Monthly Archives: May 2010

China’s Anti-Monopoly Law Steps Out

We do not pretend to be lawyers so a statement that China’s anti-monopoly law is a hybrid of European and U.S. models is a broad generalization. We do know that there was concern among foreign businesses when it was being introduced in 2007 that it could be used against foreign multinationals to bolster domestic industries and their acquisition of IP rights and technology, though it should be said that overall the new law was seen as a significant step forward in Chinese commercial law.

James T. Areddy and Dinny McMahon, writing in the Wall Street Journal, take last week’s divestment of Pfizer’s Chinese swine-vaccine business to Harbin Pharmaceutical as an occasion to review the use of the  anti-monopoly law two years in. They find five other examples of where the Commerce Ministry has stepped into mergers involving multinationals, blocking one of them, Coca-Cola’s $2.4 billion bid last year for Huiyuan Juice.

That was the only one in which the acquisition target was a Chinese firm. Of the other five target companies three were American, one British and one Japanese. The acquirers break down is three American, two Japanese and one Belgian. The tone of the article is that there is a lean, albeit a small one, in the direction of protecting the national interest, though that is what anti-monopoly laws everywhere tend to get used to do. That is different, too, from using the law to promote a national interest. What is clear is that Chinese anti-monopoly review is taking its place alongside those in the U.S. and, in particular, the E.U. in any big-ticket cross-border M&A.

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A China-Japan-South Korea Trade Pact Could Change The Politics of Korea

Amidst all the discussion between Prime Minister Wen Jiabao, South Korean President Lee Myung Bak and Japanese Prime Minister Yukio Hatoyama at their tripartite summit this weekend about how to deal with North Korea, was some significant progress on creating a free trade agreement between the three countries. To the emerging generation of China’s leaders born after the Korean War — and particularly to the next generation of leaders of the Party’s International Department, which is a more important determinant of policy towards North Korea than the Foreign Ministry — that may be of more lasting significance than propping up the ally on whose side China fought against South Korea and the U.S. more than half a century ago.

Lee’s spokesman said the president had “stressed the need to enhance economic cooperation between the three countries and work toward integrating their economies.” The three countries agreed to set up a permanent liaison office in South Korea next year and to pursue a free-trade agreement. This is not a new idea, of course. A lot of work has been done on it at a semi-official level over the past several years and China, Japan and South Korea are already tied closely by trade and investment as well as geographical proximity. The same three leaders discussed a free trade agreement when they met for their summit last year. This year, the language being used to describe their latest discussions seems more purposeful.

There have been some grandiose thoughts about creating an Asian equivalent of the European Union. That is a long way off,  perhaps impossibly far off, but the three countries are the region’s three largest economies, collectively accounting for 16% of world GDP, so would be a formidable bloc just by dint of their economic size. Japan and South Korea are already China’s largest trade partners after the U.S. and the E.U., and delivering economic growth is a policy priority for the Party for all the well-rehearsed reasons of self-preservation. That is one reason that Beijing is doing what it can to ease tensions on the peninsula, to preserve stability in the region. Changing the economics of East Asia, and thus the interests of the free-trade participants, could change the politics of the peninsula more rapidly than the diplomats can.

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The Impasse On The Peninsula

Like so many moments of tension on the Korean peninsula there doesn’t seem a logical way out of the near-crisis created by North Korea’s sinking of the Cheonan (below right), a South Korean corvette, in March.

Beijing is doing all it can not to join the international condemnation of its ally Pyongyang for being behind the torpedo attack on the warship. Prime Minister Wen Jiabao, now visiting South Korea, has said China won’t defend any party found to be responsible once it has objectively decided who was responsible, but he stopped well short of endorsing the international report that has already blamed North Korea. Wen’s words were, though, as far as he could go without changing position.

Wen and his South Korean and Japanese counterparts are spending the weekend in a tripartite summit on the South Korean resort island of Jeju. There he will no doubt be under as much pressure to get off the fence as he was when U.S. Secretary of State Hilary Clinton visited him in Beijing last week. Meanwhile, Pyongyang, for its part, has not only denied involvement but accused the South Koreans of faking the sinking. None of which lowers tensions.

China holds veto power at the U.N. Its support would be essential for any move to condemn or sanction North Korea through the Security Council either over the Cheonan or the U.N.’s own new allegations that North Korea is exporting nuclear and ballistic missile technology via a complex of  intermediaries, shell companies and overseas criminal networks to circumvent existing sanctions. It is difficult at this point to see Beijing supporting a U.N. resolution against North Korea that contained sanctions, and South Korea, Japan and the U.S. supporting one that didn’t.

Maybe this weekend’s discussions can conjure up some verbal prestidigitation to satisfy both sides. This Bystander doubts it. At some point, Beijing will have to decide whether its support for its ally is worth the price it is paying in being perceived as being ineffectual in a crisis.

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Honda Strike Presages Higher Wage Costs

Industrial strikes beyond token protests are uncommon in China but growing in number by all accounts. The one at a Honda parts factory in Foshan that has shut down all four of the Japanese car makers assembly lines in the country is notable. It is being talked of as the largest industrial action since China started opening up its economy to foreign investment.

Workers at Honda’s Foshan plant are demanding that their monthly salaries be raised from 1,000-1,5000 yuan ($146-220) to 2,000-2,500 yuan. Minimum wage in the city is 920 yuan. The plant employs some 1,850 workers making transmissions and engine parts for Honda’s three joint venture factories building cars for the domestic market and its one that makes the export-only Jazz compacts. They say they want more money to offset rising consumer prices.

Negotiations between the company and the workers broke down, prompting local officials to step in. With labor shortages being reported in the Pearl River Delta, workers have a stronger bargaining hand than before. So manufacturing wage costs seem likely to rise across the board.

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Market Guidance Chinese-Style

If China can have state guided capitalism and state-owned corporations there wouldn’t seem to be any reason that it can’t have state-guided markets, too. Its proposed carbon trading market due to start in 2014 would seem to fall squarely into that category. Feng Shengbo, deputy director of the China Clean Development Mechanism Project Management Center of the Energy Research Insititute of the National Development and Reform Commission (NDRC), told Bloomberg that authorities are drawing up rules for a market to be run by “associations” overseen by  government. “The government will not directly control the market,” Feng said, “but if the associations make misleading policy it’s for the government to guide them.” Not exactly Adam Smith’s invisible hand.

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An Early Sign Of Slowing Growth?

A straw in the wind from the electronics industry about how strong recovery will remain in the second half of this year:  we are hearing reports that PC orders are weakening, not just in China but from across the region, which will have a knock-on effect on chip makers. Our man with the robot soldering iron tells us that OEM makers are also seeing demand from Europe drop for all sorts of components and, for chip makers, slowing demand from Chinese car makers (which is a more concerning coalmine canary). This follows lackluster Labor Day retail sales in China for phones and TVs. So it seems that inventories are starting to back up.

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Strategic And Economic Diaologue: Bigger Not Necessarily Better

Is the Strategic and Economic Dialogue between Beijing and Washington still working? As each round gets ever larger, it doesn’t seem necessarily to generate more success.

The intent of the semi-annual high level talks is to coordinate and contain the many big issues that comprise the increasingly complex China-U.S. relationship. Regular discussion is certainly better than none and at the working officials level understanding has certainly been improved even if the process remains cumbersome. But the most recent set didn’t have much by way of policy accomplishments and were dominated by two external issues: North Korea and the euro crisis.

The two sides do not seem to have made any substantive progress on the first one, the only one of the pair that the two countries could directly effect. In Washington, now in election season (as if it ever isn’t) that only reinforces the doubts of the effectiveness of the talks caused by the lack of progress on the currency issue.

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The Strange Case Of Factory Suicides

We are not sure what to make of stories circulating about a series of suspected suicides at a Foxconn plant in Shenzhen. The Taiwanese company is an contract manufacturer of electronics equipment. Customers include U.S. multinationals such as Apple, Sony and Hewlett-Packard and products produced include the iPhone and Wii.

At least 10 of its workers, all under 25, have apparently committed suicide, the most recent a 19-year old  employee from Hunan who is thought to have jumped from a dormitory building. There are said to have been at least 20 failed attempts. The company has hired Buddhist monks to rid the place of evil spirits and taken practical measures such as erecting 3-meter high fences around the dormitories, hiring psychiatrists and playing music to calm workers on the assembly lines.

The plant is huge; it employs 420,000 and there is talk of poor working conditions and long hours. (An English translation of an undercover investigation by Southern Weekend is here.)  A BBC report says theories range from the presence of a suicide cluster (essentially a spate of copycat attempts) to that number of suicides being what would be expected in a population that large. Whatever the reason, factory suicides are not uncommon even if those at Foxconn are getting the most attention. Tt is a disturbing underbelly to factory life.

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No Change On Yuan, No Progress On Pyongyang

China hasn’t budged from its position of being willing to allow the yuan to appreciate against the dollar but only when it is good and ready. The issue came up, inevitably, at the latest round of high-level dialogue between the two countries in Beijing. China has also hitched the question of the U.S. easing its restrictions on high-tech exports to the currency issue, which will further ensure nothing happens anytime soon. But the tone of the talks was amicable, including even the warning to Washington to keep its nose out of what Beijing considers domestic affairs — Tibet and Taiwan.

All of which is good as the two countries more pressing issue is what to do about North Korea sinking of the South Korean warship Cheonan. Seoul has suspended trade with Pyongyang and demanded an apology, which is a modest interpretation of the “stern” response it promised to the sinking. North Korea denies any involvement the sinking and has threatened war if sanctions are imposed and to shoot down any psychological warfare apparatus along the DMZ if that is reactivated as Seoul has also threatened. U.S. Secretary of State asked China to help bring North Korea to heel, but the question remains how much influence Beijing holds over the mercurial North Korean leader Kim Jong Il.

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Investment Boost For Xinjiang

Pouring money on troubled waters underpins much of the Party’s approach to ensuring political stability through economic development. Xinjiang is the latest case in point. State investment in the far western province whose capital Urumqi saw deadly rioting between ethnic Uighurs and Han Chinese last July is to be doubled over the next five years with the goal of raising provincial per capita GDP to the national average by 2015. Rural per capita incomes in Xinjiang are a fifth lower than in the country as a whole and urban ones two-fifths lower.

Much of the money, which could amount to 2 trillion yuan ($300 million) over the five years, will go into infrastructure such as roads and railways. Details from Xinhua. The natural-resources-rich province will also test taxing resources including oil and gas through a price-based rather than volume-based levy. The change could raise an additional 10 billion yuan a year of tax revenue for Xinjiang.

How the greater wealth all this will create trickles down is the question. In other areas of China’s periphery forced economic development has not necessarily gone in hand in hand with social harmony.

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