Monthly Archives: October 2010

China Turns Down U.S. Currency War Offer It Was Always Going To Refuse

As this Bystander expected, prospects for the G-20 calling a truce in the currency wars seem remote. Reuters news agency is reporting that China, India and Germany are rejecting out of hand a U.S. proposal to set numerical targets for trade surpluses and deficits at the G-20 finance ministers meeting in Seoul this weekend.

The American proposal would put far too much flesh for the taste of the surplus nations on the bone of a mom-and-apple-pie agreement among the G20 a year ago that big surplus countries like China would aim to shift growth away from being export led while the big deficit economies like the U.S. would seek to boost domestic savings. We expect the communiqué to be issued after this weekend’s meeting will be long on good intentions but short on any agreed measures — let alone commitments — to make good on them, not the ideal preparation for the G-20 leaders’ summit next month.

This post was first published on Market Bystander.

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Latest GDP, Inflation Numbers Signal Economy Back To Normal

The latest GDP and consumer price inflation figures confirm the economy is slowing more slowly than expected, which led to the surprise rise in interest rates earlier this week. The economy grew at 9.6% in the third quarter compared to the same period a year earlier. That is the slowest year-on-year quarterly growth of the year as the government continues to mop up after its stimulus package, but still faster than expected. Consumer prices rose by 3.6% in September compared to the same month a year earlier, the fastest increase in two years and well above the government’s 3% target rate. More expensive food, in the wake of the year’s abnormally bad weather, and housing were the reason.

At an IMF conference on Monday, central bank governor Zhou Xiaochuan (right) said China faces increasing risks from excessive liquidity, inflation, asset bubbles and non-performing loans in the wake of the global financial crisis. While those may all be true, the latest economic data and the firmness of domestic demand and investment suggest the economy has weathered the crisis and is now getting back to normal. While more interest-rate rises and increases in banks’ reserve-ratio requirements are likely, they will be mainly intended to deflate the persistent property bubble.

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China’s Surprise Rate Hike Heralds More And Higher Yuan

The Chinese central bank’s move to raise interest rates was unexpected. Policymakers are getting more nervy about the inflation risk and inflows of hot money.

The rate rises, the first since before the global financial crisis hit in 2008, lift the one-year lending rate a quarter of a percentage point to 5.56% and the deposit rate by a similar amount to 2.5%. We would not be surprised if they turn out to be the first of a series of modest rises over the coming year to 18 months as the central bank starts to mop up the excess liquidity that fueled the re-acceleration of growth following last year’s slowdown. Last week, the central bank increased reserve ratios for selected banks.

The next set of monthly figures are likely to show consumer prices rising at their fastest pace in a couple of years at 3.6% for September and that the third-quarter GDP figure may be stronger than the 9.5% growth expected, but the rate increases are better considered as part of the attempt to dampen a prospective asset bubble, particularly in real estate where we have seen a number of recent measures to curb demand and reduce the obdurately high levels of loans still flowing into property markets. Negative real interest rates would only exacerbate the flow of money out of bank savings and into hard assets, so the central bank has to get ahead of the inflation figures with its deposit rates.

But what is given to policymakers with one hand is taken away with another. Higher rates will encourage more capital inflows from abroad, inflows the People’s Bank of China is already concerned will be swollen by the U.S. Federal Reserve’s expected second round of quantitative easing. And that will put more pressure on the yuan for an upward revaluation, adding further layers of both economic and political complexity to the management of the economy.

It does, however, provide Beijing with a convenient excuse for letting the currency move up ahead of next weekend’s G-20 finance ministers’ meeting without appearing to be bowing to international pressure to do so. We can only wish, too, that  it will also help the world get away from the sterile debate over currency wars.


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Last Five Bodies Recovered From Henan Mine Blast

Recovery teams have now brought out the bodies of all 37 coal miners smothered by coal dust after by an underground explosion in the Pingyu No.4 coal mine in Yuzhou in Henan on Saturday, Xinhua reports. Two hundred and thirty nine miners survived the disaster. Strenuous official efforts are being made to rid the industry of its reputation as the world’s most dangerous, but this is still China’s worst mining accident since only June.

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Zambia Mine Shootings Likely To Resound Into 2011

Two Chinese managers of the Collum coal mine in southern Zambia, Xiao Li Shan, 48, and Wu Jiu Hua, 46, have been charged with attempted murder following a shooting incident at the mine that left at least 11 workers injured. The shootings happened during a protest by miners on Friday over pay and conditions. The two managers allegedly opened fire on the protesters though whether they were shooting at or over the heads of the crowd is unclear.

China has invested heavily in Zambia’s mining industry. As in other African countries, those investments have been accompanied by rising tensions between locals and Chinese expatriates who arrive along with the investment cash from China. Some 500 Zambian copper mine workers were sacked in 2008 after rioting and attacking a Chinese manager whose injuries required hospital treatment. However, the tensions are more politicized in Zambia than anywhere else in Africa; it was a campaign issue in the presidential election in 2006 following an earlier shooting that had left five Zambians wounded by managers during pay riots at the Chinese-owned Chambishi mine the previous year.

With a general election due next year, this latest incident is likely to remain politically prominent for a while with opposition parties using it as a stick to beat a government they feel they can unseat after five consecutive terms of office. This will cause an extended and trickily public relations problem for Beijing.

Update: From the Foreign Ministry’s Oct. 19th press briefing:

[Foreign ministry spokesman Ma Zhaoxu] said the matter was largely resolved but China would keep cooperating closely with Zambia to ensure any outstanding issues were settled according to law and safeguard the security and legitimate interests of Chinese companies and personnel.


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China’s Visible Vs Invisible Hand

All seems to be going to plan as the Party’s annual meeting draws to its close. Vice-Premier Xi Jinping (left) has been appointed as vice-chairman of the Central Military Commission, seen as an essential way station on his path to the presidency in succession to Hu Jintao who steps down as head of the Party in 2012 and as president the year after. Though Xi didn’t get the expected CMC vice-chairmanship last year, the top job is now his to lose.

Hu is also currently head of the commission, as is customary for China’s top leader. Control of the military underpins the Party’s hold on power while its ability to continue delivering economic growth for all underpins its legitimacy to govern. The new five year economic plan for 2011-15 takes continuing growth as a given and will concentrate on closing the social stability threatening wealth gaps that have opened up between rich and poor and between coastal and inland areas.

The ever strengthening ties between the Party, state and officials and the policy of promoting national champions in strategically important industries (129 companies who now account for two-thirds of GDP) will give Xi and his likely prime minister, Li Keqiang, a means to do that: a visible hand on the tiller of economic development rather than the invisible hand of the market. The princeling Xi’s reported pro-business sentiments may be better regarded as being supportive of a cosy relationship between Party and state officials and big business. Indeed, the industrial champions have a formal role under the new five-year plan to ensure its smooth fulfillment. An unintended but inevitable consequence may be growing friction between the means of implementing the goals of the economic plan of the new leadership and the aspirations of countries like the U.S. and the E.U. who want China to become a full market economy.

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Henan Coal Mine Disaster Will Accelerate Safety Drive

No mining accident comes at a good time, but the deadly blast at the Pingyu No.4 coal mine in Yuzhou, Henan, which killed 26 miners and trapped 11 more, could scarcely have come at a worst one. State TV carried live coverage of the recent remarkable rescue of 33 copper miners in Chile and one of the three  capsules built for the rescue is to be exhibited at the Shanghai Expo. The National Energy Administration had just announced good progress on its program of closing the smaller and most dangerous mines. The Henan disaster is getting decreasing official coverage even as the rescue effort (above left) inexorably transmutes into a recovery operation. But the long-term effect will be to speed up the efforts to make the world’s most lethal mining industry less so.

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U.S. Treasury Dodges Declaring China A Currency Manipulator

The U.S. Treasury is mandated by law to issue a report every six months on whether any country is manipulating its currency for an unfair trade advantage. Although, or more likely because the exchange rate between China’s yuan and the U.S. dollar, is so political charged now, the Treasury has booted down the road taking a decision on whether to declare China a currency manipulator as charged by so many in the U.S. It says it will wait not just until after the U.S. mid-term Congressional elections on Nov. 2nd, but also the Seoul summit meeting of G-20 leaders on Nov.11 and the Asia Pacific Economic Cooperation forum summit on Nov. 13-14. Those meetings may come to some agreement, though we think that unlikely, so the U.S. Treasury’s delay looks like a Hail Mary pass while its scrambles, to mix a metaphor, to take a policy high-road:

The challenge of building a stronger, more balanced and sustainable global economic recovery is a multilateral challenge, not just the responsibility of China and the United States.  It requires policy reforms in all major economies.

We know that is right, but good luck with that anyway.

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Sinochem Reportedly Backs Off Potash Corp., But How Far?

Reuters is reporting that Sinochem won’t proceed with a possible bid for the world’s largest fertilizer maker, Canada’s Potash Corp., currently subject to hostile $39 billion offer from Australia’s mining giant, BHP Billiton. The state-owned chemicals group had been consulting with investment bank advisors about putting together a consortium counterbid, possibly involving several sovereign wealth funds including Singapore’s Temasek. Reuters says its sources say these discussions are dead.

Potash Corp. produces a fifth of the world’s potash. (The picture above is of a Potash Corp. mine in Saskatchewan.) While the industrial logic for a Chinese bid for the leading producer of the nutrient most essential to boosting grain production to meet China’s booming food needs was there, at least for China, any bid that would have given a customer ownership of its supplier, and thus great pricing power, was always going to be looked on askance by the Canadian government. And the more so if the bidder for such a strategic asset was not just foreign but Chinese.

This political sensitivity may have been behind Sinochem’s decision not to proceed — and we should say that Sinochem has made no public pronouncement on any aspect of its intentions in all of this beyond that it is watching the situation with interest. Our suspicion is that Sinochem has no appetite for being involved in a hostile takeover battle. State-owned companies anywhere rarely launch hostile bids and when they do, they usually end up battered and bruised. Sinochem will no doubt remember the $18.5 billion hostile bid for Unocal of California by CNOOC in 2005 which ended with China’s third-largest oil producer withdrawing with its tail between its legs after running into a wall of xenophobia.

The lesson for China’s state owned would-be multinationals is that minority partnering is a more politically adroit way to go, as the state-owned aluminum group Chinalco did in 2008 when it bought into Rio-Tinto in partnership with Alcoa. Though that wasn’t an entirely happy story in the end, it did minimize political opposition to Chinese ownership of foreign natural-resource assets.

Sinochem’s exploration of a consortium bid would have been along the same tactical lines. Even if that particular proposed deal couldn’t be made to work, either because the numbers didn’t add up or the Canadian government was seen as likely to block any foreign-led bid, the thought of taking a stake large enough to have a voice at the table but small enough not to ruffle nationalistic feathers remains sound. A Canadian-led white-knight bid for Potash Corp. is still on the cards to thwart BHP Billiton. If it happens, this Bystander wouldn’t be surprised to see Sinochem as a minority partner yet.

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China Closes More Small And Deadly Coal Mines

While world attention has been transfixed by the rescue of 33 copper mine workers in Chile, China, the world’s largest coal producer and consumer, and which sits on a seventh of the world’s coal reserves, has announced that it shut down more than 1,350 small and dangerous coal mines in the first nine months of this year.

The closures are part of a drive to cut the industry’s appalling accident rate. China’s coal mines are the world’s most deadly; an estimated 20,000 of the country’s 5 million coal miners die each year in accidents such as this, though the official numbers are barely a seventh of that and falling: 2,631 deaths in 2009, down from more than 6,000 in 2004. Small and unregulated mines have the laxest safety precautions.

The country’s reliance on coal for the power generation that has driven its growth over the past three decades has until recently meant that safety has played a distant second fiddle to production. As recently as six years ago, four out of five coal miners killed in accidents worldwide died in a mine in China. That said, China’s largest coal mining companies now have safety records to compare with the best in the world.

The closures also support the official drive to reduce green house gas emissions by cutting the mining and use of highly polluting brown coal and lignite, and to preserve fast disappearing agricultural land which mining operations make unsuitable for farming.

The National Energy Administration says this year’s  closures have taken out 125 million tones of outdated production capacity so far. The target is to close more than 1,500 small mines this year, and the shut-downs are being hurried forward to meet it. The longer term goal is to close all small mines by 2015. This was part of a ten year plan launched in early 2006 to reorganize the country’s fragmented coal industry –  then 28,000 coal mines, of which only 2,000 were state owned –  into five or six large groups such as Shenhua Group, China’s largest coal producer, China National Coal, the second largest, and Pingshuo Coal Industry Corp, the largest exporter. There will be fewer than 10,000 small mines left by the end of this year at current rates of closure.


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