Monthly Archives: June 2010

Kyrgyzstan Airlift Continues

China has now evacuated nearly 1,000 of its nationals from Kyrgyzstan, where ethnic violence has left at least 170 dead, Xinhua reports. Seven evacuation flights have been undertaken with at least two more planned. The air lift started earlier this week. Most of the evacuees are businessmen and their families or construction workers in the southern Kyrgyz towns of Osh and Karasu. The governments of South Korea, India, and Pakistan have organized similar air lifts.

Meanwhile Beijing is offering 5 million yuan ($731 million) in humanitarian aid in the form of medicine, medical equipment, food, drinking water, blankets and tents. Red Cross officials say there are shortages of basic necessities like food, water, shelter and medicine across the Uzbek-dominated south of the country where the violence has been most extreme and we are starting to get reports of atrocities. The officials guesstimate that “tens of thousands” of Uzbeks have been displaced within Kyrgyzstan while at least 75,000 refugees have fled into Uzbekistan.

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China’s Welcome Rising Wages

Much of the commentary about China written by non-Chinese, scholarly, commercial, journalistic, is written by Americans, as weight of numbers suggests it would. That may be, though, why historical perspective is often missing. America is a country where history is regarded as the refuse of the present rather than prologue to the future. As we read coverage of the strikes and pay rises at the likes of the Foxconn and Honda factories and of Uncle Wen Jiabao’s tribute to the migrant workers filling all the other workshops and assembly plants of China’s industrial heartland, this strikes us as being particularly the case when it comes to China’s economic development.

There is an arc to industrial revolutions. Economies transverse it in their own ways and at their own speeds, but they don’t avoid it. That is as true for China as it was for England, Germany, the U.S., Japan, South Korea and many others before it.  One characteristic of China’s industrial revolution is that it is being carried out under the umbrella of state-owned capitalism. Another is that, unlike, say, Japan, which became the low-cost export manufacturer to the world by taking labour out of manufacturing, China did so by putting low-cost labour in.

That was always going to be unsustainable as China’s industries started moving up the development ladder as they are now doing. One measure of that is the rising level of capital per employee. Another is the rising skill levels being required from workers. The inevitable consequence is a rise in productivity. The International Labor Organization’s most recent biennial international productivity study shows China’s productivity increasing by an annual average of 5.7% since 1980 (the figures run to 2006 but the trend is clear). Wages should be rising to reflect that, just as wages in England and America did at comparative stages of development. (Not that those pay rises didn’t come without their share of labor struggles.)

Even the scale of pay rises being seen at Foxconn, a special situation anyway, and Honda would not materially change retail prices for China’s exports. Labour accounts for about 5% of the price of consumer electronic goods like an iPhone. There a plenty of points along global supply chains where some if not all of any wage cost increases can be absorbed. If wage inflation is to push manufacturing out of the present industrial heartlands it is more likely to go to inland than to Vietnam or other lower-cost countries. True, some Western multinationals are looking at shortening their international supply chains, but that is more because of factors such as event risk (think volcanic dust disrupting transport) and carbon footprint concerns than labour costs.

There is one more reason to cheer rising wages in China. More money in the pockets of Chinese workers and thus more purchasing power. That is a prerequisite for domestic-demand driven growth.

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China Evacuates Its Nationals From Kyrgyzstan

China has dispatched two airliners to evacuate some 200 Chinese students and nationals caught up in the unrest in Kyrgyzstan. Xinhua reported that the first one is expected to land back in Urumqi overnight. Two further flights are planned for tomorrow. There are no reports of Chinese nationals being among the more than 100 reported dead in the outbreak of ethnic violence, but some Chinese-owned businesses are reported to have been looted.

Unlike Russia, China appears to have no plans for a military response. The prospect of civil war in Kyrgyzstan poses dilemmas for both Beijing and Moscow. Neither wants to be dragged into a potentially messy, ethnic conflict. But neither would be happy with a prolonged period of instability or civil war, which could easily spill over into neighbouring stans such as Kazakhstan, or even into the outer fringes of Russia and China itself.

Beijing and Moscow have been jockeying for influence in the region in recent years. Beijing won’t be thrilled to see a small Russian dominated peace-keeping force under the aegis of the Collective Security Treaty Organisation (the security pact between most of the former states of Soviet Central Asia) being deployed in Kyrgyzstan if the violence continues, but it may look upon it as the lesser of two evils, providing there is a fixed period to its deployment.


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Behind May’s Trade Figures

The latest monthly trade figures, for May, flatter to deceive in a couple of respects. Exports, at $131.8 billion, were up 48.5% year on year, but May 2009′s figures were abnormally low, amplifying the comparison. Second, trade with Europe, China’s biggest export market, remains robust, but that may mean that the impact of the euro-zone debt crisis has yet to affect China’s exporters rather than they have avoided it.

None the less, exports overall are at their highest level since September 2008 and the trade surplus, at $19.5 billion, was the biggest in seven months. Both confirm our view about the strength of China’s economy going into the third quarter, and of the global economy’s continuing recovery.

Whether all that is sufficient to bring about any change to the yuan’s peg to the dollar remains moot, to our minds. Those, particularly in the U.S., likely to get exercised over this again as a result of the May figures, should use the yuan’s 20% appreciation against the euro as a consequence of being pegged to the dollar as a reality check on the size of the effect any revaluation of the yuan against the dollar would have on China-U.S. trade.

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China’s Q3 Economic Outook

The eurozone debt crisis has changed the short-term plans of China’s economic policymakers. The second half of this year was meant to be when the stimulus measures put in place for the global financial crisis were unwound  and the assets bubble they produced deflated in measured manner so growth could continue at a brisk but not dangerously rapid pace. Instead they are having to deal with the consequences of the fiscal austerity measures being put in place by indebted European governments.

Those will affect China directly as Europe is the main export market for its manufacturers and indirectly though the brake they will impose on global economic recovery and an increased risk of a double-dip recession. For now, China’s leaders are signaling that they will do what is necessary to sustain growth. That will mean no rush to wind down existing stimulus measures and a readiness to provide more should a slowdown in the growth rate warrant it.

Absent spectacularly negative events in Europe, we don’t think that will be needed. We still expect the economy to grow by 10% in the third quarter, thanks to strong domestic demand, recovery in the U.S. and the revival of world trade. That would be down from the 11.9% growth rate of the first quarter, but still comfortably above the 8% level that sends political alarm bells ringing in Beijing and opens the public spending coffers.

The uncertainty that pervades policy makers will likely mean a pause in their slow but steady tightening of monetary policy already underway. Fixed asset growth is slowing, showing that some of the measures the authorities have been taking to deflate the property bubble are having an effect (the euro crisis has taken care of the bubble in stock prices). The central bank has raised banks’ capital reserve requirements three times this year to rein in the lending that is fueling the property boom. However, new bank lending is proving more intractable than the central bank would like: 3.4 trillion yuan ($498 billion) of new loans were made in the first four months of the year, on track for a number for the full year closer to last year’s 9.6 trillion yuan than this year’s target of a reduction to 7.5 trillion yuan.

Similarly consumer price inflation is bumping up against its targets (3% for the year). Beyond soaring housing prices, food prices are up following a long run of wretched weather in key crop growing areas. Commodity prices are rising worldwide and labor cost pressures are increasing beyond the well publicized wage rises at Foxconn and Honda. Both those trends showed up in the 6.8% increase in the producer price index in April. Key questions are how much of those price pressures can manufacturers pass onto domestic and export customers, and with what effect on sales. None the less, inflation pressures aren’t so great that the central bank needs to raise interest rates again. Given the overall uncertainty over the economic outlook, it has no great desire to do so anyway.

Keeping the economy steady and growing until it is clear what the fallout from the euro crisis is remains the priority. A wild card for the economy is the leadership succession. We are seeing evidence of the behind the scenes factional jostling for position breaking through in foreign policy every now and then. No reason to suppose that couldn’t happen with economic policy, too, especially as the two are now so connected. Arguably with the yuan revaluation issue, it already has.


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Ganzhou Readies To Install Its Giant Clock

We reported last November that Ganzhou in Jiangxi, which bills itself as The Tungsten Capital of the World, was to build the world’s largest mechanical clock as the centerpiece of a new horology theme park. Installation is due to start this weekend and will take the rest of the month to complete.

The $1.5 million clock is big. With diameters of 12.8 meters, its faces are almost twice the size of those on London’s iconic Big Ben. None bigger are to be found anywhere. The clock will be housed in a 113 meter high tower, the Harmony Tower (artist’s rendition). The mechanism was built in England by clock maker Smith of Derby, which now owns the company that in 1925 built the clock in the tower of the Customs House on the Bund in Shanghai, though the original Westminster chimes were subsequently modified to play The East is Red.

The Ganzhou clock will chime conventionally on the hour and at sunrise. Its hands use carbon fiber materials developed for racing cars to keep the weight down, and include a third hand to chart lunar chapters. Yantai built the four faces using stainless steel.

This being the centerpiece of a planned tourist attraction cum business park, the Tower will also contain places to eat, including a rotating restaurant, commercial offices, a gallery where visitors can view the movement and an exhibition telling the history of timekeeping. The clock may be the world’s biggest mechanical clock, but it won’t be the highest. That is another Smith of Derby clock, at the Chicago head office of the U.S. aerospace company, Boeing, which is 170 meters above street level.

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Dead Smugglers And China’s North Korea Policies

This is unusual. Beijing has accused North Korean border guards of shooting dead three Chinese citizens and wounding a fourth. The incident took place last week near the border town of Dandong, according to the Chinese foreign ministry. The four were reportedly trying to smuggle copper out of North Korea. Beijing has filed a formal complaint with Pyongyang.

There is a flourishing smuggling business in both directions across the border in addition to the legal trade between the two countries (China accounts for four-fifths of North Korea’s trade and North Korea’s half-hidden private markets are full of black-market Chinese goods), but it is unusual for the commerce to be interrupted in this way, and even more so for China to make a public complaint about it. Coming as it does in the wake of the torpedoing of the South Korean corvette the Cheonan in March, and China’s strenuous fence-sitting efforts to reduce tensions on the peninsula while not letting itself be pushed into joining the international condemnation of North Korea for being responsible for the attack, it all seems curiouser still.

This Bystander wonders if just as the strains of a leadership succession are being seen in North Korea, so there has been an outbreak of factional friction in China between the Foreign Ministry and the Party’s International Department, which traditionally has had the final — and harder line — say in policy towards their Korean War era allies in Pyongyang.

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Death Toll From Guangxi Rain Storms Rises

An update to the death toll from the flooding and landslides in Guangxi: Xinhua now says at least 51 people are dead with two unaccounted for following this week’s rain storms. Thirty of the deaths were recorded after rain-triggered mudslides buried several homes in mountainside villages in Yulin City.

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China’s Agricultural Bank To Raise $30B Through IPO

This may not seem an ideal time for a bank to be raising capital: the government is reining in bank lending as part of its crackdown on real estate speculation; investors worldwide are spooked by the Eurozone debt crisis; bank valuations are at lows; and many banks are seeking to raise capital to bolster inadequate balance sheets. Yet Agricultural Bank of China is going to market in Shanghai and Hong Kong with an initial public offering of 15% of its equity said to raise up to $30 billion. That would make it the world’s largest IPO, topping the $22 billion Industrial & Commercial Bank of China (ICBC) raised in 2006. The securities regulator is due to review the offer plan on June 9, with mid-July said to be the target date for the IPO itself.

Four other big state-owned banks, ICBC, China Construction Bank, Bank of China and Bank of Communications have announced plans to raise $27 billion of new capital by selling shares and bonds this year, now regulators have raised the mandatory minimum capital adequacy ratio to 11.5%. Agricultural Bank, the country’s fourth-largest by assets, is the least profitable of the four biggest banks to go through the state-led restructuring of a couple of years back. It got a 130 billion yuan government cash injection and scratched 816 billion yuan of non-performing loans from its balance sheet in 2008.

The bank says it had a capital adequacy ratio of 10.07% at the end of 2009 and its non-performing loan ratio stood at 2.91%. It also says it increased its profit by 26% to 65 billion yuan last year, and forecasts net income will rise to at least 82.9 billion yuan in 2010. But to raise the sort of sum it is looking for in the current climate, its underwriters are going to have to have some big Chinese institutional investors lined up.

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New Japanese Prime Minister Unlikely To Reverse Course On China Policy

When newly resigned Yukio Hatoyama was Japan’s incoming prime minister almost two years ago, he made it clear that his Democratic Party would steer Japan into a new and closer relationship with China than had been to the taste of the traditionally U.S.-leaning Liberal Democrats.

In one sense he was pushing an open door. Relations between the two countries have been on the mend since hitting rock bottom in 2006, at least on the official level. Popular anti-Chinese sentiment is a seam that runs almost as deep in Japan as anti-Japanese sentiment does in China. But Hatoyama and Prime Minister Wen Jiabao saw common cause in closer economic relations between their two countries, a theme again discussed only last month with their South Korean counterpart President Lee Myung-bak at their annual tripartite summit.

Hatoyama’s failure to deliver on an election promise to move the U.S. military base from Okinawa was the immediate cause of his resignation and the recent ratcheting up of tension on the Korean peninsula may have provided a sharp reminder of the value of an American security blanket to Japan, but the shifting economic balance of power in East Asia and growing ties between Japanese companies and China for both production and markets means Hatoyama’s successor is unlikely to reverse the policy of ‘fraternal solidarity’ towards China in any fundamental way.

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