China Comment

Energy, Environment, and Economy

China’s Oil Price Freeze

Considering recent shortages in fuel in some places in China, as reported by today’s WSJ and an article by the Jamestown Foundation, many may wonder why China is leaving its oil prices at the same level since the last raise in November 2007?

What follows is an analysis focusing on bank loans and stability concerns. More work needs to be done looking into the elite political decisions, namely the discussions between ministers in charge of different portfolios since that can also affect these decisions, but that will have to wait for later.

China wants to present a good image to the world while it prepares to host the Olympic games. The Olympics are a coming-out ceremony for them, an opportunity for much 爱国 (aiguo) or love of country/patriotism. Red, the color of China, appears everywhere. Even PEPSI changed its traditional blue to red in the run up to the Olympics. As one Chinese said in the article: “I thought it was a good idea when I saw those promotional cans. They’re supporting Team China.”

So, what stereotypes does China have to promote to present a good image of their country?

1.) China is not backward

Thus they have retranslated many formerly amusing signs that made little sense in English, such as “Deformed Man” signs outside toilets for the handicapped.

2.) China is ruled by law and order and every Chinese loves China.

Thus, they will increase security and recently presented new regulations aimed at discouraging protestors, both from outside and inside the country. Additionally, the recent clampdown on foreigners overstaying and sometimes working on tourist visas is somewhat based on this. China wants to catalogue all the people inside the country. Laxity in law enforcement is dissipating as the government becomes concerned that foreign elements might seek to upset the festivities.

This also explains the move to ban liquids on Beijing subways starting on May 9th, which appears to be based on International Flight legislation banning liquids on airplanes, and the ban on liquids in other major cities’ subways around the world.

Additionally, the ban of reporters from travelling freely in T*b*t is another example of China trying to present a good “face” to the world– if no one is seen protesting, then it doesn’t happen.

And of course China’s press has cracked down against “negative stories”, and the Hong Kong-based South China Morning Post and other media outlets routinely provide evidence of the country’s greater crackdowns on the free speech of the press. (“Free media for Games = media free of bad news, one city says.” South China Morning Post. March 20, 2007.); also see an April 30, 2007 report on: “The Olympics countdown – repression of activists overshadows death penalty and media reforms”

3.) China wants its economy to keep growing.

China has not reevaluated its currency extremely fast in order to control inflation since it fears (since 2007 in fact, when it had only appreciated 5% against the dollar since the July 2005 depegging, compared to the over 20% it has appreciated by April 2008) that exporters will not be able to survive if there is a rapid reevaluation. Chinese exports to the world have risen exponentially since the early 2000s as the multifiber agreement and trade protectionist agreements expired.

If exporters start suffering, then bad loans could accumulate back to levels not seen since 2005/6 when worries about China’s 10-45% nonperforming loans in state banks led some people to predict an imminent banking collapse– that did not happen, however (China claimed state banks NPLs were only 9.5%) . China seems to have cleaned up it banking act (surprisingly quickly), making its banks at least as solvent as those in America and Europe wracked by subprime.

Some argue that China’s state banks’ cleaned up their balance sheets. However, it appears that some exposure might be hidden. According to the 2006 NYT article: “China Construction had turned in the best numbers at that point, reducing its share to 3.92 percent of loan assets late in 2004, down from 17 percent in 2002… But the risk adviser began cautioning that bad loans were being hidden at the bank’s branches, erroneously labeled as good loans, even though company records showed that they were impaired. He told bank officials that in Beijing and Tianjin alone, he had uncovered $750 million in bad loans that had been deemed good.”

According to an article in Britain’s Telegraph from December 2006; “Less understood is that a sharp rise in the yuan could be the last straw for China’s banks, sitting on a network of loss-making factories living off marginal exports. Standard & Poor’s said a 25pc rise in the yuan combined with a 2pc rise in interest rates would slash corporate profits by a third.”

All these reasons may explain why China raised the reserve requirement to 17.5%. China’s leaders don’t want to risk a hit to their economy’s growth and want to insulate themselves from runs on banks that might happen if loans start to go bad.

As one professor said in regards to a 2006 report on China’s banks, quoted in the NYT: “If there is a slowdown, there will be a day of reckoning. It might be in a long, long time or it might be the day after the Olympics.”

BUT WHY WOULD RAISING GAS PRICES HURT THIS?

Considering all the unrest and trouble that China has recently suffered in T*b*t, and with increasingly loud voices calling for accountability in the construction of school buildings, China wants to avoid more unrest.

With inflation at around 8 percent on the year already, and likely to climb higher, increasing prices for gasoline and ending subsidies can send that rocketing even faster. China’s low per person GDP means that non-subsidized gas will negatively effect farmers, and small businesspeople disproportionately. This could cut into entrepreneurialship and send some to protest, like people have already done in India and Malaysia where “the pump price of gasoline rose Thursday by a whopping 41 percent to 87 cents a liter, or $3.30 a gallon.”

The question is, will gas shortages, caused by undersupply (due to price controls) result in more unrest than raising prices. It appears that as far as the Chinese leadership is concerned, they believe it is better to keep prices low, considering all the other hits to the world economy.

Therefore, I predict that if gas prices in China rise before the Olympics, they will rise much less than they have elsewhere in the world. More likely, the prices will be raised after the Olympic ceremonies are complete.

12 June, 2008 Posted by | China Economy, China Energy, China Future | , , , , , , , , , , | Leave a comment

John McCain’s China Policy

If John McCain, the presumptive American Republican Party presidential candidate wins in November 2008, his China policy appears to be one of seeking to maintain positive relations while attempting to convince China to become a responsible stakeholder in international affairs.

McCain’s voting record in the Senate indicates a relatively benign attitude toward China-US relations, but his recent campaign rhetoric indicates he might take a harsher line toward China. Then again, President Bush was harsh on China when he came into office, and that shifted sharply once he came to believe that although it might be popular to malign the country, the US might benefit by cooperating with the Asian state.

The often-quoted Yan Xuetong of “Qinghua University says Chinese-U.S. relations might be more stable under a McCain presidency than with either Democrat.”

I invite you to look below and come to your own conclusions about McCain’s statements on China.

CHINA DEMOCRATIZATION AND HUMAN RIGHTS

In (1999), McCain said that “we need not shrink from a strong advocacy of religious and political freedom [in China].” Shades of this statement were echoed McCain’s his April 2008 comments in regard to Beijing’s response to unrest in T*b*t; “If Chinese policies and practices do not change, I would not attend the opening ceremonies… It does no service to the Chinese government, and certainly no service to the people of China, for the United States and other democracies to pretend that the suppression of rights in China does not concern us. It does, will and must concern us.”

(All three Presidential candidates echoed similar statements regarding attendance of the opening ceremonies.)

McCain went on to urge China to engage in “a genuine dialogue” with T*b*ts spiritual leader. McCain said: “I have listened carefully to the D@l&i L&ma, and am convinced he is a man of peace who reflects the hopes and aspirations of T*b*t*ns.” He went on to say, “I urge the Chinese authorities to ensure peaceful protest is not met with violence, to release monks and others detained for peacefully expressing their views and to allow full outside access to T*b*t.”

DIPLOMACY AND ECONOMICS

He promotes economic engagement with China (1999), and voted for normalized trade relations with China in 2000. He appears to be a “free trade” Republican who believes that lowering barriers will increase democratization, make others wealthy and lead to peace. It appears McCain subscribes to the Thomas Friedman’s “Golden Arches Theory of Conflict Prevention” (Scroll down to see the definition).

However, in recent years, his statements in regards to China have turned more belligerent. In response to unsafe toy scandals in April 2008 McCain said “If I were president of the United States, the next toy that came into this country from China that endangered the lives of our children, it would be the last,”

McCain also implied that “the G-8 should be limited to democracies,” according to a Bloomberg article reposted on The China Post, which implies he would keep China, and Russia out of the world’s major economic decisions. The economic and political wisdom of keeping some of the most powerful economic powers away from the discussion table is a bit murky. Perhaps pressure-tactics might encourage a change in attitude by the countries- but that remains to be seen.

It appears McCain is willing to confront Beijing on issues such as their support for Myanmar (Burma) and China’s continued trade dealings with Sudan. As he said in May 2008, “”I would hope” Americans would sell stocks and other investments tied to Sudan, McCain told reporters… “because I think that government obviously is one that has done virtually nothing to prevent the genocide that is taking place in Darfur.”

His comments are a bit odd, coming as they did soon after China sent over 140 engineers and troops to Sudan, but it is a fact that China’s promotion of Sudan’s “national sovereignty” has resulted in it pushing for watered down UN votes sanctioning Sudan over its treatment of the minorities in the Darfur region.

CHINA AND TAIWAN

“Guarding against Chinese threats to our strategic interests in Asia is a sound rationale for helping reduce the growing threat to Taiwan from a mainland missile attack” (1999).

Considering McCain’s interest in East Asian security, it is likely he will support the continued de facto independence of Taiwan. He would unlikely, however, support de jure independence, seeing as he has previously spoken of a “One China” principle.

CONCLUSION

John McCain appears willing to challenge China on shoddy imports, and human rights. He also appears willing to seek to maintain American military interests in the region and may subscribe to a view that America’s long-term world-competitors are large states rather than small. This would encourage him to expand the size of the professional military, and perhaps purchase a larger amount of F-22s.

If McCain speaks most belligerently about China, it will be in regards to T*b*t, or Taiwan. While he has been noted for his compassion for the Sudanese people, beyond the stock sell-off he has had little to say directly on the subject.

Of course, American forces in East Asia are currently being drawn down as troops are moving gradually from  South Korea to Guam. The drawdown of US troops could ameloriate Chinese fears of American encirclement.

McCain would try to keep the trade levers open between the countries, believing trade would be mutually beneficial. McCain’s past record is of promoting economic policies that satisfy China, and benefit America by creating a more efficient supply-chain. These policies do much toward peacefully co-existing with the Chinese State.

It appears that a McCain presidency, though potentially confrontational in regard to Chinese human rights and shoddy merchandise, would tend to reflect George Bush’s status quo of criticising China, while still increasing trade, and working toward dialogue. That is, if the OLD free trade McCain overcomes the populist G-8 and dialogue-limiting McCain that has appeared in the 2008 election cycle. If the new, more belligerent McCain crafts China policy, then pressure and stresses might develop in the Sino-US international relationship.

* The major source article for this analysis was the CFR’s analysis of Presidential Candidates’ China views.

* John McCain’s major foreign policy article in Foreign Affairs is “An Enduring Peace Built on Freedom.”

12 June, 2008 Posted by | China Future | , , , , , , | 1 Comment