While fears about the safety of Chinese food products are often well founded, in Vietnam they are so tangled up with anti-Chinese sentiment it is hard to tell where one begins and the other ends. More than 1,000 years of occupation, a bloody border war in 1979 and renewed assertiveness by China in pushing territorial claims in the South China Sea mean that tales of Chinese perfidy find fertile soil in which to grow.

[…] Nguyen Quang Bach, a customs official at Tan Thanh, one of the major entry points for Chinese goods into Vietnam, said last year daily imports peaked at 2,100 metric tons of fruit a day in the run up to the Lunar New Year, when demand for fruits is at its highest. He said this year the busiest day saw half that cross the border.

“The information (about alleged dangers) has affected people’s psychology,” he said. “Consumers don’t eat Chinese fruits and importers can’t sell them.”

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Recent data from the world’s two largest economies show that Chinese trade in goods and services reached $3.87 trillion in 2012, according to the General Administration of Customs, while the value of US exports and imports was $3.82 trillion, according to the US Commerce Department.

The ministry said, however, that China’s combined export and import volume from last year is below that of theUS when the same method of measurement is used.

A ministry official, who wasn’t identified, said on Wednesday the Commerce Department released two sets of figures for US trade last year: $3.82 trillion based on the country’s international balance of payments, and $3.882trillion based on a measurement similar to that used by the World Trade Organization. Only the smaller number was compared with China’s volume.

The official said the WTO’s annual trade report, which will be released within a month, will show a continued 1-2 ranking of the US and China.

At South China Morning Post, Tom Holland provides further details, explaining why reports that China is now the world’s biggest trading economy are wrong:

The most obvious way they are wrong is because China’s import and export numbers are heavily distorted by domestic companies fiddling their taxes.

Under mainland regulations, exporters of electronic gadgets and other widgetry can claim a value-added tax rebate worth 17 per cent of the goods’ value.

What’s more, under the Closer Economic Partnership Arrangement, no tariffs are charged on goods imported into the mainland from Hong Kong, provided the importer claims a relatively small component of value was added in the city.

As a result, mainland companies ship huge quantities of goods to Hong Kong, where their value is marked up by around 20 per cent before they are re-imported back into the mainland.[...]

A brief from The Economist looks at the numbers contested above, noting that even if they are accurate, the U.S. remains the global leader if services are included in the count:

[...]New figures show that America’s imports and exports of goods amounted to $3.82 trillion in 2012, compared with China’s $3.87 trillion (see chart). These figures count only trade in objects (ingenious or mundane). If services are added, America retains its lead for the moment. Tax dodges may also inflate China’s numbers, but its trade networks are spreading.[...]

Another recent piece on the topic from South China Morning Post notes that the Ministry of Commerce is also condemning recent U.S. sanctions on Chinese military firms for disrupting international trade norms:

Meanwhile, Beijing said the US was disrupting international trade by slapping sanctions on Chinese firms.

[...]In a separate report, Xinhua said Shen Danyang, a Ministry of Commerce spokesman, accused the US of disrupting the “normal order of international trade” and harming Chinese companies’ interest by imposing sanctions under its non-proliferation laws.

China urged the US to correct its “erroneous practice”, Xinhua said.

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“A lower comparative base last year caused by fewer working days has helped push up the growth rate this year,” said Li Jian, a foreign trade expert from a research institute at the Ministry of Commerce (MOC).

Imports continued a recovering trend due to a warming domestic market. Imports of iron ores,coal and steel, which are mainly consumed by domestic infrastructure projects, increased sharply last month, said Chen Hufei, a researcher at the Bank of Communications.

Friday’s data showed that China’s foreign trade with the European Union rose 10.5 percent year on year last month to stand at 47.14 billion U.S. dollars.

Trade with the United States increased 23.4 percent to $43.72 billion. Trade with the Association of Southeast Asian Nations grew 42.9 percent to reach $36.99billion. Trade between China’s mainland and Hong Kong surged 83 percent to $33.4 billion.

According to The Telegraph, China has surpassed the US to become the world’s biggest trading nation:

The total value of US exports and imports in 2012 was $3.82 trillion (£2.4 trillion), the US Commerce Department has revealed. China’s customs administration has already announced that the country’s total trade last year was worth $3.87 trillion.

Not only has China managed to post a larger total trading figure, but the breakdown of imports compared with exports also makes for favourable reading in Beijing. China had a full-year trade surplus of $231.1bn with the US posting a total 2012 trade deficit of $727.9bn.

However, activity across the Chinese economy was impressive, with sales of passenger cars over the month soared to their highest ever. China’s auto sales jumped 46.4pc compared with January 2012 to a record monthly high of 2.03m units, the China Association of Automobile Manufacturers (CAAM) said. Vehicle output also hit a new monthly high, surging 51.17pc to 1.96m units.

French bank Société Générale said last month there still is a chance of a “hard landing,” with growth dropping below 6pc, which would be dangerously low for China.

While China boosts its foreign trade, analysts say China’s growing influence could be a threat, from Bloomberg:

China’s growing influence in global commerce threatens to disrupt regional trading blocs as it becomes the most important commercial partner for some countries. Germany may export twice as much to China by the end of the decade as it does to France, estimated Goldman Sachs Group Inc.’s Jim O’Neill.

“For so many countries around the world, China is becoming rapidly the most important bilateral trade partner,” O’Neill, chairman of Goldman Sachs’s asset management division and the economist who bound Brazil to Russia, India and China to form the BRIC investing strategy, said in a telephone interview. “At this kind of pace by the end of the decade many European countries will be doing more individual trade with China than with bilateral partners in Europe.”

“It is remarkable that an economy that is only a fraction of the size of the U.S. economy has a larger trading volume,”Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington, said in an e-mail. The increase isn’t all the result of an undervalued yuan fueling an export boom, as Chinese imports have grown more rapidly than exports since 2007, he said.

“One way or another we have to get China more involved in the global organizations of today and the future despite some of their own reluctance,” O’Neill said, mentioning China’s inclusion in the IMF’s Special Drawing Rights currency basket. “To not have China more symbolically and more importantly actually central to all these things is just increasingly silly.”

CDT previously reported on the manufacturing shift that had certain products made in the US but sold in China. Reuters reports although imports from China to the US hit a record high last year, America’s exports to China also increased:

Prices for U.S. stocks rose as investors were impressed by a batch of strong trade data, which included readings showing stronger exports and imports by China during January as well as the U.S. figures for December. Prices for U.S. government debt fell.

While the overall deficit shrank last year, it grew with China, raising the hackles of U.S. manufacturers who feel Beijing gives its exporters an unfair edge by keeping its currency undervalued.

America’s December trade deficit with China for goods, which was not seasonally adjusted, narrowed by $4.5 billion on a drop in imports.

Read more about trade in China, via CDT.

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The discovery raises questions about procurement practices by U.S. departments responsible for national security. The U.S. government and Congress have raised concerns about Huawei and its alleged ties to the Chinese military and government. The company, the world’s second-largest telecommunications equipment maker, denies its products pose any security risk or that the Chinese military influences its business.

[…] William Plummer, Huawei’s vice president of external affairs in Washington, said in an email to Reuters: “There has never been a shred of substantive proof that Huawei gear is any less secure than that of our competitors, all of which rely on common global standards, supply chains, coding and manufacturing.

“Blackballing legitimate multinationals based on country of origin is reckless, both in terms of fostering a dangerously false sense of cyber-security and in threatening the free and fair global trading system that the U.S. has championed for the last 60-plus years.”

The Economist (via CDT) addressed the Huawei investigation in a pair of articles last August.

In another sign of American wariness, China was specifically excluded last week from the relaxation of export restrictions on communications satellites. From William J. Broad at The New York Times:

The strict export controls arose from a political fight over satellite launchings by China, which in the 1980s began offering cheap rides into orbit on low-cost rockets. Presidents Ronald Reagan and George H. W. Bush, both Republicans, approved transfers of American spacecraft to Chinese rockets, as did President Bill Clinton, a Democrat.

Starting in early 1998, a series of upsets brought the expanding trade to a halt. Two American satellite makers involved in the Chinese launchings, Hughes and Loral, were accused of giving China advice about making not only commercial rockets, but also military missiles.

Republicans, who controlled Congress at the time, argued that satellite exports could lead to a hemorrhage of secret materials and information, and said that China might already have stolen encryption secrets.

China responded to its continued exclusion with “grave concern”. From Yang Jingjie at Global Times:

[… T]he relaxation of export controls shut China out by stipulating that no satellites or related items may be exported, re-exported or transferred to China, North Korea or any country that is a state sponsor of terrorism. It prohibits satellites or related items from being launched in those countries, and prohibits those countries from using these items in their launch vehicles. Only the president could waive the prohibition on a case-by-case basis.

In response, China expressed grave concern.

[…] “The Obama administration has made repeated promises to relax high-tech export controls. But it turns out that it has been the strictest,” Zhou Shijian, a senior researcher with the Center for US-China Relations at Tsinghua University, told the Global Times.

The new rules proposed by some right-wing legislators have in fact labeled China as “an enemy” of the US, Zhou said, noting that even during the Cold War era, the US didn’t stop space cooperation with the former Soviet Union.

China’s satellite programmes, including its Beidou navigation system, do have significant military applications. But congress’ determination to block any cooperation with China in space also has critics in the U.S.: NASA astronaut Leroy Chiao urged a new Sino-American space partnership in 2011; Harvard-Smithsonian astrophysicist Jonathan McDowell and Joan Johnson-Freese of the Naval War College discussed the loss of “major opportunities” on NPR’s Talk of the Nation last June; and the Council on Foreign Relations’ Frank Klotz suggested in July that cooperation based on the U.S.-Russian model might better “serve long-term American interests”.

Currently, the absence of any established framework for cooperation is complicating Washington’s response to an anticipated Chinese anti-satellite weapon test, rumoured to be scheduled for January 11th. From Gregory Kulacki at the Union of Concerned Scientists:

High-level intervention in both countries is needed to stop the test and start discussions. Remarkably, there are no regular channels of communication on space issues between China and the United States. Congressional opposition to scientific and commercial cooperation with China in space shut down potential talks on human space flight that could have led to a bilateral dialog on space security.

[…] China’s space program is still in the formative stages of its development. Both the United States and the former Soviet Union conducted equally high profile ASAT testing during comparable stages in the development of their space programs, and both eventually decided to stop destructive ASAT testing. Hopefully, China will eventually come to a similar conclusion. Beginning a meaningful bilateral dialog on space security between the United States and China could hasten the day.

A Global Times editorial defended the development of anti-satellite weaponry as necessary “to deter the US from taking risky action against China in this period of great transition”, given its rejection of past olive branches.

China’s public policy is peaceful use of space, which is also China’s real desire. China has no interest in launching a large-scale space race with the US. China and Russia jointly initiated a program to avoid an arm race in outer space in 2008, but this proposal was refused by the US.

Against this background, it is necessary for China to have the ability to strike US satellites. This deterrent can provide strategic protection to Chinese satellites and the whole country’s national security.

[…] In the foreseeable future, gap between China and the US cannot be eliminated by China’s development of space weapons. The US advantage is overwhelming. Before strategic uncertainties between China and the US can disappear, China urgently needs to have an outer space trump card.

[…] Therefore, hopefully, the speculation about China’s anti-satellite tests is true.

American arms sales to China’s neighbours, meanwhile, are “set to boom”, according Reuters’ Jim Wolf, reporting on a forecast by the Aerospace Industries Association.

Fears resulting from China’s growing military spending should lead to enough U.S. sales in South and East Asia to more than offset a slowdown in European arms-buying, according to the forecast.

[…] Overall, the United States reached arms transfer agreements in 2011 totaling $66.3 billion, or nearly 78 percent of all such worldwide pacts, according to the nonpartisan Congressional Research Service. The 2011 total was swollen by a record $33.4 billion deal with Saudi Arabia. India ranked second with $6.9 billion in such agreements.

Rupert Hammond-Chambers, who consults for U.S. arms makers through BowerGroupAsia, an advisory with 10 offices in the region, predicted Southeast Asian defense budgets would expand steadily as a hedge against Chinese assertiveness in disputes in the South China and East China seas.

[…] The Obama administration says arms sales are an increasingly critical and cost-efficient arrow in its quiver to defend U.S. worldwide interests.

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Economists reacted positively to the data, according to The Sydney Morning Herald:

“The export slowdown shows external demand faces uncertainty due to concerns over the fiscal cliff in the US,” said Zhang Zhiwei, chief China economist at Nomura in Hong Kong. “Nonetheless it does not change our view that growth is on track for a strong recovery in Q4, as (growth) is mostly domestically driven.”

…

“The Chinese economy is now in a sweet spot and can stay in the sweet spot through the first half of 2013,” Ting Lu, an economist at Bank of America-Merrill Lynch, said before the trade figures were released. “Beijing will be happy to sustain the current policy stance.”

With China likely to post its slowest full-year of growth since 1999, however, Chinese leaders concluded the annual Central Economic Work Conference in Beijing on Sunday by warning that the world’s second largest economy is not yet out of the woods. With Europe’s debt crisis still raging, and with the U.S. economic recovery still uncertain amid the ongoing “fiscal cliff” deadlock in Washington, The Wall Street Journal adds that China’s new leaders “sent their strongest signal yet” that they will focus on retooling the economy to rely less on export growth and more on domestic demand. Here, the China Daily reports that top policymakers continued to pledge reform - from cutting taxes to enabling greater mobility for rural workers, and providing more support to agriculture and innovation – to keep economic growth stable.

But was anything new put forth following the conference? The Financial Times’ Jamil Anderlini checked in from Beijing today with a resounding “no”, writing that the leaders revealed an economic agenda “largely in line with that of the outgoing administration.” Similarly, Keith Bradsher of The New York Times reports that the government released a lengthy statement calling for continuity, at least for now:

The statement endorsed tax cuts, continued curbs on real estate speculation and a broader effort to increase domestic consumption and wean the economy from its dependence on exports and investment.

“The opportunities facing us are no longer the traditional ones of simply entering the international division of labor, expanding exports and accelerating investments, but rather new opportunities forcing us to expand domestic demand, improve innovative capacities and promoting the transformation of the mode of development,” the statement said.

…

While China has many economic opportunities, “we must soberly recognize that there are still many risks and challenges confronting our national development,” the overview released by Xinhua said. “Problems with imbalances, ill-coordination and lack of sustainability remain pronounced.”

“The contradiction between downward pressures on the economy and relative overcapacity in production is deepening,” the statement continued. “Business operating costs are rising while innovative capacities are inadequate. There are latent risks in the financial sphere.”

Expectations of reform have indeed been heightened of late, as new Communist Party chief Xi Jinping retraced Deng Xiaoping’s 1992 “Southern Tour” with a similar trip of his own last week. The Chinese Academy of Social Sciences even warned last week that China’s economic imbalance had reached alarming levels that would hamper growth in the absence of bold action. Such a warning comes as a new survey indicates that China’s Gini coefficient, or measure of income inequality, may be far higher than previously thought.

While China will need reform to ensure that growth returns to the 8% level that the state-run Bank of China predicts for 2013, not everyone has bought into the rhetoric. MarketWatch’s Craig Stephen wrote Sunday that “once again it looks as if talk is easier than action when it comes to economic reform in China.” The Financial Times’ Kate Mackenzie echoed that sentiment today:

Don’t be misled by the proclamations of ‘reform‘ or ‘quality growth‘ from China’s central economic work conference at the weekend. It’s more of the same, at least for the time being.

The more concrete message was that economic and monetary policies would “remain stable for year ahead”. In other words: keep pursuing for just a little longer the brittle policies of property price inflation, more infrastructure investment, and looser money and credit.

Dr. Robert Lawrence Kuhn, however, does see some key reforms on the horizon. From Forbes India:

I expect substantial changes in the economy in the months following March. In China, it is a (cultural) tradition of new governments to carry on with policies of the earlier regime for a long time. Any change is thought to be disrespectful. But this time, it seems, the risk of not reforming is much higher than the risk of change. For example, there have been a series of corruption scandals. The new leaders will be under more pressure to change much quicker. While I do not expect much change on international policies—the rigid nationalism and tough rhetoric—there will be quick changes on the economic front. Xi Jinping’s opening speech showed this. The address was rational, without the usual political jargon, and offered hope. One feedback I got from his aides is that “the biggest concern now is high expectations”. The seven top leaders are the first batch not picked by Chairman Mao Zedong or Deng Xiaoping. This marks a very important transition for China.

One question I am asked very often is for how long will China be able to retain its edge in manufacturing? From the leadership’s standpoint, the answer is clear: Wages have to go up. The economic divide is at several levels—the coastal population versus those living inland, urban versus rural, basically rich versus poor. For decades, rural wages have been increased by moving population to the cities. In the past 40 years, about 500 million people have moved to urban areas. So, the rural population has halved, while income levels have doubled. It is only possible to increase workers’ wages if the margins on manufacturing go up.

The bottom line, according to Asia advertising executive Tom Doctoroff, is that reform is no longer a luxury and all eyes are on Xi Jinping and his new regime to inspire public confidence in his blueprint for economic progress:

Many now ask whether the contradictions of society — between rich and poor, urban and rural, young and old, politically connected and “small potatoes” — are approaching the breaking point. While crisis is not imminent, loss of absolute confidence in the future of the country has manifested itself in many ways, from 200,000 local protests to a slowdown in sales of luxury goods, real estate and autos. According to C-trip, bookings mid-level travel destinations such as Hainan island, usually popular amongst the new middle class, are down dramatically. Job-hopping, perhaps the greatest indicator of economic optimism amongst ambitious Chinese, has slowed, a sign of diffused anxiety.

…

However, until Mr. Xi outlines specific, incremental steps of structural reform — intra-party checks and balances, independent commercial courts, urban residency reform, rural land-ownership reform, further strengthening of the welfare net and other institutional mechanism to safeguard the economic interests of individuals — consumer confidence will wane. If so, “rebalancing” will remain a long way off, and the China’s potential under-realized. China will certainly not flirt with Western-style democracy or laissez-faire capitalism. But the Chinese, supreme pragmatists that value stability above all else, know the status quo is unsustainable.

Have China’s Trade Statistics Been Inflated?

November export growth of 2.9% may have disappointed, especially when compared to robust figures of 9.9% and 11.6% in September and October, respectively, but what explains the big swing? Forbes’ Gordon Chang points to a couple of reasons why fake transactions may have distorted the trade data:

Are we to believe China had an export boom lasting just two months?  Anything is possible, but a more likely explanation for the anomalous September and October figures is that they were distorted by fictitious transactions.

Anne Stevenson-Yang of J Capital Research in Beijing, in one of her November e-mail alerts, suggests that the uptick in exports may have been partly due to hot-money inflows caused by currency speculation.  Exporters, she notes, are overstating sales, allowing them to book revenues in dollars.  They then use the paperwork to get permission to sell dollars for renminbi.  The result is that exporters made money with their currency transactions, but the byproduct is that the Ministry of Commerce’s trade figures overstate China’s exports.

Tom Holland of the South China Morning Post reports an even more ingenious scheme that has artificially pushed up Beijing’s trade statistics.  There is, he notes, legitimate trade where goods go from one part of China to another through Hong Kong.  For example, it makes sense to transport through Hong Kong components manufactured in Shanghai for final assembly in Shenzhen.  Since 1997, Hong Kong has been part of the People’s Republic, but it is not considered as such for customs purposes.

Other News:

• Japan may have overtaken China as the largest holder of U.S. debt, according to The Wall Street Journal.
• The Wall Street Journal reports that as part of its push to boost domestic demand, China will lower tariffs on a range of imported items next year.
• Bloomberg reports that power consumption posted its biggest monthly gain since February.
• MarketWatch’s Craig Stephen writes that China’s regulator is taking steps to heal its sickly stock markets.
• The State Administration of Foreign Exchange has removed the $1 billion limit for foreign sovereign wealth funds, central banks and monetary authorities investing in China through the QFII program, according to Reuters.

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During its traditional disassembly of one of Apple’s latest desktops, however, repair guide site iFixit noted that “Interestingly, this iMac claims to have been assembled in the USA.” While custom-configured, American-assembled Macs are not unheard of, other reports have also surfaced of new, standard-configuration iMacs bearing the “Assembled in USA” marking. At 9to5 Mac, Seth Weibtraub tried to unravel the mystery:

The “Assembled in USA” label doesn’t just mean that foreign parts screwed together in the U.S. either. The U.S. Federal Trade Commission assumes that a ”substantial transformation” must happen in the U.S. for the label to be used.

Specifically, the FTC states that the label “Assembled in the USA” should be the following:

A product that includes foreign components may be called “Assembled in USA” without qualification when its principal assembly takes place in the U.S. and the assembly is substantial. For the “assembly” claim to be valid, the product’s last “substantial transformation” also should have occurred in the U.S. That’s why a “screwdriver” assembly in the U.S. of foreign components into a final product at the end of the manufacturing process doesn’t usually qualify for the “Assembled in USA” claim.

[…] Perhaps Apple is still outsourcing the manufacture to Foxconn and others, but it is actually assembling the products in a U.S. plant? To the surprise of some, Foxconn has a few locations in the U.S., but it isn’t known if they are actually making anything here.

Weintraub also pointed out another case of an iMac “Assembled in Ireland”.

The discovery coincides with a feature at The Atlantic by Charles Fishman, on America’s “Insourcing Boom”. Fishman explains how rising oil prices and wages in China, booming natural gas production and greatly increased productivity in the U.S., and unanticipated benefits from designing and building appliances in the same location have, in many cases, reversed the logic for manufacturing in China. He focuses on General Electric’s huge Appliance Park facility in Louisville, Kentucky, whose workforce hit a low of 1,863 last year after a 1973 peak of 23,000.

[… T]his year, something curious and hopeful has begun to happen, something that cannot be explained merely by the ebbing of the Great Recession, and with it the cyclical return of recently laid-off workers. On February 10, Appliance Park opened an all-new assembly line in Building 2—largely dormant for 14 years—to make cutting-edge, low-energy water heaters. It was the first new assembly line at Appliance Park in 55 years—and the water heaters it began making had previously been made for GE in a Chinese contract factory.

[…] In the midst of this revival, [GE CEO Jeffrey] Immelt made a startling assertion. Writing in Harvard Business Review in March, he declared that outsourcing is “quickly becoming mostly outdated as a business model for GE Appliances.” Just four years after he tried to sell Appliance Park, believing it to be a relic of an era GE had transcended, he’s spending some $800 million to bring the place back to life. “I don’t do that because I run a charity,” he said at a public event in September. “I do that because I think we can do it here and make more money.”

Immelt hasn’t just changed course; he’s pirouetted.

[…] What’s happening in factories across the U.S. is not simply a reversal of decades of outsourcing. If there was once a rush to push factories of nearly every kind offshore, their return is more careful; many things are never coming back. Levi Strauss used to have more than 60 domestic blue-jeans plants; today it contracts out work to 16 and owns none, and it’s hard to imagine mass-market clothing factories ever coming back in significant numbers—the work is too basic.

[…] And of course, manufacturing employment will never again be as central to the U.S. economy as it was in the 1960s and ’70s—improvements in worker productivity alone ensure that. Back in the ’60s, Appliance Park was turning out 250,000 appliances a month. The assembly lines there today are turning out almost as many—with at most one-third of the workers.

See also ‘Made in US, But Sold in China‘ at CDT.

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But has China’s factory sector really rebounded? Not so fast, according to The Financial Times’ Kate MacKenzie, who breaks down the individual components of the official PMI and sees a mixed underlying story. Input prices have jumped, and both new export orders and employment continue to contract (albeit both more slowly than in September). MacKenzie writes that such details “stand out to us as taking the shine off the overall positive figure”. The Wall Street Journal also scanned the analyst community and found a mixed reaction to the manufacturing data, though some wrote that the readings validated the government’s current approach to policy easing.

As observers continue to debate the direction of the Chinese economy after September and third quarter data also generated cautious optimism, Peking University’s Michael Pettis remains at the center of the debate. The self-proclaimed “China skeptic” has long-highlighted the constraints of China’s growth engine and stressed the likelihood of  a sharp and necessary slowdown as the economy shifts away from an investment and export-led model, and this past week he took on two “China bulls” in separate conversations on the subject.

NPR’s Rachel Martin interviewed Pettis and CLSA’s Andrew Rothman, who took the view that China’s rebalancing process has already commenced thanks to “significant steps” taken by the government:

ROTHMAN: Well, actually one of the reasons why I’m bullish about China is because it is slowing down. It’s very positive that the leadership of China has recognized that the two decades of 10 percent growth are no longer sustainable. And they’ve made a lot of adjustments to slow it down while still keeping income growth high. But it’s always going to be slower, a little bit slower every year for the future.

MARTIN: Michael, I assume you’re not as optimistic as Andy.

PETTIS: Well, China’s economy has been driven primarily by very high investment. Every country that has had very high levels of investment for many years has run into the problems that, at some point, additional investment creates economic activity but it actually destroys wealth. The problem is if you bring investment levels down, you need something else to replace it. And that something else is normally consumption.

But it’s extremely difficult consumption rates up quickly enough to replace declining investment rates. So we’re going to see many years of much, much slower growth as China rebalances away from investment.

With growth already retreating from the double-levels enjoyed before the financial crisis, The Wall Street Journal also asked Pettis and expert Nick Lardy if 7%-8% economic expansion is “the new normal” or if the slowdown will continue. Lardy argued that consumption has already begun to contribute more prominently to GDP, and wrote that he expects incoming leaders Xi Jinping and Li Keqiang to accelerate the pace of reform and stave off any further deterioration in China’s economic performance. Pettis, however, challenged the assumption that household consumption can continue to grow at such a strong clip and instead suggested that overall economic growth “will slow substantially in the next few years”. From Pettis’ response to Lardy:

Global and Chinese conditions are not nearly as good anymore. This means that it will be hard to maintain 7% household consumption growth even in the best-case scenario. But rebalancing in China means by definition that household consumption growth has to outpace GDP growth by at least 3 or 4 percentage points every year for the next decade just to bring Chinese consumptions levels to rates equivalent to the lowest consuming countries in the world.

This is just another way of saying that the growth contribution of investment has to drop so sharply that GDP growth cannot exceed 3% – 4% if China is to rebalance. Any higher GDP growth cannot be consistent with even a minimal rebalancing of the Chinese economy unless there is some way to force much greater growth in household consumption – i.e. much greater growth in household income – in spite of much worse global and Chinese economic conditions.

The arithmetic simply doesn’t work. China must rebalance its economy because its over-reliance on investment has become toxic. For China even to maintain GDP growth rates of even 7% to 8% implicitly requires that household consumption grow by 10% – 12%, something never before achieved even under much better economic conditions. Without a deus ex machine that turbocharges consumption growth, high GDP growth rates are incompatible with rebalancing.

Big Bad Loans

Broader economic data may point to a rebound, but disappointing corporate earnings results have blunted that outlook to an extent. From oil refiners to construction and heavy machinery giants, and from the auto industry to airlines, a number of big names have seen profits slump in the just-completed quarter.

Why? There are plenty of reasons – slumping global demand and rising labor costs, to name a couple. But The Diplomat’s James Parker also writes that China is “addicted to credit”, and notices the sharp increase in accounts receivable (money owed but not yet paid to a company by its customers) on the balance sheets of Chinese companies:

During a slowdown, it is common for payments to be delayed as everyone hangs on to cash. Some companies, though, can be tempted to avoid curtailing production by offering reluctant customers much easier credit to encourage sales, the hope being that the slump will soon end and “natural” demand will pick up again. The trouble of course is that if the slowdown is prolonged, or the recovery weaker than expected, these accounts receivable might turn “un-receivable”, and thus have to be written down as losses. An increase in A/R is expected, but such a large increase suggests that some companies have been staying in operations through this vendor financing.

The Wall Street Journal also reports that China’s state-run banks, despite enjoying double-digit profit growth in the third quarter, are bracing for an uptick in non-performing loans. Even The China Daily admits that bad loans are weighing on China’s biggest lenders, and Forbes contributor Gordon Chang goes so far as to call the Big Four banks “China’s Enrons”:

Whether they cooked the books or not, Chinese bankers have a lot to hide. To avoid the effects of the global downturn, Premier Wen Jiabao, beginning at the end of 2008, made the banks go on a spree by forcing them to abandon lending standards. That permitted China to bulk up on “ghost cities,” towering government offices in rural villages, and magnificent airports in the middle of farmland. Even after central officials supposedly reined in the loan-a-thon in 2010, lending has continued at a fast pace: new loans were up 23.7% in Q3, compared to the same quarter last year.

As a result of this “directed” lending, the banks are now carrying “assets” that cannot, in the normal course of business, be paid back. “The Mother of All Debt Bombs” is how Minxin Pei of Claremont McKenna College characterizes the risky situation. Chanos puts it this way: “Imagine a credit python,” he said. “The U.S. is the pig at the end of the snake, and China and Asia are the pig entering the snake in terms of deleveraging the banks.”

Other News:

• The China Daily reports that analysts expect the Renminbi trading band to be broadened this year.
• Real estate developers have turned their eyes back towards Beijing and Shanghai, according to Bloomberg, as opportunities wane in 2nd-Tier cities.
• Crude steel output slowed sharply during the first nine months of 2012, according to data provided by China’s National Development and Reform Commission (NDRC)
• Search engine giant Baidu reported a 60% rise in third quarter profit amid growing advertising revenue.
• China announced new measures aimed at supporting its ailing solar industry, which has suffered U.S. duties on exports over dumping claims.
• As sales growth slumps for Nike, Lee jeans and others, one private equity partner tells The Wall Street Journal that “the hypergrowth era for the apparel industry in China is over, period“.
• Toyota misfired with Chinese buyers, and the problem runs far deeper than the recent anti-Japan protests, writes Reuters’ Norihiko Shirouzu.
• Bloomberg reports that China has suspended operations at some coal mines to avoid any safety disasters in the run-up to this week’s 18th Party Congress.
• Tobacco giant Philip Morris is trying to raise its profile in China.
• Reuters reports that a Chinese sovereign wealth fund has taken a 10 percent stake in the holding company which controls Britain’s Heathrow Airport.

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Post tags: Andrew Rothman, bad loans, China PMI, credit crisis, economic growth, economic reform, economic slowdown, employment, exports, GDP, Li Keqiang, manufacturing, michael pettis, Nick Lardy, Xi Jinping
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The W.T.O. case accuses China of providing at least $1 billion worth of subsidies from 2009 to 2011 for exports of autos and auto parts. While China exports virtually no fully assembled cars to the United States, it has rapidly expanded exports to developing countries, and those exports compete to some extent with cars exported or designed in the United States.

[…] Auto parts employment in the United States has dropped by about one-half from 2001 to 2010, as imports from China grew nearly sevenfold over the same period, according to data provided by the senior official, who insisted on anonymity citing an administration policy banning on-the-record comments on a new policy before an official announcement is made. Auto parts manufacturers directly employ 54,200 people in Ohio, and when suppliers like steel makers are included, the auto industry accounts for 850,000 jobs in the state, or 12.4 percent of total employment there.

Mark Landler further discusses the delicacy of handling U.S.-China economic ties in an election year. From The New York Times:

It is the latest in a string of trade actions against China taken by the Obama administration, and the second announced by the president on the eve of a campaign visit to Ohio, where the auto parts industry employs 52,400 people. In July – just before he flew to Toledo, home of a Jeep Wrangler factory – the White House filed a complaint against Beijing for levying $3.3 billion in duties on American automobiles.

[…] Mr. Romney fired back even before Mr. Obama spoke, accusing him of doing “too little, too late” to curb China’s unfair trade practices. The latest trade case, Mr. Romney said, was little more than a campaign stunt, failing to compensate for his unwillingness to take other actions, like labeling China a currency manipulator.

[…] Bashing China is a tried-and-true campaign strategy for both parties, particularly in swing states like Ohio, where a heavy loss of manufacturing jobs has coincided with a surge of Chinese-made auto parts into the United States.

Meanwhile, China has also taken to the W.T.O to fire back. From Tom Miles and Michael Martina at Reuters:

China filed a complaint at the World Trade Organization on Monday to challenge a new U.S. law on “countervailing duties”, or tariffs intended to combat export-promoting subsidies.

[…]Commerce Ministry spokesman Shen Danyang said China hoped the United States could “correct its mistaken policy and appropriately resolve China’s concerns”.

“China has, under various circumstances, repeatedly reiterated that it resolutely opposes the abuse of trade remedy regulations, opposes trade protectionism, and will staunchly exercise its WTO-member rights to protect the legal rights of its domestic industry,” Shen said.

See also a previous W.T.O case against China under the Obama administration, via CDT.

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Post tags: exports, protectionism, subsidies, trade, trade disputes, U.S. relations, United States, WTO
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China is Vietnam’s largest trading partner. Last year their two-way trade stood at $36 billion, while trade between America and Vietnam was $22 billion. Their two-way trade however is a bit more one-way than the Vietnamese would like. Their trade deficit already stands at $1.85 billion for the first two months of 2012, according to Vietnam’s General Statistics Office.

This doesn’t even take into account for the huge black-market border trade at places like Mong Cai, in the north of the country, or Lang Son, which is known, among other things, for its large sex-toy market (dildos being technically illegal in Vietnam).

The more serious piece on India, Friend, enemy, rival, investor, also ran in the magazine:

Rising trade with China has been good for India. It mainly imports Chinese capital goods, with firms benefiting from cheap and decent gear. The giant Reliance Group has bought kit for power stations and telecoms networks—partly paid for with competitive Chinese loans. Chinese firms have often strived to win such business. Pan Song of Shanghai Electric, which makes power equipment for Reliance, among others, recounts years of hard slog in India.

But for India the China connection is also disconcerting. For every dollar’s worth of exports to China, India imports three, leading to a trade deficit of up to $40 billion in the year to March 2012, or about 2% of GDP (see chart). China accounts for a fifth of India’s overall trade deficit with the world, over half if oil is excluded. Given India’s balance-of-payments woes—the rupee has fallen by a fifth in the past year—even Chinese businessmen worry that the discrepancy in bilateral trade is unhealthy.

And it may grow larger. For a start, the little manufacturing India has tends to be quite high-end. As Chinese firms shift to more complex forms of production, they will make life harder for Indian firms. Saif Qureishi of Kryfs, which makes the metal cores of transformers used in, for example, power grids, says China has won a third of the Indian transformer market and is giving locals “a bloody nose”.

Posted with Blogsy

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Even with Beijing having already taken steps in the second quarter to offset slumping exports and boost domestic consumption, including its first interest rate cut since late 2008, The Wall Street Journal reports that analysts believe the government still has more tools left in its policy arsenal:

“There should be [another] cut in interest rates and in the bank-reserve ratio in July,” said Sheng Hongqing, senior economist at China Everbright Bank. “The export situation is very difficult.” Other economists were also anticipating more monetary policy moves ahead. “The government hasn’t done enough in terms of policy easing,” said Wei Yao, China economist at Société Générale.

A Reuters piece out Monday asserts that no bottom is in sight as China looks increasingly likely to miss its 2012 growth target. But as bearish as recent data appear, could the real situation on the ground actually be worse? In a New York Times piece over the weekend, Keith Bradsher points out that while doubts have persisted for years about the accuracy of Chinese economic data, this is the first time in several decades that a slowdown has coincided with a leadership change at the top of a Communist Party regime that has long-relied on economic growth for its legitimacy and social stability. As a result, local and regional officials with an eye toward promotion may be fudging the numbers:

Record-setting mountains of excess coal have accumulated at the country’s biggest storage areas because power plants are burning less coal in the face of tumbling electricity demand. But local and provincial government officials have forced plant managers not to report to Beijing the full extent of the slowdown, power sector executives said.

Electricity production and consumption have been considered a telltale sign of a wide variety of economic activity. They are widely viewed by foreign investors and even some Chinese officials as the gold standard for measuring what is really happening in the country’s economy, because the gathering and reporting of data in China is not considered as reliable as it is in many countries.

…

“The government officials don’t want to see the negative,” so they tell power managers to report usage declines as zero change, said a chief executive in the power sector.

Another top corporate executive in China with access to electricity grid data from two provinces in east-central China that are centers of heavy industry, Shandong and Jiangsu, said that electricity consumption in both provinces had dropped more than 10 percent in May from a year earlier. Electricity consumption has also fallen in parts of western China. Yet, the economist with ties to the statistical agency said that cities and provinces across the country had reported flat or only slightly rising electricity consumption.

Accusations of financial fraud weren’t only reserved for Chinese public officials last week, as one of China’s largest property developers came under fire in a scathing research report rife with allegations of accounting irregularities, bribery and insolvency. Short seller Citron Research published a 57-page report on Thursday about Evergrande Real Estate Group, a Hong Kong-listed company whose property assets have grown 23x since 2006. The report calls out “at least 6 accounting shenanigans” used to hide an actual equity value well less than zero. From the report:

Over the past 5 years, Evergrande has executed an untoward program of bribes aimed at local government officials in order to build its raw land industry. To finance growing cash flow shortfalls related to these bribes, subsequent land purchases, and related real estate construction activities, Evergrande has employed a complex web of Ponzi-style financing schemes. These schemes are characterized by a reliance upon perpetually growing pre-sales, off-balance sheet partnerships and IRR guarantees to third parties.

Evergrande’s business model is unsustainable, and is showing signs of severe stress. Management is working hard to cover-up the company’s precarious and rapidly deteriorating financial condition. However, with presales and condo prices now falling rapidly, with its income statement and assets materially overstated, and with its off-balance sheet guarantees looming as more and more imminent liabilities, our analysis suggests that the cover-up has entered its final inning.

Evergrande’s share price plunged following the report’s dissemination, and the company denied the accusations in a brief statement to the Hong Kong Stock Exchange on Thursday while reportedly considering legal action against Citron. A number of global investment houses published on the incident and questioned the validity of the report, with some even reiterating their “buy” rating on the stock, a fact that Evergrande hurried to point out in a stronger statement on Friday titled ““Eight Famous Investment Banks Support Evergrande to Dispel Rumors Spread by A Short Seller.” Reuters even reported that Evergrande had explored buying back some of its shares on the open market after the beating they took on Thursday, a move that aimed at further bolstering

Still, the damage was arguably done anyway. At a time when Chinese companies are suffering perhaps their greatest crisis of credibility in years, Evergrande joins a list of scandal-ridden companies that includes names such as Sino Forest, ChinaCast Education and SinoTech Energy. The difference is that the others were small and obscure companies while Evergrande ranked 5th in market capitalization among Chinese property names before the report. Sino Forest was a junior county-level cadre to Evergrande’s Politburo heavyweight.

Sino Forest, ChinaCast and SinoTech were, however, listed in the United States, where Patrick Chovanec writes that regulators may have to forcibly delist every Chinese company unless they can reach an agreement with China on a satisfactory way to deal with fraud investigations going forward. While such a “nuclear option” is unlikely, Chovanec writes that few investors or politicians have seriously considered the possibility:

Rather than assisting the SEC in its cross-border probes — as other countries regularly do — the China Securities Regulatory Commission (CSRC) has actively blocked the SEC’s information requests, insisting that audit materials on Chinese firms fall under China’s ambiguous yet draconian State Secrets Law. This April, when the SEC issued a subpoena to the Chinese arm of Deloitte, demanding the audit records of Longtop Financial (which collapsed last May after Deloitte resigned as its auditor), Deloitte refused, noting that the CSRC directly ordered them not to turn over such papers. The firm argued it could be dissolved and its partners jailed for life if they were to comply. In May, the SEC responded by initiating administrative proceedings to punish Deloitte China for violating its duties under the 2002 Sarbanes-Oxley Act. Penalties could include suspending the firm’s authority to perform audits for US-listed companies, which are required under U.S. securities laws. Apparently similar subpoenas have been issued to each of the other “Big Four” global audit firms (E&Y, KMPG, and PWC), and have met with similar replies.

There is a further complication.  The Sarbanes-Oxley Act established the Public Company Accounting Oversight Board (PCAOB), a five-person body appointed by the SEC.  Public accounting firms that wish to perform audits on US-listed companies must register with PCAOB, and PCAOB is required, by law, to conduct inspections of those firms.  So far, Chinese authorities have refused PCAOB permission to inspect auditors based in China, including the local arms of “Big Four” global audit firms.  Last month, it looked like PCAOB might have worked out a compromise that would let it observe Chinese regulators perform their own inspection, but the SEC action against Deloitte China appears to have derailed that plan.   The stage is set for a deadlock with serious, potentially disastrous implications, as my fellow CPA and Peking University counterpart Paul Gillis describes in his blog:

The PCAOB faces a December deadline to complete inspections of Chinese accounting firms that are registered with the PCAOB. It seems highly unlikely that they will meet this deadline, since Chinese regulators will not let them come to China. While the PCAOB could extend the deadline, they have already been under political pressure to act … Without resolution, the only meaningful option for the SEC, and the PCAOB, is for the PCAOB to deregister the firms and for the SEC to ban them from practice before the SEC.

The consequence of those actions would be that U.S. listed Chinese companies would be without auditors and unable to find them. Having an auditor is a listing requirement of the exchanges, so under exchange rules the companies face delisting. The U.S. listed Chinese companies would be unable to file financial statements as required. That should lead the SEC to eventually deregister the companies with the SEC.

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Post tags: accounting, CCP 5th generation, coal, economic growth, electricity, Evergrande Real Estate, exports, fraud, GDP, hard landing, imports, leadership transition, PMI, sino-forest
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China is among the countries with relatively rich rare earth reserves. Since the 1950s, remarkable progress has been witnessed made in China’s rare earth industry. After many years of effort, China has become the world’s largest producer, consumer and exporter of rare earth products.

While bringing benefits to mankind, the exploitation of rare earth has brought about increasingly significant problems regarding this resource and the environment. In the exploitation and utilization of rare earth, the rational utilization and effective protection of the environment pose common challenges for the world at large. In recent years, China has taken comprehensive measures in the links of mining, production and exporting of rare earth goods and strengthened efforts for the protection of the resource and the environment, endeavoring to ensure a sustainable and healthy development of this industry.

With the in-depth development of economic globalization, China is involved in more extensive international exchanges and cooperation in the field of rare earth. Always honoring the rules and living up to its commitments, China has provided the world with large quantities of rare earth products. It will continue to follow the WTO rules, strengthen scientific management of this industry and supply rare earth products to the global market, so as to make its due contribution to the development and prosperity of the world economy.

For some time now, some countries have been particularly fretful about the situation of China’s rare earth industry and related policies, doing a lot of guesswork and conjuring up many stories. We hereby give a presentation about China’s rare earth industry in order to further provide the international community with a better understanding of this issue.

The white paper likely drew scrutiny from China’s trading partners, specifically the United States, European Union and Japan, who filed a WTO case in March to protest the export quota system China enforces on the rare earth industry. China defends its tight control over rare earth exports as a byproduct of its willingness to take on the environmental burden of extraction, and the white paper not only addressed the environmental angle extensively but also challenged foreign estimates of China’s reserves. Most importantly, but perhaps not surprisingly, it also gave no sign that China would lift export quotas. Xinhua reports that the chief of the Rare Earth Office said that China meets global market demand despite the export controls, while another official defended the policy in a news conference, according to The New York Times:

“The protection of the environment is never a pretext for gaining advantage or increasing economic returns,” Su Bo, a deputy minister of industry, said at a news conference in Beijing.

For The Diplomat, editor Jason Miks asks University of Connecticut specialist Nicholas Leadbeeater about the environmental dangers related to rare earth mining:

“I would say that the issue with rare earth mining is that the rare earth metals are in fact not all that rare, but they are found in small concentrations in ore and often found alongside things like uranium. Extraction of the rare earths from the ore is energy intensive and requires high temperatures as well as often needing significant quantities of hazardous chemicals like concentrated sulfuric acid,” he told me. “The extraction process results in a lot of waste, some of it radioactive due to the uranium and other radioactive elements in the ore alongside the rare earths. In addition to this are the other environmental and health concerns of mining large areas for ore.”

So, with this in mind, what does the future hold? According to Leadbeater, it’s “becoming increasingly obvious that, while rare earths are used in many ‘environmentally friendly’ applications such as hybrid cars, the supply of the key rare earths isn’t sustainable on a long term basis.”

This means, he says, that industry is looking for alternatives to the rare earth components, “be this a complete redesign of their technology or else a way to make components more efficient,” and so reducing the amount of rare earth required.

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Post tags: EU, exports, Japan, natural resources, rare earth elements, rare metals, United States, WTO
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People’s Bank of China (PBOC) Governor Zhou Xiaochuan wrote back in March that conditions were “basically ripe” for interest rate liberalization, and former PBOC adviser Li Daokui also claimed in a  March speech that banks were big enough to fend for themselves. The policy move suggests, to an extent, that Beijing agrees. Banks now have greater flexibility to set the rates that they offer to savers (up to 1.1x the deposit rate, vs. 1.0x before) and borrowers (as low as 0.8x the lending rate, vs. 0.9x before), which will give households more reasons to put their cash in the bank and will allow banks to offer more attractive terms to potential borrowers.

The Wall Street Journal’s Tom Orlik writes that the policy move “hasn’t come a moment too soon” and will help ease the problems caused by the existing system:

Low interest rates for savers have triggered an exodus of funds from the banking system into new wealth-management products—short-term investments offering some of the security of a deposit but with inflation-beating returns. Assets invested in these products have grown from almost zero a few years ago to equal roughly 10% of deposits in the banks by the end of 2011, according to some estimates. As a consequence, the banks are starved of deposits, making it difficult for them to ratchet up lending to support growth.

Thursday’s move will also help to alleviate a problematic inflexibility on the lending side. In the past, banks could lend at a discount of up to 10% of the benchmark lending rate. But that discount has proved insufficient to attract borrowers, with major customers facing lower returns on investment. Medium and long-term loans to business were down 45% year-to-year in April.

The IMF hailed the adjustment in monetary policy, but not everyone applauded the news. CNBC Market Watch’s Craig Stephens warned that it could do more harm than good, and investors sold off Chinese bank shares on concerns that the rate cut would squeeze profits. Beyond that, attention quickly turned to the weekend and several key pieces of May data scheduled for release. Exports (+15.3%) and imports (+12.7%) both saw strong year-on-year increases, beating expectations and widening China’s trade surplus, though one economist told The Wall Street Journal  “it is doubtful” that the growth could be sustained into the summer due to the economic turbulence in Europe. Most importantly, China’s National Bureau of Statistics announced that consumer prices rose just 3%, a two-year low. Bloomberg reports that the figure should help assuage fears that more loosening will lead to price spikes. While Beijing has battled high inflation in the past year, writes David Pierson of The Los Angeles Times, focus can now shift to buoying the economy.

Still, retail sales grew at their slowest rate since 2011 and factory output continues to hover just above three-year lows. Given that the country faces sub-8% GDP growth in the second quarter and possibly its lowest full-year growth level since 1999, will the door remain open for increased monetary policy support? Economist Ding Shuang told Bloomberg today that he expects up to two more interest rate reductions this year, part of an “aggressive” easing strategy:

The expansion this quarter may be “very weak” at 7 percent to 7.5 percent, Ding said after the government announced data for industrial production, inflation, fixed-asset investment and exports over the past two days. Better-than- forecast trade growth in May may not be sustained as a likely recession in the European Union restrains demand, he said.

The central bank last week cut rates for the first time since 2008 in what Ding said was a “very strong signal of more aggressive policy easing.”

Overseas shipments climbed 15.3 percent in May from a year earlier, the customs bureau said yesterday, exceeding all 29 estimates in a Bloomberg News survey. Industrial output rose by less than 10 percent for a second month and retail sales increased the least in almost six years excluding holiday-month distortions, statistics bureau reports showed June 9.

Any Bulls Out There?

Despite the weak data and fears of a hard landing, not everyone is a bear on China. Business Insider notes that one research analyst expects signs of stabilization, and The Wall Street Journal reports that U.S. and other global fund managers are shrugging off the red flags and upping their bets on China:

Fund managers and financial advisers who increased their exposure even higher concede that China’s period of double-digit growth may be over. But, they add, the country’s long-term growth prospects—estimated at more than 8% by the World Bank—still trump many other markets and should continue to boost profits and eventually share prices.

Many also are encouraged by recent steps taken by Beijing to spur growth by loosening bank-reserve requirements and speeding up the approval process for infrastructure projects.

“Every year it seems there’s a growth scare from China, and every time it has been a buying opportunity,” says Mike Avery, co-manager of the $26.9 billion Ivy Asset Strategy fund, which recently raised its China stake to 20% from 18% at the end of last year.

Indeed, with Chinese stocks down about 12% over the past year, pros say many are trading at bargain prices. The MSCI China index, which tracks large- and mid-cap Chinese companies, trades at eight times next year’s earnings, about a third below its 10-year average. “China is safely cheap right now and gives you tremendous room for error,” says Jeff Everett, manager of the $360 million Wells Fargo Advantage International Equity fund. He has doubled the fund’s exposure to China and Hong Kong to about 10% since taking over the fund this year.

Fuel Prices Cut

While the PBOC’s rate cut attracted an understandably large amount of attention, it wasn’t the only move made by the government to fight the slowdown. China cut fuel prices by nearly 6%, the second reduction in a month and the largest since late 2008, in a move described by the National Development and Reform Commission as made in response to the global slump in crude oil prices. One former policymaker, however, told The China Daily that reform is still needed to allow China’s fuel prices to move with the rest of the world:

Under the current mechanism, started in 2008, the government may adjust fuel prices if the average movement of the three reference markets’ oil prices change 4 percent.

The current pricing program remains complex and not nimble enough to reflect global crude oil prices, said Zhou Dadi, former director of the NDRC’s energy research institute, adding that further reform to reflect supply and demand is a must.

The government may take the opportunity of global price drops to narrow the gap between international and domestic crude charges, and then introduce reforms to avoid volatility and market speculation, JYD’s Han said.

The revamp of the current pricing program is now just a matter of time, said Han Wenke, director of the NDRC’s energy research institute, and a guest China Daily economist.

Who stands to lose from the fuel price cut? China’s biggest oil refiners, according to Bloomberg,

Other News

• Beijing is preparing for a possible Greek exit from the eurozone, reports The China Daily, with hopes that China’s economy can cushion the blow of a worst-case scenario.
• Meanwhile, The Wall Street Journal reports that Hong Kong’s tycoons are doing their best to prop up the city’s real estate market.
• Although one investment bank thinks that China may ease property curbs to support growth, a government official tells Xinhua News that the property cooling measures are here to stay.
• China’s Banking Regulatory Commission has delayed plans to tighten banks’ capital rules until the beginning of next year, according to Bloomberg.
• The Wall Street Journal details the challenge facing China’s labor market: a lack of workers.
• The Financial Times highlights the plight of Chinese heavy equipment makers as they continue to delay Hong Kong IPO plans.
• Chinese temples may have to table their hopes of listing on a public stock exchange, according to one official.

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Post tags: China stocks, debt crisis, economic growth, Europe, exports, Fuel Prices, GDP, hard landing, imports, interest rates, Li Daokui, monetary policy, peoples bank of china, property prices, trade surplus, zhou xiaochuan
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The contribution of foreign demand to China’s growth has always been exaggerated, and it is now shrinking. It is investment, not exports, that leads China’s economy. Spending on plant, machinery, buildings and infrastructure accounted for about 48% of China’s GDP in 2011. Household consumption, supposedly the sole end and purpose of economic activity, accounts for only about a third of GDP.

The state’s influence over the allocation of capital is the source of much waste, but it helps keep investment up when private confidence is down. And although China’s repressed banking system is inefficient, it is also resilient because most of its vast pool of depositors have nowhere else to go.

Yet this Economist article is not exactly bullish on China’s future economic progress either. It indicated that China’s growth could slow down due to its aging demography. China’s working-age percentage of the population fell. The article voiced concerns over China’s investment-led economy:

A disproportionate share of China’s investment is made by state-owned enterprises and, in recent years, by infrastructure ventures under the control of provincial or municipal authorities but not on their balance sheets. This investment has often been clumsy.

Hong Kong bureau chief of The New York Times Keith Bradsher reports on the same debate with the case study of Xi’an, a city in northwestern China. Bradsher writes that productive state investments are increasingly scarce:

…with the country having finished building much of its infrastructure, it is having a harder time finding further projects that can pass cost-benefit analyses.

Still, one of his sources argued that investment-led economy has its advantages for growth:

“When you’ve got state banks lending to state enterprises to implement the state’s five-year plan, you don’t have a lot of downside to investment,” said Paul Gruenwald, a former International Monetary Fund official in Hong Kong who is now the chief Asia economist at ANZ, one of Australia’s biggest banks.

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Post tags: economic growth, economic slowdown, exports, hard landing, infrastructure, investment
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China extended what it may have intended as an olive branch to the U.S., Japan and Europe in their dispute over rare earths even as it defended its export controls.

China controls nearly all the world’s production of rare earths—a group of 17 minerals with high-tech uses ranging from personal computers to advanced weaponry—but hopes to move up the value chain to become a manufacturer as well as supplier of rare-earth-based products.

As part of that strategy it has repeatedly invited foreign companies to work on China-based rare-earth joint ventures, both to bolster its own technological capabilities and address foreign complaints over its rare-earth quotas. But the latest gesture’s emphasis on environment technologies and the singling out of the U.S., the European Union and Japan—which last month filed a rare-earth action before the World Trade Organization—as potential collaborators appeared to be an effort at least partly intended to address the WTO complaint.

[...]“There could be two elements,” said Michael Komesaroff, an expert on China’s metal industry with the consulting firm Urandaline Investments. “One is that the Chinese may genuinely have a desire to improve environmental interests and they think they can learn from foreign technology. Another is that this is an olive branch because of the trade complaint taken to the WTO by the U.S. and the EU.”

It has been noted that China’s willingness to assume the environmental cost of rare earth extraction is a major reason for its dominance of the industry, and China repeatedly claims that the motives for limiting rare earth exports are based on environmental stewardship. From China Daily:

At a regular press conference, Zhu Hongren, chief engineer of the Ministry of Industry and Information Technology (MIIT), reiterated that comprehensive measures to regulate China’s rare earth industry, including production caps, export quota cuts and stricter emission standards, are in line with WTO rules.

“The disorderly development of the rare earth industry has caused enormous damage to the environment,” Zhu said, warning that the environment will suffer greatly if rare earth exploitation is not regulated.

He said China’s regulations are created after fully considering the ability of the environment to ensure effective supplies of rare earth metals.

He added that China is willing to cooperate with foreign companies in recycling rare earth metals and developing substitutes for the metals.

Beijing Review has more from the domestic press about a newly formed organization to “spur healthy development of the industry,” while a Daily Mail story reports on the economic importance and severe environmental damage of rare earth development in China. Also see “Pollution in Fashion and Under Rugs,” and prior coverage of rare earth elements and exported pollution, via CDT.

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China received 5 percent of the volume of international transfers of “major conventional weapons” from 2007 to 2011, Sipri said in a report released today. The total was half that of India, which last year overtook China as the world’s largest recipient of arms, and less than South Korea and Pakistan.

“In certain sectors such as combat aircraft, with the exception of certain parts like engines, China is able to put together these systems largely from their own indigenous base now,” Paul Holtom, director of Sipri’s arms transfer program, said by phone. “India is still struggling there.”

…

China’s arms exports nearly doubled in 2007 to 2011 from five years earlier, Sipri said, making it the world’s sixth biggest supplier after the United Kingdom. About two-thirds of China’s weapons were sold to neighboring Pakistan, it said, including 50 JF-17 combat aircraft, 203 tanks and three warships.

Even as China boosts its domestic production of arms, however, Harry Kasianis writes in The Diplomat that an imminent purchase of advanced fighter aircraft from Russia may provide insight into the limits China still faces in building up its own military capabilities from within:

So what would be China’s motivation to purchase new planes from Russia now? Some have argued that maybe all is not well with China’s cloned craft. Vasily Kashin, an expert at the Center for Analysis of Strategies and Technologies speaking with Kommersant, felt the “willingness to buy such a large batch of fighter jets indicates that the Chinese are faced with serious technical problems during the work on the modification of its aircraft that are based on the Su-27.”

One must also consider China’s highly touted and much-debated J-20 fifth generation fighter might suffer from one major problem – the Chinese have struggled with the domestic production of strong jet engines. Reports have surfaced that at least one of the J-20 prototypes uses a Russian borrowed engine. Access to Russian engine technology may therefore be one of the driving factors behind Beijing’s interest in the Su-35. As regular Diplomat contributors Andrew Erickson and Gabe Collins have noted, “China’s inability to domestically mass-produce modern high-performance jet engines at a consistently high-quality standard is an enduring Achilles heel of the Chinese military aerospace sector and is likely a headwind that has slowed development and production of the J-15, J-20, and other late-generation tactical aircraft.”

© Scott Greene for China Digital Times (CDT), 2012. | Permalink | No comment | Add to del.icio.us
Post tags: air force, China's rise, exports, imports, military spending, Russia
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