Monthly Archives: October 2011

Critical Next Step For China’s Space Program

A schematic image of China's proposed space station, for which the docking of Shenzhou-8 with the unmanned orbiting space laboratory, Tiangong-1, is an essential first step.

When China sent up the first building block of its space station in September, it was always the case that the second module wouldn’t be far behind. Shenzhou-8 will get blasted off on Tuesday to join–if all goes well–the unmanned space laboratory, Tiangong-1, already in orbit. (Update: the launch was successful; docking is planned for no later than Thursday. Done. Check). Shenzhous -9 and -10 are to follow next year. The drawing above is a representation of what the space station will look like once it is fully assembled. The part closest to the bottom left looks like a Shenzhou module.

Chinese space launches are now routine, but docking in space is new for its space program, and a critical skill to master as it races to catch-up with the other space powers. The U.S., for example, first docked spacecraft in 1966. It will take a decade for the space station to be built out fully and astronauts are likely to be aboard from next year. But none of that will be possible without successful docking in space. This docking is running six months behind its original schedule, but China’s space engineers, who will be orchestrating the docking from the ground, know how important it is to get this essential step right–so essential that they will perform the operation twice on this mission, docking, then undocking and docking again.

State media is again giving the docking great fanfare.


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The Troubling Trouble On China’s Southwestern Reaches

The situation just across the border from Yunnan in Myanmar’s Kachin state is becoming increasingly unstable. Beijing has moved additional troops to its side of the border to prevent a trickle of refugees into China again turning in to a flood, and to provide some moral, and possibly material support to Myanmar government forces fighting the Kachin Independence Army (KIA).

Fighting has intensified since the midyear collapse of a long-standing ceasefire between the KIA and the government. Ethnic Kachins fleeing the fighting are reportedly being turned back at the border. We hear, but have not been able to confirm, that the transport of supplies of food and medicine in the opposite direction are being hindered if they are thought to be destined for the KIA. Chinese riot police have been holding crowd control exercises within a baton’s length of crossings points on the border, while an additional 6,000 PLA troops were sent to Yunnan this month. They are being deployed opposite the KIA strongholds and refugee camps being set up for displaced Kachins that are close to the China border.

Beijing’s sympathies lie with Naypyidaw not the KIA, which has led the campaign to disrupt the expansion of China’s commercial interests in Kachin. The 17-year ceasefire between the KIA and the government had allowed Chinese companies to start logging, mining and hydropower projects in the region, such as the controversial and now suspended construction of the Myitsone Hydoelectric Dam on the Irrawaddy river. These interests are now at considerable risk.

Beijing would most like its old allies in Naypyidaw just to get the KIA under control. The hardliners in Myanmar’s army, who are close to Beijing, are happy to do that by force of arms, as they have shown in recent weeks, but President Thein Sein’s civilian government that succeeded the military junta that made Myanmar an international pariah, is more constrained. It is courting the West and the Association of Southeast Asian Nations (ASEAN) in order to return to the international fold. It cannot be seen to be Beijing’s lapdog, protecting Chinese commercial interests at the expense of a native ethnic minority and creating a humanitarian disaster to boot.

For its part, Beijing may have to take some sort of lead in brokering an end to the fighting in Kachin, uncomfortable as that might be for it now. Not only does it want neither unrest nor a humanitarian disaster on its southwestern reaches but it also does not want to create an opportunity for India or ASEAN to step, in the name of regional security, in to what Beijing considers its sphere of influence and a key corridor connecting it to the Indian Ocean.


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China Will Be Exacting Contributor To Euro-Bailout

China’s contribution to the euro-zone’s would-be 1 trillion euro bail-out fund, the European Financial Stability Facility (EFSF), will likely be more token than substantive. The head of the fund, Klaus Regling, is in Beijing with his collecting tin, but while he will find his hosts wishing to be internationally cooperative, he will also find them risk-adverse and somewhat divided on how much China should contribute. Some would prefer to contribute through the IMF, where China could extract some political return, which will also be expected but more difficult to achieve if Beijing contributes directly to the EFSF. The are also still some burned fingers in Beijing from earlier foreign investments to diversify its foreign exchange reserves from U.S. government paper. The unresolved details of Europe’s plan gives Beijing the necessary excuse not to be rushed into committing itself to anything just yet and the time to work on some quid pro quo, probably on the trade and technology transfer fronts.

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China’s Muni-Bond Market Brought Back To Life

This Bystander noted last year that moves were afoot to develop a municipal bond market as a way to put the financing of provincial and local governments on a more transparent footing, and to wean it from the off-balance sheet financing via captive investment vehicles that local authorities have resorted to get round restrictions on official borrowings. As of June, 2010, these captive investment vehicles accounted for 7.7 trillion yuan of local government borrowings (more than three-quarters of the total), and had become some of the most riskiest parts of local government finances in the eyes of the finance ministry.

Now, Zhejiang and Guangdong provinces and the municipalities of Shanghai and Shenzen have been given permission by the ministry to issue three- and five-year bonds on a trial basis. It is the first such direct muni-bond issuance sanctioned in 17 years.  Collectively the quartet are expected to be capped at 20 billion-30 billion yuan first time round. (Update: Shanghai, 7.1 billion yuan; Guangdong, 6.9 billion yuan; Zhejiang, 6.7 billion; and Shenzhen 2.2 billion yuan.) That would be one-tenth of the annual issuance now made by the finance ministry on behalf of local governments to help meet funding shortfalls.

Though the bonds will issued by the four authorities, they will be closely supervised by the ministry. The proceeds of the sales will be kept in a special account at the ministry, which will oversee the payment of interest and principal, and, in effect, guarantee the bonds. The ministry will also have a big say in what the money raised can be used for. Zhejiang is expected to be first out of the gate, raising funds for infrastructure projects. If all goes well, other provincial and city governments will be allowed to follow suit.

Beijing banned local governments from selling their own bonds–and from running deficits, come to that– in 1994 when it became concerned local authorities were running up huge debts they wouldn’t be able to pay. Now policymakers are concerned that local authorities have again borrowed too heavily in the wake of China’s post-2008 global financial crisis stimulus, and that in a slowing economy and cooling property market they will again struggle to repay their loans. Worse, that could trigger a banking crisis.

While the immediate priority is to clean up and deflate the local government debt bubble before it can go damagingly pop, the development of a local-government bond market is in Bejing’s long-term plan for developing its domestic financial markets. Beijing is moving cautiously, however. It remains wary of giving provinces more control over their own development, at the expense of central control. The initial quartet are trustees, so to speak, and financially sound enough to test the waters without too great a risk of mishap.

Beijing will still have to guarantee the debt of many provinces for sometime to come, and there is a real risk that some of the weaker provinces won’t able to maintain their debt service. As Liu Mingkang, head of the banking regulator, noted earlier this week, there are serious concerns about the levels of local government debt. “We cannot deny that local government financing platforms have not been managed well,” he said.

A quick glance west to Greece or east to California reveals the trouble fiscally wayward and heavily indebted national and local governments can get into. Having prided itself on avoiding the worst excesses of the prelude to the recent global financial crisis, Beijing doesn’t want to go there in its aftermath.



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Chinese Seeking Asylum In Rich Countries On The Rise

Nearly 11,700 Chinese sought asylum in the U.S, Europe and other industrialized countries in the first half of this year, 15% more than in the same period of 2010, and the highest half-yearly figure since the second half of 2003, according to the UN High Commissioner for Refugees (UNHNCR). China accounted for the second largest group of asylum seekers to industrialized countries after Afghanistan, or 6% of the total.

Two thirds of the asylum seekers from China applied for refuge in the U.S. They accounted for roughy one quarter of the 36,400 applications for asylum lodged in the U.S., constituting the largest national group of would-be refugees. France was the second favorite destination of asylum seekers from China with Canada the third, followed by Australia and the U.K. Asylum applications to Australia were down following Canberra’s tightening of its asylum laws.

Elsewhere, asylum seekers from China have been on the rise, with 20,297 seeking refuge in industrialized countries in 2009 and 21,567 in 2010. This year is on pace to hit the 25,000 mark. While that would not a huge number in relation to China’s immense population, the steady increase in would-be refugees is notable even given the fact that China has historically been one of leading sources of asylum seekers. (We should note that the UNHCR counts asylum applicants and not those who are granted refugee status. Many are turned down and returned to their country of origin. We should also note that the UNHCR reckons that four out of five if all refugees worldwide end up not in industrialized countries but in developing ones.)

The UNHCR report is a statistical compilation and provides little commentary to explain the increase in those seeking refugee status beyond noting that in the first half of 2011 there was a 17% increase in the overall number of individuals requesting refugee status in the 44 industrialized countries monitored as compared to the first half of 2010. It notes that “there have been major forced displacement crises in West, North and East Africa,” but these shouldn’t have affected the Chinese numbers.

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China Still On Course For Soft Landing

China’s economy grew by 9.1% year-on-year in the third quarter, suggesting that policymakers are sustaining the flight path to a soft landing. Quarter-on-quarter GDP growth slowed from 2.4% to 2.3%, but was still faster than the 2.0% of the first quarter.

Not that the economy doesn’t remain vulnerable to external and internal shocks. Export demand from developed countries remains fragile.  Europe’s eurocrisis and America’s political impasse, on top of the great consumer deleveraging occurring on both continents, continue to ensure slow to no growth in both markets. Beijing’s attempts to rebalance growth from investment and exports towards domestic consumption should make the economy better able to withstand an external demand shock. This Bystander doesn’t believe the substance yet matches the promise, however.

Meanwhile, the domestic property market and the closely linked quality of banks’ loan books since the stimulus that followed the 2008 global financial crisis remain concerns. Bankruptcies among small and medium-sized enterprises suggests that the tightening of monetary policy since 2010 has slowed growth overall, but unevenly. The sustained 9%+ GDP growth rate suggests that further tightening to tackle stubbornly high inflation remains a possibility, though policymakers may want to give themselves another quarter’s figures to be confident that a hard landing is not in prospect.

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China’s Inflation Remains Stubbornly High

Consumer price inflation remains persistently high, though it has eased from July’s peak of 6.5%. September’s number came in at 6.1%, against August’s 6.2%. The summer’s storms and droughts kept food price rises from moderating. The food component of the inflation figure rose 13.4% in September, as it had in August.

With the global economic outlook still uncertain, policymakers at the People’s Bank of China are likely to maintain their policy tightening on hold, but this latest set of monthly numbers won’t do enough to lower inflationary expectations to give this Bystander any confidence that there won’t be another round of interest rate rises or bank capital reserve increases.

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