Monthly Archives: November 2011

China Tilts Monetary Policy Ever So Slightly

China’s economic policymakers have shifted their stance to a certain extent. The central bank’s cut in the capital reserves it requires of banks, though tiny, trimming half a percentage point off the record 21.5% for big banks, goes beyond “fine tuning”. It shows slowing growth is now a greater policy concern than inflation, which, though remaining stubbornly high, policymakers take as having peaked. The move is cautious, and follows a similar cut for small regional banks last week, but policymakers are signaling they stand ready to loosen further if circumstances warrant.

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Second Sea Trials For China’s First Aircraft Carrier

China’s much-watched first aircraft carrier, a refitted old Soviet carrier, the Varyag, has set out on its second sea trial, state media report. (Defense ministry statement, in Chinese.) The photo above, taken on Nov. 29, shows the carrier heading out of Dalian, where its conversion work has been done.

The Varyag’s first sea trials took place in August. The vessel has since been back in its dock in Dalian for further fitting out. It second voyage is thought to be for additional systems testing and crew training. It is unclear whether the carrier will join up with any of the annual exercises the PLA-Navy is currently conducting in the western Pacific.

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TV Ads And Subtractions In China’s Cultural Reform

The ban on TV ads during dramas and films running longer than 45 minutes that China’s propaganda chiefs are imposing from January is aiming at the wrong target if the purpose is to bring the country’s increasingly money-grubbing media to heel. While TV advertising now accounts for three-fifths of China’s total advertising market, it is the rapid growth of digital media that is making China one of the fastest growing advertising markets in the world. MEC China, part of the WPP media agency empire, forecasts a 17% jump in ad expenditures to $63 billion next year, driven by companies trying to reach the online “Me Generation”.

For the past couple of years, the industry’s regulator, the State Administration of Radio, Film and Television, has been snipping away at successful mass entertainment programs shown on the country’s proliferation of TV stations. It has restricted the time allowed for ads between and during programs, and leaned on broadcasters to show more culturally uplifting programming. As in many aspects of life, when it comes to cultural reform, a proxy for the desire to develop soft power around national cultural identity, the Party’s say-so is competing against more and more alternative voices. Hence the propaganda department’s attempts to guide market forces to impose the necessary drive for the promotion of the cultural values that it wants to see. However, though there will be some early disruption as TV ad campaigns for the new year have already been bought, the longer-term outcome is likely to be that money that would have gone to TV advertising will just move online rather than new culturally correct domestic programming will be created to keep it on TV, let alone fill the gaps created by its departure.

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Patrolling The Speed Trade Along The Mekong

Joint armed police patrols along the upper reaches of the Mekong where it passes between China, Myanmar, Laos and Thailand are to start in mid-December. Agreement between the four countries to patrol the waters was reached at the end of October following the execution-like killing of 13 Chinese seamen earlier that month in attacks on their two freighters for which nine Thai soldiers were eventually arrested. (They have pleaded not guilty to charges of murder, though earlier reports quoted Thai authorities as saying the soldiers had admitted the killings.)

While the area is part of the Golden Triangle, long notorious as the stronghold of the Shan and Wu drug lords who control the opium trade, it is now a center for amphetamine production, a more marketable drug that is both cheaper and easier to produce than opium and heroin. Thailand is the region’s largest market for amphetamines, according to the United Nations Office on Drugs and Crime (UNODC), a view reflected in the fast rising volumes of seizures of the drug in China, Laos, Myanmar and Thailand, 133 million pills last year up from 32 million in 2008.

For some time there have been reports of vessels on the river that refuse to pay protection money being seized by gangs and used to ship amphetamines and other drugs. The two vessels attacked in October were found with large supplies of pills on board. Units of the Thai army are reported to be complicit in these protections of the amphetamine trade, to which, as the UNODC map shows, the Mekong provides a backbone.

Greater Mekong Subregion: Primary Metaampthetamine Trafficking Routes

Chinese vessels have frequently been the subject of these attacks as they dominate shipping on the river, an important trade conduit between Yunnan and Southeast Asia. According to Xinhua, 116 of the 130 ships involved in international shipping on the Mekong are operated by Chinese companies. All maritime trade along the river has been suspended since the early October attacks.

However, the illicit drugs trade operates on both sides of the river, with UNODC saying that the greatest number of illicit amphetamine manufacturing labs discovered and shut down in the region, 458 in 2009, were in China. Along with Myanmar, China is the largest producer of illicit amphetamines in the region. In 2010, UNODC says, 378 illicit labs were detected in China, compared to 391 in 2009 and 244 in 2008. Manufacturing of amphetamines appears to have shifted to Yunnan from Guangdong and Fujian, following the crackdown there since 2006. That crackdown is now moving west.

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Feeding The Mind

It is smart for children to eat well, and eating well can make children smarter. This Bystander’s eye was caught by this story of a type we always find pleasing: research turning into policy with a beneficial outcome.

This particular piece of research was conducted in Shaanxi by a team of researchers from Stanford University in the U.S. which showed that 40% of school children in the rural parts of the province were suffering from anemia, and that their school performance improved once their diet was fortified with iron to address that. With an estimated one in three children living in rural areas across the country being anemic, Beijing now plans to spend 16 billion yuan ($2.5 billion) a year over the next nine years on a pilot project to improve school meals for 26 million elementary and middle school students in the countryside. The Stanford researchers conducted their initial study in 2008, with a broader four-province back-up study following. The results prompted the directive from Beijing last month to improve school meal nutrition. “The social return is huge,” says Scott Rozelle, the research team’s leader. “These kids will be able to do better in school, work harder and sustain China’s growth.”

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India Trumps China At UN

Our man in New York sends word of a little noticed election at the United Nations in which the dragon has suffered a reverse at the hands of the elephant. For the past 10 years, Beijing has occupied a seat on the UN’s Joint Inspection Unit, the UN system’s independent external oversight body. But it has been ousted with A. Gopinathan’s 106-77 defeat of Zhang Yan for a five-year term starting in 2013. Gopinathan is India’s permanent representative to the UN in Geneva; Zhang is Beijing’s well-regarded but somewhat controversial ambassador to New Delhi.

This was a rare head-to-head confrontation of Asia’s two regional powers, and while the post is of greater importance within the UN than without, it serves as a reminder that Beijing’s sway is not omnipotent, regardless of the fact that China has a permanent seat on the UN’s Security Council, whereas India has only a rotating one. We also understand that New Delhi only decided to fight for the post after Beijing asked it not to field a candidate for Asia’s second seat at the unit. Japan holds the other one.

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China’s Manufacturers Flash A Warning

HSBC Purchasing Managers Index, 2009-2011As straws in the wind go, it is scarcely encouraging. The flash reading on the HSBC purchasing managers index (PMI) for November is signaling that China’s manufacturing output will switch to contraction from growth. At 48.0, the number is down from 51.0 in November and its lowest since March 2009 though still well above the low in the depths of the global financial crisis in 2008 (see chart; the black line represents November’s flash forecast).

Now, this is the preliminary estimate, and the HSBC PMI overweights small and medium sized businesses against the large state owned enterprises that generate the majority of the economy’s output compared to the government’s index. So the final number and the government’s index, both due early next month, may turn out a tad higher, though it must be said that the flash reading usually turns out to be pretty accurate.

Whether either number can creep above the 50 level that marks the dividing line between growth and contraction will weigh on policymakers considering whether to turn their “fine tuning” of monetary policy into something more accommodating, albeit not as heavily as the prospects for demand in China’s largest export market, debt-crisis embroiled Europe, and domestic inflation, which though off its peak remains persistently high. Perhaps surprisingly, the flash PMI number suggests that export orders are holding up better than orders overall, suggesting that the policy tightening of earlier this year is still working its way through to the economy overall.

Earlier this week, the World Bank raised its forecast for China’s GDP growth this year to 9.1% from 9.0% though said it expected a slowing to 8.4% growth next year in the face of the drop of global demand. That pace of growth would be  at the upper end of what the PMI is now signaling.

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Shenzhen Joins Pilot For China’s Carbon Trading Market

Shenzhen has been added to the list of provinces and municipalities that will pilot China’s proposed carbon trading market. That takes the initial set to seven. The participation of Beijing, Chongqing, Shanghai, Tianjin, Hubei and Guangdong has been known since the summer. An official with the National Development and Reform Commission confirmed the go-ahead with the pilot scheme to Xinhua, but otherwise details remain sketchy. Central government has still to set overall carbon discharge reduction targets, which are a prerequisite for establishing the national carbon trading market that has been pencilled in for a 2015 launch.

By then, China’s goal is to have cut carbon dioxide emissions per unit of GDP by 17% from 2010 levels, according to a white paper on climate change issued this week ahead of the UN’s forthcoming climate change talks in Durban in South Africa. A reduction of that magnitude will be a tough ask given the pace of the economy’s growth. The pilot carbon-trading scheme is expected to start in 2013.

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World Bank Sees Scope For Soft Landing For China’s Economy

The World Bank has raised its forecast for growth in China this year to 9.1%. In March the bank had forecast 9.0% GDP growth. But it sees growth slowing next year to 8.4% against the background of a slowing global economy. That will also put the brakes on regional growth already hit by the flooding in Thailand that has disrupted manufacturing supply chains.

In its semi-annual regional economic outlook, the bank highlights the Chinese economy’s vulnerabilities to the debt crisis in Europe and the heavy endebtedness of local governments at home, which it says may be exacerbated by the central government’s success so far in dampening the property bubble. “Policymakers will need to walk a fine line guarding against the short-term risks to growth and the lingering vulnerabilities associated with a still buoyant, if not overheated, economy,” the bank says. It also notes that the moderation in inflation gives policymakers scope to manage a soft landing by loosening their monetary tightening.

The bank also says that the slowdown in global growth provides an opportunity for governments to refocus on reforms that will boost growth in the medium- and long-term, including investment to increase productivity and move toward higher value-added production, a task it calls “urgent” for China’s coastal manufacturers. In a clear nod to Beijing, it also says that where investment levels are already high, increasing the quality and efficiency of these investments should be the first priority alongside rebalancing growth towards domestic consumption. To drive ahead the structural changes in China’s economy, the bank repeats its calls for Beijing to focus on completing the transition to a market-based economy and strengthen the national innovation system. The China-specific part of the outlook is here.

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Debt Takes Its Toll

Vehicles wait at the Langdong Tollgate on the Guilin-Beihai Highway in Nanning, capital of the Guangxi Zhuang autonomous region, October 2011

Yet another rumble of local-government debt trouble. After a three-year highway building boom across China, outstanding debt for toll-road construction is 2.2 trillion yuan ($346 billion), according to numbers compiled by Caixin. That is much higher than the 1.3 trillion yuan outstanding at the end of last year counted by an official audit published earlier this year covering 16 of China’s 29 provinces. Banks have provided 90% of the lending. Toll roads in Guangdong account for 10% of the total, at 227 billion yuan, with another eight provinces collectively accounting for a third more, the Caixin report says.

The danger lies in tolls barely raising sufficient revenue to service the debt. China’s toll roads account for 95% of the country’s 74,000 kilometres of highways, such as the Guilin-Beihai Highway shown in the Xinhua picture above. Yet the audit found that they generated only 170 billion yuan in revenue last year, with just four provinces and municipalities a profit at the tollgates. Guangdong, Caixin says, collected 789 million yuan in road tolls last year and had to use all but 19 million of that on debt repayment. Other provinces are having to take out new loans to pay off old ones.

The audit found that more than half of new highway loans were being used to that end. That is getting more difficult for provinces to do as Beijing tightens the liquidity spigot, leaving some highways uncompleted as construction comes to the same dead stop as their funding. Meanwhile, other political constraints don’t give provinces much if any scope to raise tolls.


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