Monthly Archives: March 2011

Safely Buying British

China not only has a taste for British cars; it likes its companies, too. The Economist reveals that China’s sovereign wealth fund has sprinkled a little of its largesse around a lot of Britain’s biggest companies. The State Administration of Foreign Exchange (SAFE), which manages the country’s foreign reserves, has put £13.8 billion (147 billion yuan/$22.3 billion) of its estimated at $350 billion investment fund into 63 of the companies that make up the FTSE 100 index.

Holdings vary in size from 0.18% in the Royal Bank of Scotland to 1.63% in ARM Holdings, a technology firm. (A full list of the fund’s disclosed holdings can be found here.)  Its biggest investment by value is in Royal Dutch Shell; energy and basic materials are the two sectors that attract most of its cash.

Where else in the West is it similarly sprinkling, we wonder?

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SAIC To Put An MG Saloon Back On Britain’s Roads, Drive Into Europe

It is scarcely the thunderous 1950′s police-car lookalike MGZB that Brits of a certain age will remember, but the MG6, seen above in a corporate promotional shot, is soon to go on sale in the U.K., the Wall Street Journal reports, returning a saloon from the storied British sports-car manufacturer to Britain’s roads for the first time in years. The marque is now owned by SAIC Motor, acquired via a tortuous route following MG’s descent into bankruptcy and SAIC’s own merger with NAC. SAIC’s home-market version of the MG6 has sold well in China; the 1.8-litre model of the hatchback going on sale in Europe will be tweaked to European tastes, as will a planned 1.9-litre turbo-diesel.

SAIC is also looking to break new ground for a Chinese carmaker in western Europe. Not only is it producing the car at Longbridge in Britain’s Midlands, it is setting up dealerships in the country, making it the first to have a distribution channel in Europe of its own, though it may also tap into the expertise of the global dealer network of its U.S. partner, GM, as it reportedly plans eventually to sell 40,000 MG6s a year in Europe.

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China’s Nuclear Energy Program Post-Fukushima

The crisis still unfolding at Japan’s devastated Fukushima Daiichi nuclear reactors will have a huge impact on the global nuclear industry. That will not only be in terms of the running of existing reactors and the design and location of future ones, but also in the reevaluation of nuclear’s place in energy policies.

Europe has already started that process. Germany is shutting down reactors; Spain, Russia and the U.K. are ordering safety reviews. China has now followed the U.S. in suspending the approval process for new nuclear power stations so that safety standards can be reexamined. Beijing has also said it will revise its standards for the safety management of nuclear plants without giving any detail about what those revisions might entail.

Fukushima is unlike Chernobyl or even Three Mile Island in that the damage was caused by a natural disaster, whereas the other two were to varying degrees a result of human error. But seismic risks, including tsunamis, are highly relevant in many  parts of the world with expanding nuclear programs to satisfy growing energy needs such as southeastern Europe, India, Iran, Turkey, the U.S. and, of course, China, which accounts for 40% of the world’s nuclear power plants currently under construction. This Asian slice of a U.N.-sponsored seismic risk map, below, shows the most hazardous areas, in the dark red.

Caixin has a map of where China’s existing and planned nuclear power plants are here which you can easily overlay in your mind on the map above, while The Wall Street Journal has a map plotting them against China’s fault lines here.

Beijing has already said it doesn’t plan to alter its plans to build new reactors. The new five-year plan proposes a fourfold expansion of the country’s nuclear power generation capacity from 10 gigawatts (less than 2% of the country’s current electricity generation) to 40 gigawatts. Last year Beijing approved 34 new nuclear power plants to add 37 gigawatts of  capacity. Work has started on 26 six of those units, accounting for 78% of the planned new capacity. The newly announced safety review is likely to mean no more than a pause for breath.

Liu Tienan, chief of China’s National Energy Bureau, does say that China has much to learn from Japan’s crisis, particularly about safety. Modern reactors, so called Generation 3 reactors, are more safely designed than Generation 1 and 2 reactors, the type in use at Fukushima. Generation 3 reactors use a passive cooling system that does not require electricity to run. They may well have survived the Sendai earthquake and tsunami in tact. It was the loss of electric power needed to run the cooling system and its back-ups that put the reactors at risk, not the direct impact of the quake and tsunami. That said plenty of wars have been lost by generals refighting the last one.

China is pursuing home-grown nuclear power generation technology based on what it is transferring from American, French and Japanese nuclear companies (no one really knows what is going on in China’s military nuclear program). On the civilian side, the AP1000 reactors Beijing has chosen for construction on the east coast and plans to build further inland are a Generation III design. They are also being used for 14 proposed reactors in the U.S. The design has been approved by the U.S. Nuclear Regulatory Commission, but there remain some concerns about its safety, particularly its capacity to survive being hit by an aircraft.

No power generation system will ever be 100% safe. When nuclear goes wrong, it tends to go catastrophically wrong. Predicting what could trigger that catastrophe will never be a 100% science, either. In 2003, the Japanese Nuclear Commission was set this safety target:

The mean value of acute fatality risk by radiation exposure resultant from an accident of a nuclear installation to individuals of the public, who live in the vicinity of the site boundary of the nuclear installation, should not exceed the probability of about 1×10^6 per year.

1×10^6 is a million. Japan’s once-in-a-million-years event happened just eight years later.

China’s nuclear program has had its safety issues in the past, and Fukushima will give more strength to the voices raising concerns about nuclear safety. But the country’s need to generate ever more power to fuel growth and to meet a self-imposed goal of generating 15% of its energy needs using non-fossil fuels by 2020 means it is unlikely to scale back its nuclear program, even if it slows the pace of development. Beijing can convince itself that the safety issues can be handled (even if convincing its citizens is another matter, and that may depend on how Fukushima turns out). Its biggest impediment is, as it is everywhere for nuclear, cost. Reactors are expensive to build and have histories of expensive project delays. The country is looking at a potential bill of $150 billion over the next decade for its nuclear program, more if the safety review imposes additional safety-related costs. Meanwhile, there are less expensive alternatives, such as gas, and in future renewables developing rapidly. The future pace of the development of China’s nuclear energy program won’t be decided on safety alone.


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From Fast Imitation To Frugal Innovation

China, like India for that matter, has set off down a development path to convert its companies from imitators to innovators. President Hu Jintao reaffirmed that at an exhibition in Beijing showcasing the country’s scientific and technological achievements during the just concluded five-year plan, urging scientists to enhance China’s capacity for innovation so as to seize the initiative in global competition.

China has made a purposeful start, but it will be a long journey. The country ranks 21st out of 40 countries on its own global innovation list. Against the oft-used benchmark of patents granted, China generates 2,000 a year, one fortieth as many as the U.S., and half of China’s comes from local affiliates of multinationals. Yet that belies advances China is starting to make in fundamental science and technology. Measured by how much the country spends on research and development as a percentage of its gross domestic product, a measure known as GERD, China now ranks third in the world after the U.S. and Japan, having raised its GERD from 0.57% in 1995 to 1.54% in 2008. That translates into annual R&D spending approaching half a trillion yuan ($75 billion), though China’s critics will jibe that much of that should be called R&C spending, for research and copying.

Beijing’s long-term target is for a 2.5% GERD by 2020. The new five-year plan calls for a large increase in R&D spending. There are straws in the wind that suggest that that will manifest itself as an up to 10 trillion yuan ($1.5 trillion) boost for selected advanced industries over the next five years, both directly through soft loans and government procurement and via incentives for foreign companies to set up more R&D facilities in China. The number being floated may be pie in the sky (it is after all two and a half times the size of the 2008 stimulus package) and it is far from clear how much would go for R&D as opposed to infrastructure development, but it is clear that improving the technological capabilities of China’s manufacturers is a policy priority. The anointed industries are biotech, post-fossil-fuels energy, energy conservation and environmental protection, clean-energy vehicles, new materials, and next-generation information technology and high-end equipment manufacturing. The plan calls for these industries to account for 15% of China’s GDP at the end of the next five-year plan, up from 5% going into it.

It is easy to forget that China’s exports have been moving up the value chain away from low-tech products since the 1990s. Firms like Huawei and Lenovo have prospered by absorbing foreign technology and business expertise, and adapting them to produce products for the Chinese market before taking the same strategy into global markets. Not all foreign suppliers of technology and expertise have been happy with the first part of that strategy. They have had to agree to hand over technology to win access to domestic markets and then found that Chinese enterprises are preferring — or being encourage to prefer — to buy locally developed products, patriotic support of the pursuit of “indigenous innovation’.

What also needs not to be lost sight of is that this is a different stripe of innovation, not so much yet leading-edge technological innovation as process innovation; the use of China’s labor quality, supply chain integrity and infrastructure to reduce cost. As S.D. Shibulal, chief operating officer of Infosys Technologies, notes in an INSEAD article on innovation in emerging markets, Chinese companies “are redesigning products to reduce costs; they are redesigning entire business processes to do things better and faster than their rivals.” He dubs this “frugal innovation”.

This lets Chinese companies pickoff niches where they can refine their products and market entry. Haier, the white-goods manufacturer, was a harbinger of  this approach with wine-cooler refrigerators, turning what was a high-end consumer good into a much cheaper middle-market one, and grabbing 60% of the market in the process, according to Peter Williamson, a former INSEAD professor who has written a book on the topic. Consumers were prepared to accept a small drop in quality in return for a large cut in price.

“The real challenge for foreign firms is not so much the top end of the market in many given industries, but the medium sector, which we call the ‘good enough’ sector,” says Anil K. Gupta, a current INSEAD professor. The lesson is that Western multinationals are going to have to learn to compete in the middle market as well as the top-end one, as this is where “future battles for world market share will be fought.”

Meanwhile the challenge for Chinese firms will be to develop their own brands and innovate their own products, then move from manufacturing them at home to designing them there and manufacturing in lower cost countries.

Update: The Economist Intelligence Unit estimates that China’s R&D spending of 500 billion yuan in 2009 will rise to 1.2 trillion yuan by 2015 and to 2.1 trillion yuan by 2020, which is $320 billion at today’s exchange rates. Much of the support will come via fiscal inducements, it says.


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Will China’s Rich Change The Global Art Market?

China has displaced the U.K. to become the world’s second largest art market after the U.S., according to a report on the global art market in 2010 commissioned by the European Fine Art Foundation and published to coincide with its Maastricht arts and antiques fair, the art dealing world’s annual trade show that opens at the end of this week. Given the pace of economic growth that China has enjoyed in recent years, regardless of the global financial crisis in 2008 (when China displaced France as the third largest art market), and the consequent growth of a cadre of newly rich potential purchasers, that is perhaps no great surprise.  Something similar happened in Japan at its equivalent phase of growth in the 1980s. Older hands will remember Yasuo Goto of the Yasuda Fire and Marine Insurance Company paying $40 million at auction for a Van Gogh in 1987, a price that more than tripled the then world record for a work of art.

What intrigues us is whether the scale of China’s newly rich buying art will turn fine art into a structured alternative-investment category in a way that Japan didn’t. China has taken a tentative first step in this direction. In January, it set up the government-backed Tianjin Cultural Artwork Exchange to let investors buy and sell fractional ownership of paintings, calligraphy and other works of art — and so provide a rudimentary public market where investors, small and large, could, in effect, trade art shares.

What it and a similar exchange in France don’t let an investor do is invest in the broad art market or in an index of it. The art world doesn’t have an investment-grade index equivalent to a broad stock market index. Constructing one would be even more difficult than creating real-estate indices, which also have to contend with the issue of measuring a market of one-off products, properties in its case, works of art in the other; further, though art sales are an estimated $30 billion a year market, less than half of that is comprised of discoverable prices, i.e. sales at auction; three-fifths to two-thirds are private sales. Could Chinese buying provide the impetus for tackling those structural market problems? Or will it just create another bubbly fad that will eventually go pop?

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Subsidy Or Welfare Spending?

In an economy such as China’s, standing somewhere uncertain in the transition from being centrally planned to a market economy, is everything a subsidy? The question is raised again both by the World Trade Organization’s surprise ruling that the U.S. had introduced illegal anti-dumping and anti-subsidy duties on some steel exports and by a new World Bank research working paper looking at the effects of a countervailing duties case brought by the United States in 2007 against Chinese imports of coated free sheet paper which were alleged to be being sold at below fair market value because of government subsidies to the Chinese manufacturers.

That case petered out after the U.S.’s International Trade Commission eventually found that no injury had been done to American paper producers. Its significance lies in that it reversed a long-standing American policy of not imposing countervailing and their sister anti-dumping duties on exports from non-market economies (into which category China falls until 2016 under the terms of its joining the WTO), thus opening the door for at least eight such trade actions from a wide range of industries.

Wonk warning: The paper will put any trade policy wonk in pig heaven. You will be neck deep in WTO rules and regs and the arcane arts of diving fair market value and identifying subsidies. If that is what fascinates you, you will find it a fascinating case study. If that’s not you, read on here.

The broader question is how does China, or any other transitioning economy for that matter, implement social and economic development policies it legitimately wants to pursue, as set forth, for example, in the new five-year plan, without distorting trade? What counts as an export subsidy and what is fair game for a countervailing or anti-dumping duty? For example, does the VAT rebate that Chinese farmers get (they effectively pay 5.8%, not the full 13% as part of the push to narrow urban-rural income disparities) count as an export subsidy, as some at the U.S. agriculture department argue? Or discounted land or energy supplies given by central or local governments as an inducement to attract new industry to desired regions, as some in the U.S. steel industry promote. What about a bank loan; the U.S. commerce department has determined that the domestic banking sector doesn’t operate on a commercial basis? Or China’s managed currency, which some in the U.S. Congress want made subject to trade remedies? Even censorship is starting to come under the microscope to examine if it, too, is a trade issue.

China has made great progress in reducing its overt subsidies (tariffs, subsidies and export taxes/rebates), down from 8% of GDP in 1985 to 0.7% by 2005 according to one 2007 study. But there are still a lot of subsidies designed to promote economic and social welfare goals, particularly poverty reduction and environmental protection, some of which are reported to the WTO but which need to be made trade neutral and applied according to universal principles not discriminatorily in line with WTO rules.

It is now a reasonable argument to make that U.S. trade remedy laws have strayed far from their original purpose, and are now being used by special interests to shield themselves from competition. Greg Mankiw, the Harvard University economist who is a former chair of the U.S. President’s Council of Economic Advisers, has said, “Anti-dumping is the ‘third rail’ of U.S. trade politics, with few politicians of either party willing to point out its broadly negative impact.” The World Bank paper quotes recent research that found that each job saved by steel tariffs cam e at the cost of three jobs in steel-using industries and caused economic distortion equal to some $450,000.

The paper suggests three remedies: contesting these cases in the courts or via the WTO disputes mechanism, as in the case of the steel duties–China and its companies now have hordes of trade lawyers in Geneva, Washington and Brussels on retainer; changing the rules on countervailing and anti-dumping duties via the Doha round of trade negotiations, but which would depend on the chimera of the Doha round actually being concluded; and China advancing the date of its recognition as a market economy from 2016, which would come with its own baggage. That, though, would be the idealists’ solution as it would let China provide a model for developing economies designing industrial and development policies intended to achieve social objectives that don’t simultaneously distort trade.

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World’s Fastest Underwater Train: It Will Be Chinese

Despite the corruption scandal surrounding China’s high-speed rail network and calls from some quarters for a pause for breath in its breakneck expansion, the superlatives continue to rack up. Add to the list, the fastest underwater trains. Strictly speaking, the existing record is yet to be broken. But the tunnel through which the trains will run has been built, Xinhua reports. Its stretches for 10.8 kilometers under the Pearl River estuary on the run from Guangzhou to Shenzhen and Hong Kong that will open next year. Trains will be able to speed through it at a record-setting 350 kph, with the trip between Guangzhou to Hong Kong cut to 40 minutes from the current two hours.


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February’s Dismal Numbers

The newly released economic statistics don’t make for cheerful reading in Beijing. Consumer price inflation in February was 4.9% year-on-year, unchanged from January’s rate and with food prices up 11% in February compared to 10.3% in January. The New Year holiday will have pushed food prices up somewhat but the increase along with February’s producer price index being up 7.2% suggests inflationary pressure won’t be abating soon.

Neither is the sharp increase in residential real estate investment in January and February reassuring, up 35% from the same period a year earlier, and above the 33% growth for 2010.  Overall fixed-asset investment growth was up 24.9% year-on-year for the two months, compared to 23.8% for 2010. Central government investment was up 6.3% but local governments’ remains strong, up 26.9%. Beijing won’t be happy about that as it suggests the government is struggling to rein in the economy and make headway in its intention to rebalance the economy away from investment.

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The Algorithm Of Dissent

Here is the algorithm of dissent, as elucidated by the People’ Daily: dissent leads to chaos; chaos spells disaster for all the gains of economic development; one million Libyans are now in need of humanitarian assistance; ultimately it is the ordinary people who suffer hardship. So don’t become a Jasmine tea party. As state media tells us, “The Chinese people know only too well that the precondition of living a good life is national stability and social harmony.” So now you know, too.


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Forget February’s Trade Figures

China’s trade deficit for February is an anomaly caused by the New Year holiday. This set of trade figures is even more meaningless for interpretation of a trend than a single month’s numbers usually are. If one looks at the trade figures for January and February combined, exports were up 21.3% and imports 36% on the same period a year earlier, compared with 17.9% and 25.6% in December. Rising commodity prices are inflating the export number, but the arc of the trend is for a gradually diminishing surplus on a rising volume of trade.


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