Monthly Archives: February 2011

China Tweaks Regional Banks’ Capital Ratios, Frets About Local Gov’t Debt

China’s central bank is acknowledging a badly kept secret, that it is applying different capital reserve requirements to different banks. Xinhua reports that 40 regional banks with low capital adequacy ratios, rapid lending growth and a high risk loan book have been the subject of individually differentiated reserve requirements.

Capital reserve requirements are one of the main tools used by the central bank to mop up the inflation-driving excess liquidity in the economy. Last week, there was a further 0.5 percentage points rise in the benchmark ratio, the eighth increase since the beginning of last year. Large banks are now required to maintain capital ratios of 19.5%. Small and mid-sized banks will have to set aside upwards of 16% of their deposits as reserves, Xinhua says. Some banks are already said to have had a 20% ratio imposed.

Meanwhile, Bloomberg reports that regulators have told banks to recalculate their capital levels using higher risk weightings for their loans to local governments via captive investment vehicles used to get round restrictions on raising capital from banks directly. We have noted the risks inherent in these before. Banks had lent at least $1.2 trillion this way to local governments as of June 30th, with 23% not backed by cash flows. It is these latter loans that particularly concern regulators and to which the highest new risk weightings, 300%, will be applied.

No official word on any of this that we’ve seen, but Bloomberg says the deadline for recalculation is March 31st, and it could reduce the capital ratios of the country’s five biggest lenders to near the regulatory minimum. Last year, authorities cracked down on such lending after a surge fueled concern that it could lead to a wave of defaults that could rock the banking system.


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U.N. Warns On Drought, Land Loss Threats To China’s Food Security

A senior U.N. official says that loss of farmland poses a major threat to China’s ability to be self-sufficient in grain. The warning comes from Olivier De Schutter, the U.N. Human Rights Council’s special rapporteur on the right to food, in a preliminary report based on a visit to China in December. De Schutter writes:

Since 1997, China has lost 8.2 million hectares of arable land due to urbanization, forest and grassland replanting programmes, and damage caused by natural disasters, and the country’s per capita available land is now at 0.092 hectares, 40 per cent of the world average. This shrinking of arable land represents a major threat to the ability of China to maintain its current self-sufficiency in grain. China has adopted the principle according to which any cultivated land lost for other purposes should be reclaimed elsewhere, and it has set a “red line” at 1.8 billion mu (120 million hectares) beyond which arable land will not be allowed to shrink further. But China is already dangerously close to this limit.

De Schutter also highlights the issue of drought:

Water scarcity is a huge problem: per capita water availability is less than one third the world average. According to one estimate, climate change may cause agricultural productivity to drop by 5 to 10 per cent by 2030 in the absence of mitigation actions, affecting principally wheat, rice and maize. Indeed, already today, droughts affect between 200 and 600 million mu of farmland in China every year.

De Schutter recognizes the progress Beijing has made in improving food security, but says more needs to done to improve living conditions in rural areas, to improve the security of land tenure and to move to more sustainable farming. All these are challenges that Beijing acknowledges it faces, though that makes addressing them none the less urgent.

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Chinese Firms Caught Up In Libya Unrest

State media are reporting attacks on Chinese firms working in Libya as unrest continues in the North African country. No fatalities have been reported but there is word of injuries. (Update: 15 are reported to have been seriously wounded.)  Workers are quoted as saying that nearly all Chinese companies in the country have been attacked or looted. It is not clear if Chinese businesses were targeted or whether they were just caught up in the general violence. South Korean firms have also been attacked, but, equally, that could also be a case of mistaken identity. Eighteen months ago, Chinese businesses in Algeria were the focal point of a violent backlash against the growing Chinese business presence in North Africa.

China’s trade and investment in Libya is modest but has been expanding since the U.N and the U.S. lifted their sanctions against Libya in 2003 and 2004 respectively, opening the way for Gaddafi’s pariah state to reengage with the world. Two-way trade reached $6.6 billion in 2010; Sinopec buys 6 million barrels of crude a month from Libya. Chinese companies have won a reported $21 billion of contracts to develop infrastructure in Libya, with Italian, Turkish and Russian companies providing stiff competition. ZTE, and Huawei have won telecoms contracts. China Railway is working on $2.6 billion worth of rail projects as Libya restores the rail network it abandoned in the 1980s. China Civil Engineering Construction Corporation is a general contractor. Chinese companies also have a joint venture with a Libyan state investment fund in a controversial rice farming project in neighboring Mali.

In all there are some 30,000 Chinese working in Libya, mostly in the construction and oil and gas industries. Chinese operations known to have been attacked in recent days include a construction site in the eastern city of Agedabia run by Huafeng Construction, which was looted, forcing nearly 1,000 Chinese workers to flee. Separately,  83 employees of China Building Technique Group, a state-owned architectural design firm, working in Tobruk evacuated to Egypt, where the Chinese embassy has temporarily stationed staff near the border with Libya.

Libya is Africa’s third largest oil producer and fourth largest natural gas producer. China has been trying to ease its way into the energy sector, which is dominated by BP and Italy’s ENI.  In  2009, Libya vetoed a $462 million bid by China National Petroleum Corp. for Canada’s Verenex Energy, which operates in Libya, and bought it itself. Chinese oil survey teams have since been active in Libya. CNPC announced last year its first find, a small oil and gas field in the Sirte Basin, which holds four-fifths of Libya’s proven oil reserves.

The fighting in Libya, in contrast to what happened in Egypt and Tunisia, has been on a scale that has made it difficult for China to ignore. The foreign ministry spokesman says China is concerned about the current situation in Libya, and says it will protect its nationals and firms in the country. Vice Premier Zhang Dejiang has been deputed to organize the evacuation of Chinese citizens from Libya. Chinese vessels in the Mediterranean have been put on standby to provide medical and other emergency supplies for Chinese nationals.

Update: Nearly 3,000 Chinese nationals including embassy staff are being evacuated to Tunisia by a fleet of some 100 buses. Meanwhile, an Air China airliner left Beijing on Wednesday for Libya carrying an official evacuation task force. Four liners have also been chartered in Greece and Malta for sea evacuations.


Filed under China-Africa

Exports Said Important, Not Dominant Driver of China’s Growth

McKinsey, the management consultancy, is recirculating a recalculation it published last September of the value of China’s exports that strips out the value of imported components and semi-manufactures that get assembled into final export products. It is worth another look at the exercise, which was intended to create a truer picture of the dependency of China on exports for its economic growth and thus take a better measure of the strength of the shift to domestic demand now underway.

Arithmetically, what McKinsey calls domestic value-added exports will have to be a smaller percentage than the standard export numbers show (unless Chinese export manufacturers destroy value), so the interest lies in the scale of the reduction. What the firm found is that domestic value-added exports contributed 19%-33% of total GDP growth from 2002 to 2008, almost half the contribution indicated by the conventional numbers. So exports are an “important” but not “dominant” contributor to growth, McKinsey concludes.

One other inference to be drawn from the calculations is that China’s export manufacturers are moving up the value chain and becoming less pure assemblers, which is in line with the observable evidence. “If your company is a manufacturer in China that is primarily processing intermediate components for reexport…it’s probably time to consider alternative locations for the assembly work,” McKinsey advises.

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Drought Now Reported In Southwest China

Xinhua says that 190,000 people in one county in the Chongqing municipality in southwest China face water shortages because of a lack of rain for four months. Ponds and wells are said to have dried up. Light rain is in the forecast for the area for the next few days but it is unlikely to be sufficient to break the drought.

Unlike the North China Plain where drought is posing a serious threat to China’s grain harvest, the Sichuan basin is more a producer of livestock, milk, poultry, eggs and vegetables. Chongqing municipality and Sichuan, from which it was carved out in 1997, account for 10% of national meat production and 7% of the country’s eggs. If the drought persists, the risk is to the fodder crops for livestock, which could mean more corn having to be bought, putting further pressure on grain prices. If the dry weather is accompanied by above normal temperatures that will put chickens at risk of death from heat exposure.


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Protest, Party And Propaganda

Given the authorities’ dousing of any inflammatory news about civil uprisings against long-standing leaders in Tunisia, Egypt and elsewhere in the Middle East, this Bystander is not surprised that the full fire hose of state propaganda and security was directed at the putative protests called in 13 Chinese cities this weekend. They were in any event damp squibs, seemingly occurring only in Beijing, Shanghai and Guangzhou–if gatherings where police and onlookers believing a crowd was gathering because of the presence of a celebrity heavily outnumbers demonstrators can be called a protest. Even the arrests were in single figures.

It is no secret that the Party leadership has long been concerned about threats to its legitimacy to rule coming from the tens of thousands of protests that break out every year across the country. These are born of grievances over a myriad of local complaints about everything from corrupt officialdom to land disputes and environmental degradation. President Hu Jintao’s drive to create a harmonious society and to close the growing wealth gap in the country is an attempt to nip in the bud the potential civil unrest–and political groups–that could grow from all these.

So longstanding has been this concern that Beijing has already put in place the propaganda and security tools to control the information war. Like the telecoms and cable companies in the U.S. it understands that it is the sovereign of the Internet infrastructure that rules the Internet’s content. Within the Great Firewall, Google, Twitter and Facebook can’t help grass roots activists get around official censorship in China in the way they have facilitated in the Middle East with new software services such as Speak To Tweet. The companies aren’t present in China or in Google’s case, are heavily controlled. Local equivalents, particularly the microblog services, have patriotic obligations put upon them. Independent blogs and news sites get closed down in short order. An army of official posters and censors puts up pro-governement posts and takes down any deviating from the Party line. Mainstream media is overwhelming state run and, where not, expected to follow the guidance of Xinhua, especially when it comes to news reporting and commentary. The Politburo has reinforced the rules since Hosni Murbarak was forced to resign as president of Egypt earlier this month, and the Propaganda Department stepped up enforcement, including guidance to tone down reporting of any local incidents of disturbances.

This weekend, President Hu Jintao outlined eight points for strengthening the Party’s management over social order. The reemergence of the term social management indicates some sort of compromise, or stand-off, between the Party’s hardliners and reformers. Among the eight was one calling for tighter management over what is being said over the Internet, though Harmonious Hu also stressed the need to address the underlying problems causing the societal issues:

Further strengthen and improve controls on the information web, raising our level of control over virtual society, and perfecting our mechanisms for the channeling of public opinion online.

The goal is not anything as crude and easily criticized as shutting down the Internet or even to shut down the online conversation, but to cower and control it, with the hard and well practiced power of preemptive rounding up of dissidents providing the steel within the velvet glove.

Gene Sharp, the American nonagenarian academic who wrote the handbook on the non-violent overthrow of dictators, From Dictatorship to Democracy, a pamphlet that has been used by activists from Indonesia to Serbia to oust governments, but which, equally, provides a readymade excuse for any dictator that the U.S. is behind attempts to unseat them, argues that the power of dictatorships comes from the willing obedience of the people they govern, and that regimes don’t fall until the people withhold that consent. The Party understands that and is determined not to let itself get pushed to anywhere near that point.

Beijing has got ahead of this in a way that no authoritarian ruler in the Middle East had even begun to think about until recently. In China, the outbreak of the unrest in the Middle East, and particularly the toppling of leaders in Tunisia and Egypt, has sharpened Beijing’s need to be on top of its game. But it is one that it has been playing for a long time. Sharp’s argument for not taking the violent path to revolution is that that means taking on a regime’s best weapons. In many countries where social media have helped force regime change, the authorities were not just outgunned on the Internet, they didn’t know how to fight there or even that it was a theatre of war. It is far from clear that that is the case with China. We have even heard suggestions that the calls for his weekend’s protests were no more than an elaborate official fire drill.

Authoritarian regimes don’t fall because a few activists have read a pamphlet and put out a few Tweets. Conditions within a society have to be ripe. Uprisings to overthrow the Tsars in Russia failed in 1905-06 but succeeded in 1917; Murbarak was able to put down protests against his regime in 2006 but not this year. In both cases conditions on the ground had changed. We don’t believe conditions are ripe in China at this point to support a popular uprising that could overthrow the Party non-violently. We do believe the seeds for such conditions exist. Whether they flourish of wither is as much in the hands of the Party as it is in those of the people.

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Huawei Performs U-Turn On CFIUS Review

If Huawei Technologies’ decision to contest a U.S. national security review rejecting its acquisition of patents from 3Leaf Systems was perplexing, its U-turn to accept it is a surprise. The company says it has changed its mind because of the controversy around its earlier decision to throw itself on the mercy of an executive ruling by President Barack Obama after the Committee on Foreign Investment in the United State (CFIUS) had recommended the deal be unwound. We had thought that the company might have had some backing from Beijing for its extraordinary initial position, and earlier this week a commerce ministry spokesman called for Washington to make its national-security reviews more transparent. Maybe this was all just testing the waters of Sino-American relations and finding them a bit too choppy.

Update: A bit of backwash from state media, suggesting the U.S. has overreacted in this case.

Further update: Reports from London (here via the FT) say Huawei is offering to give London’s metro system a free mobile wireless system in time for the London Olympic Games in 2012, an ‘Olympic host to Olympic host’ gift that it is estimated would cost the company upwards of $80 million. The inevitable national security concerns about a Chinese company running such a network in London have already been raised, but we do wonder what might be said it they had proposed the gift for the Metro in Washington, D.C. instead.

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