Monthly Archives: February 2012

Chinese Firm To Build World’s Third Largest Mosque

Chinese construction companies’ work in Libya may have dried up for now. And Beijing may be wrestling with its restive Muslim Uighur minority in Xinjiang. But, regardless, China State Construction Engineering Corp. (CSCEC), has signed a contract with Algeria to build the world’s third largest mosque.

It will be situated in Mohammadia in the eastern part of the capital, Algiers, sitting on a 20 hectare site overlooking the Mediterranean. Its minaret will be an imposing 300 meters high and the mosque will be able to accommodate 120,000 worshipers. The complex will comprise a dozen buildings including a research library, according to reports. Algeria’s Religious Affairs Minister Bouabdallah Ghlamallah says, “There will be nothing like it in the world–religiously, touristically and economically”.

The city already has three grand mosques, but the most recent was built in the 17th century. Once the new mosque is completed–the target date is August, 2015; at a cost of $1.3 billion–only the al-Haram mosque in Mecca, considered by Muslims to be the most holy place and which can accommodate up to 4 million pilgrims during the Hajj, and the al-Nabawi mosque in Medina, which houses the tomb of the Prophet Muhammad, both in Saudi Arabia, will be larger.

CSCEC, which is China’s largest international general contractor, knows Algeria well. It has been building there for 30 years and has built the country’s five largest hotels. It is also one of four Chinese construction companies the World Bank barred from bidding on projects it finances following an investigation into corruption in the Philippines. CECEC’s ban runs to 2015. However, its latest Algerian contract will do no harm to China’s standing in the Arab world.

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More Emergency Relief For Drought-Stricken Yunnan

Photo taken on Feb. 24, 2012 shows cracked land in a pond at Fanglang Village in Malong County of southwest China's Yunnan Province. A brutal drought has wracked the province since late last year, leaving at least 3.15 million people without sufficient supplies of drinking water as of Monday, according to government statistics. (Xinhua/Lin Yiguang)

Emergency funds of 500 million yuan ($80 million) are being allocated for drought-relief in Yunnan, the finance ministry says. This follows the announcement earlier this month of 120 million yuan in relief assistance from central government on top of the 180 million yuan earmarked by the provincial government.

A three-year long drought that has worsened significantly since December has left 3.2 million people short of water. In recent days, more than 1,000 armed police have been deployed to deliver emergency supplies and build water storage facilities in the 15 prefectures in the province worst hit.

The photograph of a dried-out pond, above, was taken on February 24th in Malong county. There are other recent photographs here. The lack of rainfall has dried up more than 270 rivers and 410 small reservoirs, officials say. It is also putting at risk for fire more than 130,000 hectares of forests and more than four times as much cropland. Direct economic losses from the drought are estimated to have already topped 2 billion yuan.

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More Mass Vaccinations Planned Against Polio Outbreak In Xinjiang

China is extending it campaign of mass vaccinations against polio, state media has announced. Two more rounds of vaccinations will be conducted in March and April in Xinjiang. These will be the fourth and fifth rounds following a fatal outbreak of the disease there last August, though no new cases have been reported since last October. Nearly 4 million children in Xinjiang have been vaccinated so far.

The new inoculations, as with the previous round, will be given to all children under 15 in Xinjiang and to everyone under 40 in five regions of the province. They are Hotan in the south where the outbreak was first reported, Kashgar, Aksu, Bazhou and Kezhou. The outbreak is thought to have spread into southern Xinjiang from Pakistan and India.

At least 21 cases of the disease have been confirmed, leaving at least 17 people paralyzed, including eight children. Thirteen of the 21 cases are from Hotan, six from Kashgar and one each from Aksu and Bazhou. Ten of the cases are in children under three years of age and 11 cases are in adults between 19 and 53 years old. There have been two death, according to the World Health Organization, including at least one infant.

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China, Russia Settle East Siberian Oil Pricing Dispute.

Workers inspect PetroChina oil tanks in Daqing, northeast China's Heilongjiang Province, Jan. 10, 2011. Some 390,000 tonnes of crude oil have been delivered to China as of 22 p.m. Monday through an oil pipeline linking Russia's far east and northeast China, since it began operating on Jan. 1, 2011. The pipeline which originate in the Russian town of Skovorodino in the far-eastern Amur region, enters China at Mohe and terminates at Daqing, both in northeast China's Heilongjiang Province. The 1,000-km-long pipeline will transport 15 million tonnes of crude oil from Russia to China per year from 2011 until 2030, according to an agreement signed between the two countries. Some 72 kilometers of the pipeline is in Russia while 927 km of it is in China. (Xinhua/Wang Jianwei)

The long-troubled negotiations over China’s purchases of Russian oil have reportedly taken a step forward. Russian press reports say a new deal ensures a below-market price for China’s oil imports from East Siberia. Russia’s largest state-controlled oil company, Rosneft, and the pipeline monopoly, Transneft, are to give China National Petroleum Corporation (CNPC) a $1.50 a barrel discount on the oil it gets via the East Siberian-Pacific Ocean pipeline relative to the market price of Russian oil shipped to other buyers from the Pacific Ocean port of Kozmino.

China receives the vast majority of its Russian oil via a spur on the pipeline from Skovorodino to Daqing, shown above, that opened in January, 2011. But it is starting to buy Kozmino cargoes as an alternative to Iranian oil. Rosneft reportedly says the deal will cost the Russian side $3 billion a year in revenue. That seems haggling hyperbole, rather than a real number. The arithmetic suggests $3 billion over the life of the contract would be closer to the mark. Whatever the true figure, the Russians may just have to write it off as the cost of ending the dispute. China funded the building of the pipeline with a $25 billion loan but claimed Transneft overcharged for transport costs. These are part of the formula for pricing the oil with which the loan is to be repaid at a rate of 15 million tonnes of crude a year from 2011 to 2030.

The two countries still have outstanding negotiations over natural gas. Price is a point of contention in those discussions, too. However, there has been agreement that Russia will start supplying China with Eastern Siberian gas in 2015.

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China’s Reform, The World Bank And Vested Interests

The World Bank’s report on China in 2030 is a political manifesto disguised as an economic blueprint. Even the title, Building a Modern, Harmonious, and Creative High-Income Society, hits political not economic buttons. Not that the Bank casts it in that light, but it does provides China’s reformers with both strong arguments and influential backing to press ahead with reviving the economic reform. That has slowed to a glacial place now it has hit the hardest rocks of vested interest.

The World Bank gives the document intellectual and international heft. The participation of the State Council’s Development Research Centre, a prestigious government think tank, and with that the involvement of some of the most prominent technocrats who drafted the current five-year plan, lets the report avoid criticism leveled at recent International Monetary Fund recommendations for stepping up economic reform. That was castigated for being being an outside view that didn’t understand the realities of China. That can’t be said of the Bank’s report. It also gives it the implicit imprimatur of Li Keqiang, the man expected to take over from Wen Jiabao as prime minister in the current leadership transition and thus the Politburo member in charge of the economy. He signed off on the current five-year plan. He also told World Bank president Robert Zoellick, in Beijing to present the report, that China has “a long way to go before realizing modernization”.

Li is being realistic about the challenge ahead for China’s reformers. The World Bank report offers them a strategic description of the way forward rather than policy prescription. Its six strategic directions for China’s future are:

  • Completing the transition to a market economy;
  • Accelerating the pace of open innovation;
  • Going “green” to transform environmental stresses into green growth as a driver for development;
  • Expanding opportunities and services such as health, education and access to jobs for all people;
  • Modernizing and strengthening its domestic fiscal system;
  • Seeking mutually beneficial relations with the world by connecting China’s structural reforms to the changing international economy.

They are goals familiar to anyone who has read China’s current-five year plan, even if that couches them in terms that give more prominence to reductions in income inequality, universal social services, greater environmental protection and more energy efficiency. The Bank’s overarching message, though, lays out the unstated sub-text behind the five-year plan: structural reform is needed to promote a market-based economy, redefine the role of government, lessen the power of state enterprises and develop the private sector.

There is no doubt that China’s economy has reached the point in its development at which the dirigiste methods that have delivered 30 years of double digit growth need to change. Growth will inevitably slow in the coming years. All industrializing nations run into the law of large numbers. The exports and fixed asset investment that have driven growth cannot be sustained at that pace. Growing a $6 trillion economy by 10% in a year is a far greater task than growing a $350 billion one that much. That latter number is, best guess, roughly the size China’s economy was in 1981 in nominal terms. That is was 30 years of 10% growth does to $350 billion economy: turn it into $6 trillion one.

It is a remarkable achievement. Yet the arc of China’s development is not that different from the rapid industrialization phase of countries such as South Korea, Japan or even, much earlier, western Europe and the U.S., even if the magnitude of China’s arc is on an unprecedented scale. The country’s well of cheap labor, transferred from farm to factory, is starting to run low. Demographics, too, are working against growth. The value of foreign-developed technologies diminish as they age. Most of all, the economy needs to move up the value chain if it is to clear the barrier at which so many developing economies fall, that point where per capita income reaches at $10,000-12,000 a year. Vault it, and a nation becomes a middle income country on the road to being a rich one. Fail, and the country ends up stuck on a plateau of disappointed expectation.

China needs to do all that is recommended in the World Bank report if it is to clear that so-called middle-income trap, or economic Great Wall. The report doesn’t put it in these exact terms, but its message is that without reforms, growth will slow to the point where there isn’t the momentum to make the leap. This in not about whether there will be a hard or soft landing in the near term, though the Bank warns that responses to short term problems could undermine long-term strategy.

It is the politics that is the quagmire. There are clear implications for the Party in adopting market reforms. No country has done so successfully and remained a one party state. Even Japan’s Liberal Democratic Party, the closest approximation any democracy outside a city-state has had to one-party government, was eventually put into opposition at the ballot box. There is a difference between political rights and civil liberties, and the Party may find a seam in that distinction in which to work. But it would be a brave Bystander that bets on it.

The Bank does not push an overtly political agenda of what elsewhere in the world would be seen as neoliberal reforms. It hopes instead to push on an open door, offering practical steps to further an agenda China’s economic policymakers, if not all its leaders, have frequently endorsed. It does, though, call for the government “to redefine its role to focus more on systems, rules and laws” and for “redefining the roles of state-owned enterprises (SOEs) and breaking up monopolies in certain industries, diversifying ownership, lowering entry barriers to private firms, and easing access to finance for small and medium enterprises.” Those are all overtly political acts. The Bank recognizes the extent of the political opposition from vested interests to its proposed reforms. Even getting to this point with its report has been a political to and fro. The text is still a “conference edition”, i.e. subject to further revision, for which read political to and fro. State media’s reports on the report are low key (you’ll have to read to the final paragraph to find mention on it).

Reining in the power of the SOEs provides a particular challenge to the reformers. SOEs, like the military, are a source of power, money and influence for the princelings, the descendants of Mao’s original revolutionary leaders, an elite collective dynasty of some 400 families who hold extensive sway over the Party, army and the economy. Xi Jinping, the assumed successor to Hu Jintao as president, is one of their number. The princelings are neither a monolithic block nor are all opposed to reform. But modernizing the governance of the PLA to make China’s military internationally competitive is an easier sell for the reformers, and a creates more winners among the incumbents, than modernizing the state-owned enterprises and banks to the same end.

Yet without removing the structural distortions that the increasing sway of the of SOEs and banks hold over the economy, the sustainability of China’s growth remains in doubt. The double challenge is that the side effects of the twin forces of untrammeled infrastructure investment driven by SEOs and local governments that are little more than property developers–high energy consumption, inefficient capital allocation, unfettered real estate development and environmental degradation–also put economic growth at risk and threaten greater social unrest and thus the Party’s political legitimacy. Breaking the vested interests will be extremely hard for the reformers. Where they are not corrupt, they are systemic. Or both. That is one reason that reform has slowed to the extent it has.

Development of the private sector, giving more freedom to businesses to be innovative, changing the deeply rooted attitude of officials at the lower levels of the Party and government that quantity of economic growth matters more than quality of growth, more transparency to local government finances and governance, are all big changes from the way officials have done things for 30 years, 30 years that from inside China look immensely successful. China’s resilience to the post-2008 global financial crisis, and the authorities response to it, has, if anything, only further set back the case for structural reform.

That changes that China needs to rebalance its economy and go to the next phase of development go the nub of the nexus of government, Party and state, don’t make them any less necessary. How the new leadership handles it will be the measure of its success as custodian of the Party, state and government for the next ten years. The Bank is being politically adroit in casting its timetable for reform to well into the leadership term of those now about to assume the reins of power. Yet how, and whether, President Xi resolves the inevitable factional infighting between the inevitable winners and losers from reform, will determine the cast of his successors long before then.

If there is one thing a state-planned economy should be good at it is producing plans. Beijing has so many accomplished technocrats, and especially among its economic policymakers, that producing really good blueprints for change isn’t a problem for it. Implementing them is the challenge. For all the World Bank’s backing, an institution that may well be led by a Chinese before 2030, these are going to need strong domestic political leadership to be brought to fruition. That means the emergence of a modern-day Deng Xiaoping figure, singly or collectively, or, what no one wants, wrenching crisis. Otherwise China’s economy will stall, and wrenching crisis of another kind ensue. China will then look very different in 2030 from what anyone now is planning for.

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The One Question That Matters About China’s Model Of State Capitalism

Monday’s publication will push the World Bank’s report, China in 2030, to center stage in the emerging, if ultimately pointless debate about whether China’s state-directed capitalism is better than the U.S.’s free-market capitalism. The later has undeniably damaged its case with the self-inflicted injuries that caused the 2008 global financial crisis. The revival of the 1930’s blend of banker and gangster, bankster, is timely and apt, in that regard, just as are the Occupy protests that have sprung up around the free-market world. But, in their rush to throw out some fetid bathwater, capitalism’s critics risk tossing out the baby, too. Nor is the Chinese model a proven substitute. For all that it has seen China though the post-2008 crisis period with higher growth rates than the Western Economies, the long-term costs have yet to fall due.

The World Bank report reportedly argues that the dirigiste model that has seen China through a remarkable three decades of economic development has run its course. We don’t yet know the details of the Bank’s arguments, but this Bystander has long argued the necessity of structural change if China is to move up the development ladder. The heart of the real test for China’s state capitalism is not whether it is better than banksterism. It is, can it vault the country from the ranks of poor countries to rich. To do so, it will need to clear the middle-income trap or the economic Great Wall–choose your metaphor–something no developing country has done without institutional change. This Bystander thought it timely to republish China’s $10,000-12,000 Question, first published in January last year, examining whether China can defy history:

Whether political reform is an inevitable consequence of China’s economic reform has been a longstanding question. Ilian Mihov, an economics professor at INSEAD,  the Paris-based business school, flips the question on its head. He asks whether the country’s ability to develop its economy rapidly can continue without institutional reforms regarding the rule of law, governance and accountability.

In a recently published report of a session on China at an INSEAD symposium in Singapore last November, Mihov said China needs “deep structural reforms”. Command economies can only sustain fast growth with weak institutions for so long. The tipping point comes when per capita income reaches $10,000-12,000 a year, the point at which developing economies tend to stop developing without institutional change (see chart below)*.

“There is not a single country that has good quality institutions and is poor,” Mihov said in Singapore. “The gap between rich and poor is driven by poor productivity that is linked to poor quality institutions and poor business environment.”  As evidence he offers the contrasting experiences of Singapore and Venezuela. Even more dramatically, consider the economies of the old Soviet bloc, which collapsed as per capita incomes hit and then got stuck at the $12,000 a year level (adjusted for current prices).

China’s annual per capital income is $4,000. At current growth rates that gives it less than a decade before it starts bearing down in earnest on that tipping point or The Great Wall as Mihov inevitably dubs it.

What makes for the aforesaid poor quality institutions and a poor business environment includes political instability, government inefficiency and the prevalence of corruption. Those are factors within government’s control. There has been progress, albeit piecemeal, as with, for example, the current anti-corruption campaign and the improving quality of China’s civil, if not criminal courts. There are other reasons than planning for long-term economic development for those changes, but the $10,000-12,000 question is whether that progress continues at a sufficient pace to carry the country through the transformation to a new peak of development. Or will it be left stuck on the plateau of stagnation?

The growing economic and political clout of state-owned enterprises is another possible impediment to progress. Like Japan before it, China has grown fast by replicating and improving on what advanced economies have already done and producing and selling the results much more cheaply. Yet, as Japan found out, there comes a point where innovation has to replace imitation if growth is to be sustained.

China’s state-owned national champions and aspiring multinationals are ambitious, adaptive and fast learners (as were Japan’s). They are developing R&D and product development capabilities but they remain reliant on access to low-cost capital from the state, have rudimentary organizational and financial management skills by the standards of multinationals and have yet to acquire two of the most essential traits of a globalized multinational, managing diversity and allowing the intrapreneurship in which innovation can flourish (traits that few Japanese multinationals were able to acquire).

Beijing is throwing a wall of money and of engineers and scientists at making its national champions more innovative (dealing with diversity isn’t even on the radar). Yet in the process of building up the SOEs it is distorting markets and entrenching vested interests that increase the resistance to reform. It also crowds out small and medium sized companies where growth-generating innovation truly flourishes. Those need a particular business environment which is possible only with good institutions and a regulatory and governance regime that may not be to the taste of big business in the form of the SOEs, who see their (patriotic) role to be competing with other multinationals not fending off pesky upstarts at home.

That sets up a dilemma for the leadership. If the Party’s legitimacy to monopolistic rule depends on continuing to deliver the economic growth that keeps its citizens getting richer and Mihov is right that the country’s rapid economic growth cannot continue beyond a certain point without institutional reform, then managing the role of government in the economy and overcoming state-owned vested interests — in other words reforming itself — becomes China’s policy planners most important concern.

*There is a 2009 research paper on the $10,000-12,000 barrier by Mihov and his colleague Antonio Fatas, The 4Is of Economic Growth, from which the chart above was abstracted. A summary focusing on China, Another Challenge To China’s Growth, was published in the Harvard Business Review of March 2009.

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Shanghai Becomes More Like Venice, In A Bad Way

So serious has the depletion of China’s groundwater become as a result of industrialization and urbanization that the country’s large cities are sinking, as, potentially, are the high-speed rail corridors between them. So concerning is that to authorities that the State Council has made areas with high-speed rail links a priority in a new land subsidence research project it has approved to be completed by 2015. In the order of these things, that is a crash deadline.

The survey is one of four projects that the Ministry of Land and Resources said this week that the State Council had ratified to combat the effects of China’s growing water shortage. Others include yet more controls on pumping underground water, and the setting up of monitoring networks in the worst affected areas–the Yangtze river delta, the North China Plain and the Fen and Hua river basins. The network is to be in place by 2020.

It didn’t take any technology to see the 8 meter crack that opened up earlier this month in a road near the Shanghai World Financial Center. (There are some pictures here.) That is despite authorities taking preventive measures since 2005 to combat ground subsidence caused by falling water tables. Municipal officials say the city is still sinking by seven millimeters a year. That is a better state of affairs than in the past, however. Shanghai used to be sinking by several centimeters a year.

A third of China’s water reserves lie in underground aquifers. They supply 70% of the country’s drinking water and 40% of its farm irrigation needs. They are being stretched to their limits, particularly across the grain belt of the North China Plain as evermore wells are sunk to draw water for city dwellers and industry. Underground water pollution is a separate concern, but as serious.

Shanghai is one of more than 50 large cities with a similar Venice-like problem of subsidence because the water table below it is sinking. Beijing, Tianjin, Hangzhou and Xian are among others. As the number of 50 cities has been quoted since at least 2006, we suspect it may undercount the problem today. In a paper the China Geological Survey published that year the direct economic cost of subsidence was put at 1 billion yuan ($160 million) a year. It will likely top that now.

Tianjin, which like Shanghai has been sinking since the 1920s although it wasn’t until the 1960s that it was understood why, shows why widespread limits on groundwater pumping are so urgent, and also how difficult it is to control subsidence. The city introduced restrictions as long ago as 1985. Its sinking has slowed from 80 millimeters a year then but is still dropping 20 millimeters a year now. Coastal cities share another characteristic with Venice. Floods are becoming more frequent and severe. The lower cities sink the more susceptible they are to them.

We have noted before the potential explosive social costs of a water crisis getting beyond the government’s control. It will take a comprehensive program of water conservation, better water resource management and better husbandry of the ecosystem. And there are plans on all those fronts. But if they fail, it will be more than a high-speed train or two that comes off the rails.

 

 

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