making Chinese companies world class as well as national champions, many of those vested interests will have to be made less obstructive.

The new report promises another round of tougher anti-corruption measures. New rules require Party members to report incomes and investments, in the hope that transparency will curb the worst excesses of the connections between officials and businesses, especially at the local and provincial level. The Party is also to curb spending on official entertaining and study groups, which can transmute seamlessly from hospitality into payola.

This isn’t the first anti-corruption campaign to have been launched — often at times of leadership transition. Nor will it be the last. There are already more than a thousand anti-corruption rules on the books. As for the new additions, as so often, the devil won’t be so much in the details as in the implementation. Up to now, corruption has been a low-risk, high-reward activity for most officials. If corruption is to be reined in that balance will have to change.

 

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China To Continue To Trim Rare-Earth Export Quotas

China has set a preliminary rare-earths export quota of 14,446 tonnes for 2011, according to the Commerce ministry. The preliminary quota is a sighter for the industry covering roughly the first half of the year. State media announced that as an 11.4% year-on-year cut in comparison to the preliminary quota for 2010, but unofficial comparisons with last year’s numbers put the reduction at closer to 35%-39%.

The full year quota for this year is 30,300 tonnes, 40% down from 2009 as Beijing pursues a policy of cutting back rare-earth exports to husband its resources. That quota was exceeded by September, with exports in the first nine months of the year reaching 32,200 tonnes, despite supply interruptions reported in the second half of this year that sent manufacturers who depend on the minerals to produce an array of high-tech goods from consumer electronics to weapons into a flap over suspicions that Beijing was using its current market dominance for noncommercial purposes. China said in July that it would cut exports in the second half to supply its own electronics industry. Quotas were cut by 72% for the second half and prices surged.

Beijing is also to set up an industry association to conduct price negotiations with foreign buyers (and keep domestic miners, whose operations cause great environmental damage, under a tighter official thumb), much as happens in the steel industry. The new association will fall under the Ministry of Industry and Information Technology. (Update:  Caijing reports that new environmental protection standards and possibly new taxes are to be imposed on the industry in 2011.)

Meanwhile, as we noted before, the day is fast approaching when rare earths are rare no more. Production is being ramped up in North America, Australia, India, South Africa and Brazil as mines that once looked uneconomic get reopened or expanded. That China has an monopoly that cannot be defended for too much longer is a reason that it is likely to dodge a WTO challenge over its rare-earth exports.

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How Business-Friendly Is China?

How easy is it to do business in China? The World Bank ranks it as 79th out of 183 countries where it tracks the regulatory environment for entrepreneurs. Singapore is number one; the U.S. number five. There is more to business success than rules and regulations, of course, but the World Bank’s study does provide a way to quantify the red tape that can get in the way.

The Bank’s newly published analysis of China in its Doing Business Series breaks the overall ranking into nine categories. China ranks worst on dealing with construction permits (181st), starting a business (151st) and paying taxes (114th). It fares much better when it comes to enforcing contracts (15th), registering property (38th) and trading across borders (50th). The middling categories are getting credit (65th), closing a business (68th) and protecting investors (93rd).

Comparing, the Bank’s latest study to its one five years ago, China has become measurably more business-friendly, showing at least half as much progress again as its fellow BRICs, Brazil, Russia and India. How does that compare to your own experience?

 

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China Hikes Interest Rates Another Notch

As expected, China’s central bank has raised its benchmark interest rates before the end of the year. Its one-year lending rate goes up by a quarter of a percentage point to 5.81% from 5.56%, effective Dec. 26th. The corresponding deposit rate rises to 2.75% from 2.50%. It is the second rate rise in as many months and another turn of the screw in the fight against inflation. We expect to see more rate rises in 2011 to push up the price of credit as well as more quantitative measures to reduce its supply. Yesterday, Hu Xiaolian, a deputy governor at the People’s Bank of China told a meeting of bankers that China “should maintain a reasonable and moderate credit growth next year that is in line with the country’s goal in economic development and inflation control”.

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China Defends Its Trade And Investment Record In Africa

China’s growing trade and particularly investment in Africa has its critics. Now China has come to its own defense. Its first policy paper on the subject says the fast growth of Chinese trade and investment has helped African countries meet UN Millennium Development Goals and is transforming the continent by building infrastructure and creating a new class of consumer.

Two-way trade only reached the $10 billion mark in 2000. In the first 11 months of this year, it was worth $115 billion, a 43.5% year-on-year rise, with that growth rate likely to accelerate in coming years. Natural resources flow east with low-cost manufactures coming in the opposite direction, with the balance of trade in Beijing’s favor. According to U.S. embassy cables published by WikiLeaks, the imports have also included some arms and other security related equipment.

Beijing is pushing Chinese companies to expand their investment from the extractive industries, where it has been concentrated as China has sought to secure supplies of natural resources, to manufacturing, construction and real estate, finance, tourism and agriculture. The policy paper says the stock of China’s investment in Africa at the end of 2009 was $9 billion,  a surprisingly low looking number to our eyes. It is spread across 49 African countries, but mostly in (resources-rich) South Africa, Nigeria, Zambia, Sudan, Algeria and Egypt. The policy paper says there is a matching stock of African investment in China, though the multinational brewer SABMiller, the SA standing for South Africa, probably accounts for a big chunk of that.

The $9 billion reckoning of Chinese investment in Africa will also likely not include the ports, roads, railways, dams and sports stadiums built with preferential loans and credits provided by China, $5 billion worth in 2007-09 with another $10 billion in 2010-12. Chinese aid is also going into schools, wells, hospitals public housing and agriculture. It has also cancelled $2 billion of African nations’ debts over the past decade.

China is building six economic trade and cooperation zones across Africa in which Chinese firms build the infrastructure for Chinese and other foreign firms to move in to create industrial clusters. It says the first of these in Zambia has attracted 13 companies, investment of $600 million and created 6,000 local jobs — the lack of employment for locals being a widespread complaint of Africans against Chinese firms. Regardless of the unease it causes others inside and outside the continent, China’s presence and influence in Africa is only going to get larger.

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Beijing To Cut New Car Registrations To Ease Gridlock

Beijing will issue only 240,000 new car registrations next year in an attempt to tackle the city’s chronic traffic congestion, such as shown by the snapshot of Google’s traffic map (right) for Tuesday evening’s rush hour; traffic jams in dark red. The new number is less than a third of the 760,000 new cars registered this year, which has taken the number of cars on the capital’s roads to more than 4.7 million — up from less than 1 million 15 years ago.

Eighty-eight per cent of new 2011 plates are being reserved for private cars. They will be allocated by lottery. Beijing residents have been rushing to buy and register new vehicles before the new regulations come into effect at the end of this week, with 50,000 cars reportedly sold so far this month, almost six times December 2009′s sales. This panic buying has led to Huang Wei, the vice-mayor in charge of transport since 2008, being transferred to a new job in Xinjiang, according to the Financial Times.

The new regulations apply to first-time car buyers. Drivers replacing a vehicle are exempt, so the measure along with higher parking charges in the city centre from April, a restriction to one car registration per person and banning cars without Beijing licences from driving within the 5th Ring Road in rush hours, will likely do no more than slow the worsening of the traffic jams. As Liu Zhi, who leads the World Bank’s infrastructure team in Beijing, argues, city authorities are going to have to take far more drastic action to cut the demand for car use, which is the prerequisite for easing the overcrowding on the roads. That means turning talk of significantly heavier investment in public transport into reality.

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