Monthly Archives: January 2012

WTO Natural Resouces Ruling Not Prelude For Rare Earths

China’s WTO loss over certain natural resource exports shouldn’t overly encourage anyone who would like the same approach to be taken towards Beijing’s export restrictions on rare earths. These were introduced in 2010 to prevent environmental damage and unsustainable depletion of the country’s rare earth reserves. Beijing’s tough enforcement of them makes the case that they are a mere pretext for protectionism more difficult to sustain. Indeed, Beijing make make use of the latest WTO ruling to enforce them more vigorously and to bear down on foot dragging enterprises and local officials. China is the world’s largest supplier of rare earths. Unlike coke, zinc, bauxite and the six other raw materials whose export quotas, licences and duties the WTO has decided break world trade rules, rare earths are of such strategic importance to China’s economy and its military’s development that Beijing is not going to leave itself vulnerable to any trade challenge.

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The Men On The Moon

The call by Newt Gingrich, the American politician who is seeking the Republican party’s presidential nomination, for the U.S. to establish a Moon base “by the end of my second term”, which, if it happens, would be 2020, throws down a gauntlet to China’s ambitious space program. “It is clearly in [the U.S.'s] interest,” he said, to acquire so much experience in space that we clearly have a capacity that the Chinese and the Russians will never come anywhere near to matching.”

China’s space scientists have nursed a long-term ambition to establish a lunar base for at least a couple of decades. Gradually, the reality of the country’s space program is catching up. An unmanned mission to the Moon is planned for next year. The recently published white paper on China’s space program publicly confirmed for the first time the scarcely secret goal of following that with a manned mission. It was vague about timing, saying only that the tasks for the next five years include conducting “studies on the preliminary plan for a human lunar landing”.

As recently as a couple of years ago, space officials were talking about that happening in 2025 to 2030, but more recently 2025 is being mentioned as a by-the-latest date rather than as an at-the-earliest one, with a Moon base to follow by 2030. That coincidentally is the date Japan has pencilled in for setting up a manned Moon base.

Whether the Chinese, even if they got there before the Japanese (or the Russians who have similar ambitions), would now find the Americans already there is the new question. Certainly, if Americans put their minds to it they could pull it off, just as an earlier generation responded to President John F. Kennedy’s call in the face of the Soviet Union putting a man in orbit around the Earth to, within a decade, land an American on the Moon and bring him home. Whether Americans today have the optimism and the money is another matter.

NASA has Bush-era plans it can dust off, plans the Obama administration scaled back because of cost. Some U.S. legislators have called for NASA astronauts to return to the Moon for first time since 1972 by 2022. Gingrich proposes to involve the private sector, including in the development of space tourism and manufacturing, and to spur innovation and technological breakthroughs with both civilian and military applications. Yet eight years would be a tight deadline to pull off a mission of such complexity, regardless of how neatly it dovetails with election-campaign rhetoric. For one, a heavy lift rocket would have to be developed.

There is also the little matter of Gingrich both being nominated to run and then winning the Presidency. President Obama has expressed more interest in going to Mars than returning to the Moon.

The space world has long debated the relative scientific value of manned versus unmanned space exploration and whether returning to the Moon is a diversion from a grander goal of interplanetary travel. One alternative to having humans living on the Moon, or perhaps a first step towards that, would be to establish an unmanned lunar base. While that could be an adjunct to the International Space Station, Japan’s space agency has a plan to have a small but permanent automated base on the Moon run by humanoid robots by 2020. What odds China’s space officials are now looking at what more they could do with the robots they are planning to send to the Moon in 2017 to gather lunar samples if they left some behind?

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IMF Sees Sharp Dip In China’s Growth

The International Monetary Fund has sharply cut its forecasts for China’s growth this year and next. In its latest half-yearly update to its World Economic Outlook, the Fund has reduced its forecast for 2012′s GDP growth to 8.2% from the 9% it forecast in September, and to 8.8% from 9.5% for 2013. The cuts come against a background of what it says are dimming prospects for the global economy and increasing risks to financial stability. The IMF now expects the world economy to grow at 3.3% this year, down from 3.8% last year, with world trade growth slowing to 3.8% from 6.9%. The IMF puts China among those emerging economies that can afford “to deploy additional social spending to support poorer households in the face of weakening external demand”.

Earlier this month, the World Bank also cut its forecast for China’s GDP growth this year, to 8.4% from June’s 8.7%. But unlike the IMF, which foresees recovery in China’s economy in 2013, the Bank said it expected growth to continue slowing next year.

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Little Imminent Prospect Of Peace Along China’s Myanmar Border

Slow progress is being made at the truce talks China is hosting between the Myanmar government and the autonomy-seeking Kachin Independence Organization (KIO). Two more days of talks were held last week in Ruili, a border crossing town on the Yunnan side. Naypyidaw’s chief negotiator said afterwards that a lasting truce would not be quickly achieved. Aung Thaung, a former general who is also Myanmar’s industry minister, said the process could take more than three years.

That would not please Beijing, which wants stability along its western reaches and control over what is thought to be an arms smuggling route to Tibetean dissidents in western China, seemingly newly active. Nor would it satisfy Naypyidaw, which needs political settlements with its ethnic minorities to bolster its case for a lifting of international sanctions against the country.

Some 60,000 Kachin have fled their homes in the remote and mountainous region over the past seven months following the breakdown of a 17-years long ceasefire. A few made it into China to seek refuge with relatives, but Beijing has discouraged mass cross-border migration, fearing a large influx of refuges. Instead they are gathering in ever larger numbers in makeshift camps along the border.

Meanwhile, armed skirmishes continue along the Myanmar side of the border with Yunnan between government forces and the KIO’s military wing, the Kachin Independence Army, despite two orders by Myanmar President Thein Sein to his military to end its operations in Kachin. One (unconfirmed) report suggested fighting had spilled at one point across the border into the Chinese province. Further talks between the Naypyidaw government and the KIO are be held, probably in February.

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Tang Dynasty Redux

This Bystander’s eye was caught by an assertion that modern-day China aspires to be a latter-day incarnation of the Tang dynasty. It was made by a serious figure. David Daokui Li is a worldly and respected academic economist, well-known in the U.S. and now a professor at Tsinghua University. He is high enough in policy-making circles to be one of an elite group of academic economists advising the central bank on monetary policy. In an article published by Insead, a European business school, and titled How China Is Managing Western Hostility, Li writes:

Our aim is the revival of our great civilisation. We are not looking for retribution against the West and we are certainly not interested in dominating the world. Instead, we would like to see the revival of a peaceful, confident, open-minded civilisation similar to that of the Tang Dynasty.

The Tang dynasty lasted from the seventh to the 10th centuries and is seen as a high water mark of Chinese civilization, especially in its first 200 years and particularly in the arts. It was a period of stability and innovation. It created a powerful, centralized bureaucratic elite, introduced Buddism and woodblock printing. Its capital, modern day Xian, was probably world’s largest and richest city at the time. Yet the political and economic parallels are interesting. It was an empire of protectorates and tributary states that extended southwards into Indochina and westward along the Silk Road into Central Asia in rivalry with the Tibetan empire. It was a maritime power whose giant ocean-going junks traded across the Indian Ocean to Africa and the Middle East. Its trade and commerce thrived even as a declining central government, eclipsed by the rising power of regional military governors, withdrew from managing the economy.

Past is prologue, but only up to a point. And we would not want to overegg this particular pudding, particularly with a selective reading of history. But the issue of how the West sees China’s emergence as a world and economic power and China’s response is an important one. Li lays out a clear and succinct exposition of how to understand China’s motives and objectives. For example:

China’s emergence gives us an alternative model for social and economic institutions, different from that of the U.S and other Western countries. A model where more weight is given to social welfare, well-being, and stability, rather than to pure individual liberties.

Whether you find that threatening or not, the piece is well worth the read.

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Still Water

Thames Water's Farmoor Reservoir, Oxfordshire.

The acquisition by China Investment Corp., China’s sovereign wealth fund, of an 8.7% stake in Thames Water, which supplies water to 14 million consumers in southern England, may prove in time be a precursor to more Chinese investment in European infrastructure, but Beijing likes stability. What is more stable than utilities in Western markets?

Update: Our man in London points out that Beijing is a late arrival to the U.K. utilities foreign-ownership party, reminding us that Li Ka-shing’s Cheung Kong bought Northumbrian Water last year, while Bristol Water was bought by a Canadian investment company. Thames Water itself is owned by Kemble Water, a consortium of investors led by the Australian infrastructure investment bank Macquarie, which bought it from the German group RWE for a cut-price £8 billion in 2006.

Though the price CIC paid for its Thames Water stake was not disclosed, the likely figure is of the order of $1 billion, which won’t make much of a dent in its $410 billion coffers.

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Small Cities Astride A Social Fault Line

Just A Small City In China Getting Bigger

More than half of China’s population now lives in cities, as has been widely noted, making the country predominantly an urban nation for the first time. Two-thirds to three-quarters will likely do so by 2020. It was one in nine when Mao took power.

Urbanization has been a main prop of rising living standards, and promoted as government policy. Arguably, China’s has been the most managed such migration from farm to factory in history. The flip side of that has been an ever-widening urban-rural income gap. While that has been true for the past 30 years, it was only under the most recent five-year plan that diminishing the gap became a high policy priority. Measures were introduced to support agriculture, farmers and the countryside. They continue under the current five-year plan.

The scale of the migration from country to city is immense, some 300 million people over the two decades to 2020, needing to be provided with shelter and jobs. That is the numerical equivalent of moving the entire populations of Guatemala or Mali or Ecuador every year for 20 years.

China has 661cities by the official count. They have the capacity to absorb some but not all of those arriving from the countryside. China’s list of urban conglomerations with populations in excess of 20 million may soon extend beyond Guangzhou, Shanghai and Beijing, but small towns and cities are designated under the current five-year plan to provide the new homes, jobs and social services that will be required to absorb 40% of the labor coming off the land. As the coastal provinces are transformed into high-end service economies and manufacturing is moved inland, the eastern megalopolises won’t need vast swathes of new unskilled labor. Hence the push to develop satellite towns and second- and third-tier cities in the poorer central and western provinces. Towns and small cities are also seen as a bridge across the urban-rural income divide.

Yet, as recent events in Wukan and a host of other places earlier bear testimony, it is proving to be a troubled passage because of the fault lines in local government and the weak legal framework for land rights. The later has meant that planned rapid development has been possible because land could be taken in the name of a greater public good, but the combination has made the process highly uneven, often exacerbating inequality and sowing social discontent, leaving migrant workers and villagers, in particular, disgruntled and shut out from the benefits urbanization is meant to deliver.

One one estimate, farmland expropriation for urban redevelopment displaced 60 million-70 million people between 1990 and 2007. That is an order of population the size of Thailand, France or Italy. Even the mass migration from Italy to the U.S. at the end of the 19th century over a similar period emptied out only a third of Italy’s population.

The growing pains of towns and small cities across the country, like large ones, are all too evident. Infrastructure development–for roads, sewage, potable water, flood defense–often struggles to keep up with the rapid pace of industrialization and urbanization. Similarly, social services, transport and education. Local environments, and so quality of life, pay a huge cost, too, as land is chewed up for development and inadequate infrastructure fails to prevent the despoiling of what is left.

Some towns and small cities work better than others. Top-down planning going spectacularly wrong, resulting in ghost towns such as the much-ridiculed Ordos in Inner Mongolia, may be the exception to the rule, but the variable results in other places is partly of their own making, partly systemic. There is high variability in both the quantity and quality of trained local officials, in their cosiness with local business interests, and, most importantly, in their relationships with the next level up of government.

That last matters so much because the hodgepodge of tax and bureaucratic powers of small towns are often contested with the next higher level of bureaucracy. As a result, selling land rights to companies and developers from larger cities has become the usual way for town officials to raise funds. Wukan may have been an extreme case, but being bilked out of land by corrupt or incompetent local officials who want to turn it over it for urban development is at the heart of hundreds of thousands of similar if smaller-scale and less prominent disputes and protests every year.

These protests increasingly worry Beijing. The Party’s legitimacy to rule turns on delivering rising living standards for all. Economic development was meant to forestall social unrest, not foster it. It should also concern the rest of the world. Urbanization is an essential precursor to rebalancing China’s economy towards domestic consumption.

Beijing’s new plans for managing social unrest are designed to deal with its growing problems with urbanization. It can no longer count on the traditional cohesiveness of rural communities and danwei in the big cities to self-police. The technological upgrading of police and their surveillance capacities, and the tightening of control over mass media, including microblogs, are central to controlling the larger scale of protest that cities enable. Dissidence, whose wellsprings tend to be in the universities and artists and writers studios in the cities, is being cracked down on. Yet, tackling the root causes of social disgruntlement requires reform of local government finances and governance, and most of all, land rights. Otherwise the influx of millions of migrants into towns and small cities will only exacerbate the fault line that is trembling below.

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World Bank Sees China’s Growth Decelerating Into 2013

The World Bank’s latest Global Economic Prospects makes grim reading. It forecasts that the continuing ripple effects from the 2008 global financial crisis will slow world economic growth to 2.5% this year, with the eurozone contracting. In June, the Bank had forecast 3.6% growth for the global economy. “Even achieving these much weaker out-turns is very uncertain” the report’s lead author, Andrew Burns, writes on his Bank blog. The world faces “a year fraught with uncertainties”.

For China, the Bank forecasts that GDP growth will fall to 8.4% in 2012, down from 2011′s 9.2%. June’s forecast had been for 8.7% growth this year. As the Bank points out, 8.4% growth is “still robust” and it expects authorities “to continue to dampen ‘overly-fast’ growth in a number of economic sectors”. It adds that “the prospects for a soft landing for China remain high”.

Nonetheless it sees three downside risks to its growth forecast: trade growth slows even further in the event of a serious deterioration in Europe’s economies; the capital outflows from emerging economies, including China’s, seen in recent months turn into full spate; and China’s real estate market, which the Bank says is arguably still overinflated, weakens further. Local government borrowing and bank balance sheets are co-joined risks.

In June, the Bank had forecast growth would pick up modestly in 2013, to 8.8%. Now, it says growth will slow further next year to 8.3% “in-line with the country’s longer term potential growth rate”.

That pace of growth is starting to skirt the 8% that is always held up as the minimum needed to ensure social stability. It may force some concentration of minds on the need to push through structural reform to rebalance the economy away from export- and investment-led growth to domestic consumption. Or it may just make nervous party leaders in the midst of a leadership transition more determined to hunker down.

Footnote: This is the Bank’s summary of China’s prospects, from the East Asia-Pacific regional sector of the outlook:

In China, the lagged effects of monetary policy tightening (both in terms of interest rates and regulatory adjustment) are expected to combine with weak external demand to slow GDP growth from 9.1 percent in 2011 to 8.3 percent by 2013. The bulk of activity is expected to come from domestic demand―with private consumption and fixed investment contributing 3-and-4 percentage points to GDP in 2012―while net exports afford only a modest 0.2 point addition to growth. Inflation is anticipated to decline; and monetary policy relaxation could be in the cards during 2012. Key domestic risks for China are the property sector, local government borrowing, and bank balance sheets; but the baseline scenario envisages that policy will focus closely on these aspects, with efforts sufficient to stem systemic effects on the economy.


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Companies’ Growing Role In Natural Disaster Relief

Multinationals are taking an increasingly prominent relief role in humanitarian disasters, including those in China. The Center for Strategic and International Studies, a Washington think tank, has put the subject under its microscope, finding that corporations have become a central component of the international response to natural disasters. The likes of Coca-Cola and Cisco were bigger contributors to Sichuan earthquake relief than the U.S. government (if not bigger donors than the general public). The Center sees the trend as part of an expanding notion of ‘corporate global citizenship’, though in the case of Chinese disasters, it notes, it may be as much smart local brand building.

The Center dates the trend to the 2004 Indian Ocean tsunami. It excites policymakers, for all the differences in values and organizational cultures that exist between the private and public sectors. Companies bring cash but also a new disaster assistance network through their globalized and local personnel, supply chains and customers–and a desire to protect all three. Policy makers should remain realistic in their expectations, however. Relief for both domestic and international disasters accounts for less than 3% of all corporate donations, the Center notes.

Each natural disaster is unique in its own way. Beijing had the resources to deal with the 2008 Sichuan earthquake, unlike, say the Haiti government in the wake of the 2010 earthquake there. Yet U.S. corporations still donated an estimated $110 million toward relief of the Sichuan disaster, even if they were seen as “driven by commercial calculation rather than by acute humanitarian concerns”, the Center says. Up to a further $30 million was given via the Red Cross. The U.S. government itself gave just $5 million. The Business Round Table and the U.S.-China Business Council were instrumental in corralling U.S. multinationals to give in Washington’s stead.

Here is a list of the four most generous U.S. corporate donors for the relief of the Sichuan earthquake, one of the five big disasters examined for the Center’s study. The numbers include cash, in-kind donations and employee contributions.

  • Cisco: >$45 million
  • Coca-Cola: $15.6 million
  • Procter & Gamble: $7.6 million
  • Johnson & Johnson: $5 million

Seriously generous numbers.

This is all evolving ad hoc. In the U.S., the Business Civic Leadership Center at the U.S. Chamber of Commerce is emerging as the coordination point between the corporate, governmental and non-governmental organization worlds. UN agencies and the Global Economic Forum (Davos) is tickling forward the global agenda. There is interesting cooperation going on between companies and disaster relief agencies to enable corporate management and organizational skills and technologies to be deployed in the field at the time of disaster and to raise the core capacities of relief agencies over the longer term. As was demonstrated in the U.S. after Hurricane Katrina, a retailer like Wal-Mart is much more practiced than government disaster management agencies in distributing large volumes of basic supplies to a lot of people quickly. This is all beyond our immediate remit but gone into in some detail in the Center’s report, though the examples are mostly U.S.-centric.

From the ash-gushing Icelandic volcano to the Fukushima nuclear disaster, natural disasters can readily disrupt global supply chains. Disaster risk reduction may not have the feel-good factor of disaster relief for corporate donors, but private-sector engagement in these areas, though still rudimentary, is just as vital. That is not just about social responsibility. It is also, as the report notes, “about economic risk management and the longer-term vitality of consumer societies”.

While business may not be in the business of disasters, it decreasingly stands by, if it ever did, when disaster strikes. For multinationals in China, preparation is understanding where a company can be helpful and at what points in the system it can make their offers of assistance. For Chinese companies abroad, it is something to understand that this is becoming yet another dimension of being a multinational.


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China’s Economy Slowing But Not Faltering Enough To Force Change

China’s economy continued to slow in the fourth quarter of last year, though not by as much as many economists, if not us, had expected. Gross domestic product rose by 8.9% in October to December, compared to the same period a year earlier, the National Bureau of Statistics announced. The fourth quarter growth was the slowest for 10 quarters, and the first time the growth rate had fallen below 9% since mid-2009. Full-year GDP growth for 2011 came in at 9.2%, down from 2010′s 10.4%. The cooling of the domestic property market and the moderation of demand in China’s Western export markets have taken their toll on expansion, the one intended, the other not.

Policymakers have been pumping credit into the economy since late last year. That is likely to continue–monetary easing by way of a backdoor stimulus. The questions now are how much will be needed to keep a hard landing at bay, and how much can be risked without re-stoking inflation, which, while down from July’s 6.5% peak, is still ahead of the government’s target of 4% for the year, coming in at 5.4% for 2011. The property bubble has been deflated not punctured and still rising food prices remain a concern, the latter being both politically sensitive and the part of the consumer price index least responsive to monetary policy. Ma Jiantang, head of the statistics bureau, warns that inflation could easily reverse this year its fall in the second half of last.

Given that, and the uncertain outlook for the global economy, particularly its European component, Beijing’s policymakers will have to walk a fine line, a task made more difficult politically by the leadership transition now underway. It is also likely to make policymakers and politicians alike more nervous of tackling the changes needed to rebalance the economy in the longer term, away from export- and investment-led growth and towards domestic consumption. If anything, the higher than expected fourth-quarter GDP numbers bolsters the status quo. It will reinforce the view of the economic conservatives that it is better not to mess with the tried-and-tested mechanism of stimulating the economy via new loans from large state-owned banks to equally politically reliable large state-owned enterprises, as it appears to be forestalling the immediate danger at hand.

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