China’s Plans For Neighbourhood Nuclear Heating

CHINA NATIONAL NUCLEAR CORP. (CNNC) has been experimenting with a neighbourhood nuclear power plant the size of an Olympic swimming pool designed to provide heating for about 200,000 homes.

A 400-megawatt low-pressure ‘Yanlong’ small modular reactor (SMR) has been heating CNNC’s buildings for about three years, and the state-owned company has just run a 168-hour trial of district heating in Beijing.

The mini-reactors will cost an estimated $225 million to build (a fraction of the cost of a full-scale plant, typically upwards of $10 billion) and can be fabricated off-site and delivered by lorry, cutting constructing to three years.

How readily citizens will accept that a swimming-pool-sized nuclear power plant in the backyard is safe is one key question. Another is the economics. Neighborhood nuclear could be cheaper than gas, but pricing nuclear is notoriously difficult to forecast.

If the cost and safety issues can be resolved, SMRs become an attractive alternative to fossil fuels for cities on clean energy and environmental grounds and would help China meet its goal of increasing its domestic nuclear capacity to 200 gigawatts by 2030, up from 35 gigawatts at the end of March.

Small-scale reactors such as the one CNNC is testing fit into a wider research drive to develop and commercialise SMRs not just for cities but also islands, ships and other forms of transport.

CNNC is testing a small-scale reactor dubbed Linglong or Nimble Dragon in Hainan, and reports in October said a prototype floating nuclear power plant would be deployed before 2020 at drilling platforms in the Bohai Sea. An offshore nuclear power plant programme had been confirmed in January.  The South China Sea is the likely destination for some of them.

Such small-scale reactors are potentially commercial lifelines for the nuclear industry worldwide, which has struggled since the 2011 meltdown at Japan’s Fukushima nuclear reactor. Beijing suspended nuclear development in the wake of the disaster and only cautiously resumed it in October 2012.

China is not alone in seeing a large global market for small-scale reactors; so, too, does Russia and the United States, both of which are working on designs for them. Meanwhile, China intends for its nuclear power industry to go global, and has ambitions to sell 30 of its third-generation large nuclear power unit, the Hualong or China Dragon, by 2030 to countries involved with the Belt and Road Initiative.

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Putting Financial Stability Ahead Of Growth

IN THE SIX years since the International Monetary Fund last published a Financial System Stability Assessment of China, credit has boomed, spreading shadow banking has added complexity to the system, and moral hazard has grown as belief in the implicit state guarantee to firms and investors has remained unshakeable.

In short, financial instability risks have grown rapidly.

Within the constraint of maintaining growth and employment, authorities have responded to mitigate the risk and to put the expanding financial system on the right footing to support the ‘rebalancing’ of the economy from being led by infrastructure investment and export manufacturing to being more consumption and service driven.

There is much more to do, however, as the Fund outlines in its latest assessment.

Some of that will be politically challenging, notably allowing firms to fail, markets to fall and investors to lose money, which will be the consequences of removing the implicit guarantee that the state stands behind financial loans and products. They will also require detailed technical work on bankruptcy procedures, financial education and even social security safety nets.

Political priorities will also need to be adjusted to put financial stability ahead of economic growth. That is already starting to happen as job losses, particularly in heavy industry and primary production, and slowing economic growth more generally shows. However, the tolerance for both is greater at the higher levels of government than at the local one, where the expectation among officials that promotion depends on creating good economic growth numbers is proving hard to break. The massive task of reforming local government finances is probably a multi-decade, not just multi-year endeavour.

China Financial System Growth

Improving the supervision of the financial sector is an easier piece to bite off, and authorities have been systematically expanding that for banks, insurance companies and securities firms in recent years. The Fund recommends setting up an umbrella regulator focusing solely on financial stability to coordinate the oversight of systemic risk across sectors.

This regulator, which would be an institutional version of the recently established Financial Stability and Development Committee, will need authority and independence over the sector supervisors and an improved flow of data given the scale and complexity of the country’s financial system, especially in some of the murkier areas of shadow banking. As was seen in the West with the 2008 financial crisis, failure to monitor risks outside the regulatory perimeter can be the most damaging failure of all.

The Fund also suggests that the well-advertised rapid growth of debt requires banks to hold a plumper cushion of capital, and particularly at the larger banks that are systemically important. Greater capital reserves would not only provide a buffer in the event of a sudden or severe economic downturn, but also against the particular risk with Chinese characteristics of the extensive off-balance-sheet borrowing, notably for wealth management products, that the banks implicitly guarantee.

In the same vein, banks and financial institutions should be nudged through lending rules to stop using short-term borrowing to finance their investments and instead both lend and fund longer-term. Should it come to it, and a financial institution goes under, regulators should have their powers expanded in line with international standards to let the firm to ‘fail safely’ rather than prop it up with public funds.

Another area that the Fund urges oversight is digital finance, or fintech, which as expanded significantly in China as elsewhere. Existing oversight frameworks are often ill-fitting for the innovation that comes with fintech, though the need for systemic safety and soundness is not diminished.

The Fund calls China ‘the global centre of fintech’, noting the growth of peer-to-peer lending and the emergence of payment systems run by internet retailers such as Alibaba that are competitors to the banks’. Smartphone app WeChat’s WeBank is already a competitor to banks’ lending.

The scale of this is still small compared to the overall size of the banking system and thus not a systemic risk — yet. Nonetheless, they will need to be brought into the regulatory and supervisory scheme of things. This is starting to happen following the State Council last year launching an overhaul of internet finance oversight.

 

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China’s Collectivisation of Capital

THERE IS A vacuum in the state’s control of the economy. The combination of powerful private companies arising in new areas of economic activity from which state was absent, such as within the tech industry, and the breaking up of the patronage networks within state-owned enterprises (SOEs) as a consequence of President Xi Jinping’s anti-corruption campaign has created it.

The Party abhors a vacuum and has stepped in to assert its control as the state’s wanes. Under Xi, the People’s Daily opined in June, the Party has sought to address the “weakening, watering down, hollowing out and marginalisation” of party leadership at state enterprises.

Two months ago a government statement made it clear that private-sector business should follow Party guidance, including ‘patriotism’, ‘observing discipline’ and ‘serving society’ within its definition of entrepreneurship.

The mechanism for exercising Party control is the Party branch within companies. These have long existed within SOE’s (they are present in 93% of the 147,000 SOEs big and small) and have become prevalent in the private sector. Qi Yu, deputy head of the Central Organisation Department, said in October that 68% of 2.73 million private businesses had Party branches as of the end of last year.

Party cells are also becoming more common in joint ventures with foreign firms, and are being pushed on foreign firms with wholly owned local operations as part of the ‘new era’. Qi said 70% of foreign-funded firms in China – or 750,000 – have set up Party branches and 106,000 foreign-invested companies, against 47,000 in 2011.

Samsung and Nokia are two foreign companies who have acknowledged publicly that they have set up Party branches in their local operations; The medical systems division of Japan’s Toshiba has had a branch since 2007. The US chemicals multinational DuPont had one when it set up in Shanghai in the 1990.

The influence of Party cells varies greatly between companies and industries. At their best, or at least as portrayed by authorities, they promote goodwill and communication between the company and the Party. They run companies’ internal labour unions and be a source of labour through the agencies that coordinate them.

Some are little more than a cost irritant (the company foots the bill for Party branches’ activities). In joint ventures, especially with SOEs, they can make operational decision making more opaque and cumbersome. At the other end of the spectrum, they can seek to determine strategic and operational investment and business decisions.

Some SOEs listed in Hong Kong have gone as far as changing their articles of association so as to give the party a leading role in management decisions. And there are reports circulating of joint ventures being pressed to rewrite their terms of agreement to give the Party a more formal say in operations and management, including a final say over investment decisions.

It is that direction of travel — expanding the party’s presence in areas where it has previously had a limited role, such as in private and foreign joint-venture companies and the boards of listed firms, that is exercising foreign multinationals operating in China.

In late July, executives from more than a dozen top European companies in China met quietly in Beijing under the aegis of the EU Chamber of Commerce in China to discuss their concerns about the Party’s growing role in the local operations firms like theirs. Last month, the Delegations of German Industry and Commerce in China, representing German chambers of commerce, also raised their concerns and said some German companies might consider withdrawing from the market if the Party’s influence on their local operations grew.

Part of their argument was that companies from multi-party democracies should not be bound to promote a particular party, especially one that claims a monopoly on political power. However, the concern is that once Party presence is written into governance, commercial management autonomy is lost for good. In addition, Party members are subject to the Party’s disciplinary procedures, which, of course, is beyond any internal policies a company may have.

A statement from the State Council Information Office earlier this year, saying that “company party organisations generally carry out activities that revolve around operations management, can help companies promptly understand relevant national guiding principles and policies, coordinate all parties’ interests, resolve internal disputes, introduce and develop talent, guide the corporate culture, and build harmonious labour relations” is less reassuring to foreign investors than the Office probably intended.

The other end of the telescope is that the Party should intervene to assert the collective interest of the whole over the that of the part, the whole, in this case, being the state capitalist class.

An old-school Marxist ideologue might describe the presence of Party units in companies, and the guidance and discipline they would provide, as a precursor to the collectivisation of capital, in which individual companies become units of a state corporate whole.

In these more pragmatic days, this Bystander sees it just as the Party extending an strengthening its presence and control over all sectors of society, even in areas where it has previously had a limited role, which might be much the same thing.

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China Trade Does America A Service

US PRESIDENT DONALD Trump lambasted cheap Chinese imports for destroying American jobs when he was on the campaign trail last year.

A National Bureau of Economic Research working paper by Robert Feenstra of the University of California, Davis and Akira Sasahara of the University of Idaho, which  recently came across our desk though published in August, suggests the damage may not have been as extensive as previously thought once the gain in jobs from US exports to China are taken into account.

Looking at the impact of trade on employment in the United States from 1995 to 2011, the authors say:

For merchandise exports and imports from China, we have found added demand of 3.7 million jobs and reduced demand of 2.0 million jobs, respectively, giving a net gain of 1.7 million jobs.

Including services trade, Feenstra and Sasahara count a much larger net gain of 4 million jobs.

Different modelling approaches give some variation of results, showing that in merchandise trade the net job gain from the China trade could have been as low as 730,000 jobs or as high as 2.7 million and for trade in all sectors from 4 million to 5.1 million jobs. But all show a net gain in jobs.

At least some of that growth will have been as a result of China’s growth stimulating global growth and thus world trade.

Previous studies have estimated that since China’s accession to the World Trade Organization in 2001, unleashing the ‘China shock’ on world trade, Chinese imports accounted for one-quarter of the decline in U.S. manufacturing employment and have contributed to the unusually slow employment growth following the 2008 financial crisis.

Imports from China — or anywhere — else have twin effects. They create import competition and labour-market dislocation, but also benefit domestic consumers through lower prices. Trump concentrated on the former.

But what Feenstra and Sasahara highlight is the importance of services in the United States’ global trade. Thus Trump’s emphasis on restoring manufacturing jobs, if politically salient, is economically misplaced.

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China Will Rebalance The World’s Energy

Wind turbines in Xinjiang, 2005. Photo credit: Chris Lim. Licenced under Creative Commons

ACROSS THE MORE heavily industrialised provinces, factories and plants are being ordered to shut down or limit production during the winter months. This is both to curtail excess industrial production and also to curb seasonal smog, a byproduct of China being the world’s largest consumer of coal, which provides 65% of its energy.

The newly published annual outlook from the International Energy Agency (IEA) brings a glimmer of a silver lining to that particular dark cloud. China, it says, will remain a ‘towering presence’ in coal markets, but it believes coal use peaked in 2013 and is set to decline by almost 15% over the period to 2040.

China burnt 2.75 billion tonnes of coal in 2013, more than the rest of the world put together.

It is no secret that Beijing sees pollution as a potential political problem and that it is keen for China to go green. Lian Weiliang, deputy head of the National Development and Reform Commission, said earlier this week that the country was ahead of pace in its goal to cut coal capacity by 500 million tonnes within three to five years of 2016, while the Ministry of Industry and Information Technology forecast that environmental protection equipment manufacturing would be a 1 trillion-yuan ($150 billion) industry by 2020.

The new era will be about energy policy where the focus is on electricity, natural gas and cleaner, high-efficiency and digital technologies, not an energy system dominated by coal and a legacy of serious environmental problems, giving rise to almost 2 million premature deaths each year from poor air quality.

The switch will also flow from rebalancing the economy from a development model based on heavy industry, infrastructure development and the export of manufactured goods to one driven by higher-value-added manufacturing, services and domestic consumption.

Signs of the new era are there to be seen. Energy demand growth slowed markedly from an average of 8% per year from 2000 to 2012 to less than 2% per year since 2012. Official plans call for it to slow further to an average of 1% per year to 2040.

Energy efficiency regulation is a large part of the explanation. Without new efficiency measures, the IEA reckons, end-use consumption in 2040 would be 40% higher.

Nonetheless, such is the compounding effect of economic growth that by 2040, per-capita energy consumption in China will exceed that of the European Union and electricity demand for cooling alone in China will exceed the total electricity demand of Japan today.

The IEA reckons that China will need to add the equivalent of today’s United States power system to its electricity infrastructure to meet the demand expected by 2040. Such will be the scale of China’s clean energy deployment, technology exports and outward investment that it will play a huge role in determining global energy trends and in particular provide the momentum behind the low-carbon transition.

“When China changes, everything changes”, as the IEA says.

The agency lays out the future thus:

One-third of the world’s new wind power and solar PV is installed in China … and China also accounts for more than 40% of global investment in electric vehicles. China provides a quarter of the projected rise in global gas demand and its projected imports of 280 billion cubic metres in 2040 are second only to those of the European Union, making China a lynchpin of global gas trade. China overtakes the United States as the largest oil consumer around 2030, and its net imports reach 13 million barrels per day in 2040. But stringent fuel-efficiency measures for cars and trucks, and a shift which sees one-in-four cars being electric by 2040, means that China is no longer the main driving force behind global oil use – demand growth is larger in India post-2025.

China will also continue to lead a gradual rise in nuclear output, overtaking the United States by 2030 to become the largest producer of nuclear-based electricity.

The shift to a more services-oriented economy and a cleaner energy mix will take a decade to have its effects on the skies above. The IEA projects carbon dioxide emissions will plateau at only slightly above current level by 2030 before starting to fall back.

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Song Seeks To Open Diplomatic Doors In North Korea

Song Tao, head of the International Department of the Communist Party of China, seen in Moscow in March 2017.

THE PARTY, NOT the government runs China’s relations with North Korea. As head of the Party’s international department, Song Tao (above) is about as senior as it gets in regards to dealing with Pyongyang.

His four-day visit to North Korea is purportedly to brief North Korean party officials on the outcome of the Chinese Communist Party’s recently concluded 19th Party Congress. If he does, it will be, no doubt, be to reiterate the part in General Secretary Xi Jinping’s work report that implied that China is still more than a quarter of a century from military parity with the United States, and, by extension, that if Kim Jong-un thinks he can take on the United States in a war and win, he better think again.

Beijing certainly does want any hostilities on its doorstep. Stability is its primary goal in the nuclear standoff in the Korean peninsula. Kim will not stop his nuclear missiles programme until he has the deterrent that will ensure the continuation of his regime. Washington, for its part, is determined that he will not reach that point.

The only conceivable compromise that will lower tension on the peninsula is for China and the United States to accept that North Korea will develop long-range nuclear weapons (as they have) and work to draw it into the international arrangements that prevent those weapons being used in anger.

Although there has been no mention of it in state media, Song may have met Kim on Sunday with the likely aim of ‘opening the door’ to some semblance of diplomatic exchanges involving Washington and Pyongyang. Beijing thinks the most promising avenue for those would be around a trade-off of North Korea suspending its nuclear and missile tests in return for the suspension of large-scale US-South Korean military exercises.

Song’s trip comes just a week after the Beijing leg of US President Donald Trump five-nation Asia tour. Trump pressed China to do more to rein in North Korea. China, however, does not have as much sway over Pyongyang as Washington seems to believe, though it has more than it will publicly admit.

It has, however, been tougher on sanctions against North Korea than its previous track record in this regard would have led one to expect, and it is strictly enforcing the UN-imposed sanctions on imports of coal, iron ore and seafood from North Korea as well as shutting down banking links.

What effect this is having is difficult to ascertain in any detail, although all the reports reaching us suggest that the economy is being squeezed hard. It had grown by 3.9% in 2016, partly on baseline effects caused by the previous year’s drought, partly because of higher military spending and partly because more entrepreneurial activity had been allowed.

Growth likely slowed from that last year and may be barely 1% this, renewed drought exacerbating the impact of sanctions. In July, the UN Food and Agriculture Organization said it was the worst drought since 2001 and that food security would worsen, requiring cereal imports.

A North Korean bulk carrier, the Km Dae, has been making regular trips over the past few months (five since late June) from Nampho to the port of Yingkou, one of six ports ostensibly closed to North Korean shipping. Nampho is the port North Korea has in the past used to receive international food aid. What the vessel was carrying in either direction is unknown, though there are some reports that it docked at a berth in Yingkou used for the coal trade.

Another mystery is why North Korea has not conducted a missile or nuclear test for two months. During that time China has held its Party Congress and Trump has visited Asia, two events that on past experience Kim would have latched on to make some noise.

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China And Zimbabwe: No Great Change In The Weather

WHATEVER WORD IS is used to describe the process of separating Zimbabwe’s long-serving president, Robert Mugabe, from power, China will have lost a long-standing political friend on the continent.

True, it may not cry too many tears over that, though it does like to be loyal to old comrades. But even Beijing will recognise that the 93-year old corrupt autocrat trying to establish a dynastic succession to his 52-year-old wife Grace is not the same man as the Marxist anti-colonialist they befriend as a young man.

However, Mugabe was an important champion for China in Africa after the Sino-Soviet split in 1960 and China trained and funded his Zimbabwe African National Union (ZANU) fighters when they were still a liberation movement.

Mugabe had visited Beijing as recently as last January, returning a state visit to Zimbabwe by President Xi Jinping in December 2015, on which occasion Xi described the two nations were “real all-weather friends.”

A high-level visit to Beijing between November 8 and November 10 by Zimbabwe’s army chief, General Constantine Chiwenga, only shortly before he and fellow generals moved against Mugabe, is raising some speculative questions. This Bystander doubts if there was a Chinese hand behind ousting Mugabe. If anything, a western one seems more probable.

Nonetheless, Chiwenga  who met both the PLA’s head of the joint chiefs of staff, Li Zuocheng, and defence minister Chang Wanquan, may have felt it important to inform Beijing of his intentions, given the close relations between the countries. Or it may have been a long-planned visit that would have looked suspicious to cancel at the last minute.

China has taken a neutral stance on events since, saying:

As a friendly country to Zimbabwe, we are closely following the situation unfolding in Zimbabwe. Zimbabwe’s peace, stability, and development serve the fundamental interests of the country itself and other regional countries. It is also the common wish of the international community. We hope that Zimbabwe could properly handle its internal affairs.

State media has given prominence to voices calling for a stable transition of power.

If you follow the money, as this Bystander likes to do, you will see that Zimbabwe has as not been a recipient of Chinese foreign direct investment (FDI) on anything like scale the friendship between the two countries would suggest. Xi during his 2015 visit pledged $4 billion of grants and loans over three years, part of a $60 billion package for the whole of Africa. That year, the figure had been $600m out of a total $929 million of FDI that Zimbabwe attracted.

That should be contrasted to the $2 billion that China invested in neighbouring Zambia . The Chinese investment in the struggling Zimbabwean economy has been going into power-generation infrastructure and agriculture, notably tobacco growing.

Total trade between the two countries is tiny: less than $400 million of Chinese exports to Zimbabwe, mostly machinery and equipment, some $720 million of imports, mostly tobacco, in 2016.  Zimbabwe barely makes the top 30 of China’s trading partners in Africa.

Mugabe may have been an old friend, but China has not been throwing much good money after bad in that particular direction for some time.

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