Monthly Archives: March 2010

Rio 4 Trial Ends

The trial of the Rio 4 is over. No verdict or sentence has been handed down yet by the Shanghai court. That could take weeks. Three of the four Rio employees pleaded guilty to taking bribes; it is not known how the four pleaded to the industrial espionage charges. Those were heard in secret, though Australian diplomats were allowed to attend the part of the trial dealing with the bribery charges. Justice is blind, or at least blinded.

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Severe Weather Continues

The severe weather that has marked the past few months shows no signs of abating. The sandstorm that engulfed Beijing last weekend swept in from the far west, where the one coming along behind swirled over four prefectures in southern Xinjiang just as snow blanketed the north of the province, combining to cause chaos to road and air travel. The previous week northern Xinjiang had seen unusually heavy snow. Meanwhile, the drought in the southwest has now affected more than 50 million people, leaving 16 million facing shortages of drinking water. The State Commission of Disaster Relief has said that one fifth of  the 4.3 million hectares of farmland that have been affected by the drought have become so arid they won’t support crops. More than 4,000 military police have been deployed in  relief work, augmenting Red Cross efforts. After five months of drought, there is still no rain in the forecast for the region which includes Yunnan, Sichuan, Guizhou and Guangxi as well as Chongqing.

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Rio 4 Trial: Look It Up Once It’s Done

Stern Hu, head of Rio Tinto’s Shanghai office, who stands accused of taking bribes and engaging in industrial espionage, has admitted taking bribes, though he contests the size of them. We know that via one of the attorney’s representing one of Hu’s three colleagues who are also on trial. Proceedings, which are expected to last three days, are closed, even to Australian consular officials for most of the time. The part dealing with infringing trade secrets charges is expected to start sometime on Tuesday. As Lu Zhian, an associate professor at Fudan University’s  Law School, told Xinhua, if we want to find out what went on, we “can refer to the court’s hearing records after the trial and appeal”.

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China and Rio Tinto: Coinhabiting Parallel Universes

While gathering our thoughts for a preview of Monday’s start of the Rio 4 industrial espionage trial, we received word of Rio Tinto’s $1.35 billion iron ore joint venture with Chinalco in Guinea. Having slept on it for more than 24 hours, this Bystander still can’t make anything out of it that isn’t surreal. Perhaps it is just another example of China’s remarkable ability to operate in parallel universes.

We had assumed that the trial of Australian Stern Hu and his three Chinese colleagues at Rio would proceed to its predetermined conclusion, with a routine sentence to follow. The main point the court proceedings are meant to be making is that China follows the administration of its law–not the same thing as following the rule of law, of course–and that nobody is above the process. With a host of domestic corruption cases in train, no foreigner, especially an ethnic Chinese one like Hu, can expect much by way of favors. Foreigners routinely underestimate how signals they assume are directed at them are really more for domestic consumption.

The case has strained though not severed relations between Beijing and Canberra. Those were further frayed last June when Rio Tinto pulled the plug at the eleventh hour on a $19.5 billion cash injection from Chinaclo that would have increased the state-owned aluminum giant’s 9% stake in the Anglo-Australian miner. A revisionist view of the causes of Rio’s change of heart more favorable to the company has taken hold in Beijing. Last year Rio’s sales to China accounted for a quarter of the company’s revenue.

The new joint venture between the two in Guinea gives Chinalco a 47% stake in Rio’s Simandou project which involves infrastructure work Chinese firms are well practiced at in Africa, building a mine, a port and a railway to connect the two. Last October, China signed a $7 billion mining and energy deal with Guinea’s military rulers, so it makes a well-connected partner for Rio in a project that has run into local political problems. The joint venture also gives China a voice on the sellers’ side of the table at the iron ore price negotiations where it is already sits on the other side as the buyer. More parallel worlds.

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Fixing China’s Local-Government Finances

What strikes this Bystander as interesting about the World Bank’s latest quarterly update on China’s economy is not so much the 9.5% forecast of GDP growth for this year. A glance at any factory, wharf or store gives one an intuitive sense that the economy is outpacing last year’s 8.7% growth. All the Bank’s macro points — modest inflation risk, concern for real-estate bubble, need for more monetary tightening, correctness of fiscal neutrality, advisability of revaluing the currency — strike us as sound and unsurprising, too. What did catch our eye was the attention given to the strain on local government finances.

The central authorities have rightly increased vigilance over lending by local government investment platforms. Given China’s solid macroeconomic position, the local finance problems are unlikely to cause systemic stress. But the flow of new lending to the platforms needs to be contained and local government revenues need to become less dependent on land transaction revenues.

A huge amount of last year’ 9.6 trillion yuan of new bank-lending found its way into local government infrastructure projects. These are frequently done through captive commercial investment companies so provincial and municipal officials can get around the rudimentary system Beijing has for allocating tax revenues to provinces and cities for spending. The concern is that these investment getarounds, of which there are an estimated 3,000, won’t generate sufficient returns to pay operating and interest costs or to repay the loans taken on, leading to a rise in non-performing bank loans, especially at smaller (and weaker) regional and local banks, or leaving local governments holding the can.

The CBRC recently estimated that their bank debt increased by RMB 1.3 trillion in 2009 to RMB 5‐6 trillion at end 2009, with estimated additional committed lines of RMB 3 trillion. The possible total of RMB 9 trillion is equal to 27 percent of GDP, while some other estimates of the total liability are even higher. However, a large portion of this debt was accumulated before 2009 and so far no systemic problems have occurred as a result of it.

Even if, as the Bank repeatedly notes, the problems won’t rise to the level of a systemic risk to the banking system, Beijing has already spent trillions of yuan this decade in cleaning out the banks’ bad-loan books and doesn’t have any apetite to do so again.  It wants to clean up and rein in local government debt growth before it becomes another bubble.

The PBC and the CBRC have both warned of potential problems and called on banks to strengthen risk assessment of lending to local government projects. Some individual banks subsequently announced increased vigilance towards this type of lending. The central government is apparently considering issuing new rules on local government guarantees, with suggestions that letters of guarantee or comfort will not be valid anymore.

Tighter administrative restrictions on circumnavigational financing through local governments’ investment units is being accompanied by giving provinces and municipalities more direct access to capital markets, including an experiment with a local-government bond market. The Bank encourages Beijing to go much further:

Reform of the intergovernmental fiscal system is needed to increase and diversify the revenue base of local governments, making it rely less on volatile land sale revenues. Moreover, local fiscal activity needs to become more transparent. It would be good to include land sale revenues and the infrastructure and urban development activity in local government budgets.

That, though, would be the work of more than one five-year plan.

Update: China Daily has an example of what can allegedly go wrong.

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Currency Manipulation Countdown

The U.S. Treasury Department has to make its annual ruling for the U.S. Congress on whether it believes China is manipulating its currency by April 15. For 16 years, it has always come up short of doing so, for that would let the legislature impose sanctions, if it so chose, which, in its current mood, looks likely. A letter from 130 Congressmen asked the administration to make the currency-manipulation declaration, the latest manifestation of the rising pressure among America’s legislators for the Obama administration to take a tougher line with China.

It coincides with tougher rhetoric coming out of Beijing, warning Washington not to politicize trade and currency issues while at the same time insisting that China’s trade surplus is not the result of the yuan-dollar exchange rate. “We hope that in surmounting the crisis and reviving its economy, the United States should be a promoter of free trade, not an obstacle to it,” Yao Jian, commerce ministry spokesman said today, his words following the even tougher ones of Premier Wen Jiabao in his closing speech to the National People’s Congress and press conference after. So much for not politicizing the issue.

The truth of the matter is that allowing the yuan to appreciate in the direction of a market rate is in China’s long-term self-interest but Beijing will move on its own timetable. Most likely it will let the yuan float within a band against a basket of currencies, in which the dollar will be a large component, while managing the movement of the bands. Singapore uses that approach without so much as a peep out of Washington.

There is clearly some internal debate among officials over lifting the current yuan peg, but we can distill a consensus that it is a policy for the duration of the global financial crisis that will be ended at some point. When that point might be is the great guessing game for those outside a relatively tight circle of policy makers.

Some in Beijing might be not too unhappy for China to be labelled a currency manipulator by the U.S.. The resulting sanctions are unlikely to stand up to scrutiny by the World Trade Organisation, which could lead to a humiliating climbdown by Washington.

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Wen Rips Into Washington

No sign of any rapprochement in relations with the U.S. at Prime Minister Wen Jiabao’s customary post National People’s Congress press conference. He ripped into Washington over Taiwan, the Dalai Lama, the yuan, the Copenhagen climate conference, you name it. “These have seriously disrupted Sino-U.S. relations,” he said. “The responsibility did not lie with China,” adding that “we oppose all countries engaging in mutual finger-pointing or taking strong measures to force other nations to appreciate their currencies.”

Wen also made a rare public admission that a downturn in the economy and social unrest could be a threat to the Party’s rule. A combination of inflation, a widening income gap and corruption could be “strong enough to affect our social stability and even the stability of state power,” he said.

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China Eyes Building High-Speed Railways In U.S. And Europe

China is well into building 25,000 kilometers of high-speed railway lines and spending $300 billion over the next decade on doing so. It is already recouping some of the investment in the expertise is its gaining along the way by building high-speed lines in Turkey and Venezuela. There is a project in Brazil  in the works, as well plans to extend the domestic network into Central and Southeast Asia. Now China’s state-owned rail companies are turning their sights further afield. Western Europe already has a well-developed network of high-speed lines, so countries like Poland are prospects, as is Saudi Arabia in the Middle East. It is the U.S., though, that looks a more potentially fertile market as it has few high-speed lines but plans for $8 billion-worth new networks in California, Florida and Illinois. “We are organizing relevant companies to participate in bidding for U.S. high-speed railways,” Wang Zhiguo, a deputy railways minister, said at a press conference on Saturday.

China’s high-speed trains use mostly French, German and Japanese technology. The Chinese companies are developing their own but none has produced  a production model yet. On his most recent visit, U.S. President Barack Obama said that he would look at China’s high-speed rail technology, but the prospects of spending U.S. stimulus money on a Chinese import of this scale look politically fraught, especially with mid-term elections due this year.

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Inflation Jump Heralds Stimulus Exit

The 2.7% year-on-year increase in consumer prices in February takes the monthly inflation rate perilously close to the 3% ceiling  that Prime Minister Wen Jiabao set in his National People’s Congress speech. It is both a sharp rise from January’s figure and much higher than expected, even allowing for the seasonal New Year’s effect. Allied to similarly larger than expected jumps in the monthly industrial production and export numbers, it provides a ready excuse for the central bank to raise interest rates to dampen the rate of GDP growth, not that it takes much prompting. Higher rates could cause a bubble-inflating inflow of hot money, which makes this Bystander wonder if there might be some coordinated action coming among the world’s leading central banks to tighten monetary policy and start the exit from stimuli programs.

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China’s Glorious Billionaires

To get rich is glorious, said Deng Xiaoping. What strikes this Bystander as most telling from Forbes’s latest annual list of the world’s billionaires is that while every part of the world has more of these very rich people than they did a year ago, Asia is the only region to set a new record high.  China now has 64 billionaires, up from 28 a year ago, and 27 of them a new to the list. Hong Kong has 25 and Taiwan 18, up from five a year back. A warming of cross-Strait relations has clearly served them well, but a rising tide lifts all boats.

China’s billionaires are worth a collective $44 billion, Forbes reckons. Wahaha’s Zong Qinghou has the most, $7 billion, which puts him at number 103 overall in the world of the super-superrich. The number of China’s billionaires would probably be higher if the magazine aggregated family fortunes rather than individual ones.

The property bubble is keeping plenty of China’s billionaire’s fortunes pumped up, at least for this year, but there is a noticeable diversification of the sources of the wealth. Hui Ka Yan is the richest China real estate developer, at $4 billion, but he is fifth richest China billionaire behind mostly retailers and consumer goods producers, benefiting from the growth of domestic demand.

Baidu’s Robin Li returns to the list, now nearly twice as rich at $3.5 billion, as he was in 2008 before he fell off last year. Country Garden heiress Yang Huiyan has seen her net worth fall from the $16.2 billion that made her China’s richest person in 2007 to $3.4 billion but at 28 remains China’s youngest billionaire, a year younger than Shanxi Haixin Iron & Steel’s Li Zhaohui.

As for the rivalry between China and India, China may win on quantity but India wins on quality. Ten of Asia’s richest 25 people are Indian. Hong Kong has five entries on the list (Li Ka-shing, Lee Shau Kee, the Kwok brothers, Cheng Yu-tong and Joseph Lau) the same number as Japan. China has just one, Zong Qinghou, the same number as Taiwan (Terry Gou).

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