China Comment

Energy, Environment, and Economy

A Weak China?

In the Washington Post, John Pomfret, former WP Beijing Bureau Chief and author of Chinese Lessons: Five Classmates and the Story of New China (2006), argues that China is not going to become a superpower. His argument is a bit misleading, however. He demonstrates that China faces challenges, but he admits China’s GDP will outpace the United States’ in size. 

Pomfret’s four challenges, while intriguing, appear to be the wrong challenges to address. Despite them, China will still become a superpower. In this article, I explain why his challenges are not the most apt. Then I suggest four different challenges to China’s growth.

Pomfret calls attention to four challenges; “dire demographics, an overrated economy, an environment under siege and an ideology that doesn’t travel well.”

Dire Demographics… But Room for Expansion

Pomfret successfully argues “that as the working-age population shrinks, labor costs will rise.” In China’s coastal provinces, labor costs have already risen, partially due to reduced migrant labor flows. It is also true that after 2013, China’s labor force will peak at 900 million and subsequently the elderly will be more numerous than adolescents and children. And there are nearly 119 males born for every 100 females, which will create tensions.  

But, it is also true that despite decades of posting productivity gains, China is still underutilizing its human capital. Its workers have not yet realized the full potential of productivity gains that workers in other countries have realized- which means that China still has a vast, untapped potential for growth.

Chinese labor productivity has grown from (in 1995 RMB values) around 5000RMB per worker in 1979 to 21,500 RMB per worker in 2005 (or roughly $3100). (Holz, 166 and He & Kuijs, 6) And productivity grew at around 8.7% per year from 2000-2006. (The OECD defines Labor Productivity as GDP per hour worked) The US Labor Productivity value-added per worker is currently ranked sixth in the world by the OECD, behind Luxemborg, Norway, the Netherlands, Ireland, and Belgium.) 

Japan and South Korea, which similar to China started at a low base for productivity, are currently at 71% and 41% of US productivity ratings. Regrettably, it appears these OECD numbers have not been adjusted for PPP (Purchasing Power Parity). However, the point remains, South Korea had low productivity and a majority of citizens employed in agriculture back in the 1960s. Now, only 7.5% of its population works in agriculture.

China still has up to 43% of its population employed in agriculture (due to the nearly 200 million migrant workers who retain rural residencies, the number is probably more like 30%, but that is still an overly-high number). This underutilization and underemployment of workers demonstrates China still has much room to grow, and many more productivity gains to realize– its rise is not yet finished.

Overrated Economy… But Massive Purchasing Power

Pomfret rightfully criticises Keidel at the Carnegie Foundation for a July 2008 extremely pro-China growth article. Keidel assumes China will maintain over 7% yearly growth rates through 2030. These estimates may prove to be overly optimistic. However, China’s economy is still deregulating and expanding. It may not grow as fast as Keidel assumes, but barring massive inflation and energy shortages, the sheer amount of human capital and potential for development will allow it to expand at a healthy clip.

Pomfret wanders a bit into strange territory when he argues China cannot become a superpower simply because GDP per capita is so low. But why does low per capita GDP preclude development of a strong country? If GDP is high enough, China can finance a modern military, and its state-owned businesses can purchase overseas energy and mineral resources.

With even modest GDP growth, the domestic market can serve a middle class of perhaps 400 million (or 100 million, depending on the estimate), which is larger than almost all Western countries’ populations! If China is a giant in terms of worldwide trade, it can have greater influence in trade contracts with countries like Brazil and the Central Asian nations, marginalizing the United States.

Note: In later articles I hope to explore China’s middle class, its productivity in detail, and how China’s aging might effect domestic policies. I would love to go into greater detail on these items here, but then this post might become thesis-length. 

Environmental Problems… A Legitimate Challenge; But It Can Be Overcome

Pomfret is correct that China faces environmental problems. Elizabeth Economy and other scholars have detailed this in numerous books and articles. And environmental pressures can cause societies to implode, as Jared Diamond famously argued in Collapse.

However, China may be able to make fighting its pollution an opportunity for societal and technological development. China could allow NGOs and private groups greater chances to challenge local development and expose corrupt practices. Or, China could continue to suppress cross-provincial border NGOs, and could fail to develop technological innovation. The future of China and its environment could be dire, as Pomfret believes, or it could be positive should Chinese invent innovative environmental solutions (See Prospects for China’s NGOs for more info on Chinese NGOs).

Bankrupt Ideology… But The Country Is Just Now Developing Its “Mission” (See Maslow’s Hierarchy)

Pomfret’s argument about China’s ideological intellectual bankruptcy is interesting. He makes a good point about how China’s one-party system can stifle innovative thoughts. But China is still developing its mission, and there may come a time when China’s ideology can be successfully exported. (Please see the last section of my article on Maslow’s Hierarchy).

In contrast to the United States’ private think tank minds, and European NGO leaders, China has yet to produce many world-respected political theorists to propogate its philosophy. Its famous discursive-thinking thinkers and personalities; Wu Jinglian (economist), Bao Tong (politician), and Gao Xingjian (author) are either retired, marginalized, or living in exile.

(Note: This is not to say China lacks independent thinkers; CASS (The Chinese Academy of Social Sciences) has been known for producing innovative thought. And University scholars such as Shi Yinhong have done innovative work in regards to foreign policy. But in one example of stifling creativity, the State closed the innovative Journal “Strategy and Management” when they felt its authors strayed too far from the party line; Other thinkers contribute valuable intra-China thoughts on nationalism and how China should relate to the rest of the world, but Chinese views on how the world should be ordered internationally are less often elucidated, and have less of a world-wide impact. China has also long taken a non-voting and non-leadership position on the UN Security Council.)

Conclusion

Pomfret is right, China faces challenges. But these challenges are not dire enough to hobble its rise to global superpower status. Only the environmental challenge appears to be a potentially growth-derailing problem, and it could yet be overcome.

In response to Pomfret’s proposal, I suggest a few different problems China is facing that may delay its rise. To succeed as a superpower, China most needs to ensure energy supplies, tame inflation, deal with dissent/protests/petitioning by instituting a rule of law, and provide social services. (If the last two items are combined, then I would list Pomfret’s “environmental” challenge).

I hope to explore these problems in a future article and would like to hear your opinions on what four problems you believe are most important for China to overcome.

(My further response, based on your feedback, is here).

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30 July, 2008 Posted by | China Economy, China Future | , , , , , , , | 11 Comments

Uranium Update

China’s 2006 agreement for Australian companies to supply uranium to China, has finally borne some fruit. (And see Forbes). Energy Resources of Australia (ERA), which is controlled by Rio Tinto and which produces 10% of the world’s uranium, agreed to make a one-off shipment in the fourth quarter to an unidentified Chinese electricity company. The uranium will come from the Ranger mine. Australia holds 40% of the world’s known uranium reserves (Forbes).

Ranger is Australia’s most productive uranium mine, producing 5256 tonnes in 2006-07. It is located in the Northern Territory. Politically, it is a slightly controversial mine, due to its location near a World Heritage site and some concerns regarding its safety record.

Other Uranium Sources

China domestically mines for uranium, but it also acquires it abroad from Kazakhstan . Other countries listed as sources include Namibia. It is important to note that although as I detail in China’s Nuclear Power, China believes it may have a fair amount of uranium, as of 2007 its “proven uranium reserves within China, even if it was possible to fully extract them, could only fuel 40 GW for 50-60 years, according to China Guangdong Nuclear Power Holding Co., the country’s second-largest nuclear builder by assets,” according to Dow Jones. And that dearth of power could by necessity make China an international player on the uranium markets since China wants to have 60 GW of capacity by 2020.

Kazakhstan – As of October 2007, “China will get a stake in a 2,000-ton-a-year uranium mine in Kazakhstan in exchange for its share in a uranium-processing business… Kazatomprom said on Oct. 12 it signed agreements in Beijing with the China Guangdong Nuclear Power Group and the China National Nuclear Corporation, China’s largest producers of atomic energy”, according to the NYT quoting a Bloomberg article. Kazakhstan currently has an agreement to ship nearly half  of China’s uranium imports. (Kazakhstan holds 17% of known global uranium reserves). Kazatomprom is the world’s second largest uranium supplier as of 2007, accounting for 12% of global supply.

Namibia – “Canadian mining company UraMin will sell 35% of the [Klein-Trekkopje] mine’s output to China.”

Niger – China also explores for uranium for its nuclear power plants in Niger. In what is perhaps too much wishful thinking, ” Niger hopes to become the world’s number two uranium producer by 2011 thanks to new mines being opened by France’s Areva and the China Nuclear International Uranium Corp. (Sino-U)” (Reuters). In production capacity, Niger is currently behind Canada, Australia, Kazakhstan, and Russia.

TajikistanOnly accessible by Subscription, the Times of Central Asia (Kyrgyzstan) , quoted “China’s company eyes uranium deposits in Tajikistan” in Google News which claimed that “China’s Guangdong Corporation is interested in participation in development of uranium deposits in Tajikistan.” So it appears that talks have begun for uranium development in that Central Asian country. More news stories on this will hopefully develop.

Mongolia -There have been some talks (May 2007) http://www.mongolia-web.com/content/view/1044/2/ about China acquiring Mongolian uranium. Future agreements appear to be in the developmental stage. Mongolia may attempt to play China and Russia against each other for better deals. Russia appears to currently have the upper-hand in current prospective deal-making. “In April 2008 Russia and Mongolia signed a high-level agreement to cooperate in identifying and developing Mongolia’s uranium resources” (World Nuclear).

* More on China’s Nuclear Power industry in my article, “China’s Nuclear Power.”

* An interesting article on the Kazakh Uranium Industry. (I’m a little concerned about some of the numbers used in the article, but haven’t had time to double-check [it would take hours]. They seem okay, and the article IS on CNN, but if something seems out of place, it’s probably worth further investigation.)

* CFR also had a good report on the world’s Uranium Industry.

* Factsheets on Uranium from Cameco (slightly outdated in some places, but nice.)

28 July, 2008 Posted by | China Energy | , , , , , , , , | 3 Comments

Trouble in the Spratlys

The Spratlys, co-claimed by Vietnam, China, Brunei, Malaysia, the Philippines, and Taiwan appeared again in the news this week as China warned Vietnam and Exxon Mobil to not go ahead with planned exploration. Previously, in 2007 China discouraged BP from co-developing a natural gas field with Vietnam.

Chinese assertion of sovereignty in this case, when compared to its June 2008 deal with Japan to co-develop Chunxiao oil field in the East China Sea, is interesting. With the Chunxiao deal, China asserted supremacy, still claiming sovereignty, but it still agreed to co-develop the field, splitting investment and revenues 50-50% (“Sun Bin” has a description of that deal).

With Vietnam’s claim to the Spratly oil, China will reach no such consensus. PetroVietnam seems intent on not splitting investments with China, and Vietnam definitely has a legal case for not splitting. The Spratlys are beyond China’s Exclusive Economic Zone of 200 miles from its shores (in which it can exploit resources), however China still lays claim to them since the Spratlys are on China’s Continental Shelf.

And China has been enforcing its claims. In June 2007, “China arrested 41 Vietnamese fishermen near the Spratlys for straying into contested waters.  They were released after paying fines.  Vietnamese fishermen in another incident on July 9th were not as lucky.  One fisherman was killed and several others were injured when Chinese navy vessels opened fire on their fishing boats near the islands.” In November 2007, “large military exercises by China in the South China Sea close to the Paracels sparked protest from Vietnam.” And “on December 4… Vietnamese state media criticized China for ratifying in the People’s Congress a plan to create the Sansha administrative zone to manage the Paracels, Spratlys and the Macclesfield Banks.  The zone has been given the status of a “county-level city” within Hainan Province with its administrative headquarters on Woody Island in the Paracels… Chinese Foreign Ministry spokesman Qin Gang claimed China has “indisputable sovereignty” over the islands.”

As described by Bernard Cole in The Great Wall at Sea (2001), China signed the 1996 UN Convention on the Law of the Sea, but only after including several reservations. It claimed a sovereign right over an Exclusive Economic Zone (which would allow full naval intervention within more than 200 miles), and over its Continental Shelf (350 miles).

China also wanted boundary disputes to be settled bilaterally rather than internationally and would not allow foreign warships to transit through waters without approval. China’s naval claims extend from its coast nearly to the coasts of Indonesia, Vietnam, and the Philippines, and if accepted, would basically make the South China sea an exclusively Chinese lake, denying Vietnam easy naval access to the Pacific Ocean.

China’s historic claims to the Spratlys/Paracels are based on exploration by the Han from 200BC-220AD, and administration by the Tang Dynasty from 618-906, but Cole argues this does not really establish current-sovereignty according to modern usage.

China currently occupies around seven islands militarily, and vietnam has military garrisons on 20 Spratlys. Vietnam traces its legitimacy to 1933 French claims on the area.

The Philippines base their claim on an alleged discovery by a businessman in 1947. In 1974, he deeded the islands to government. The Brunei claim is based on proximity. 

China is upset about Vietnam exploiting the natural resources because strategic costs and energy supplies are hanging in the balance. Although most estimates place reserves under the Spratlys at 7-20 billion barrels of oil; China believes there may be as many as 200 billion barrels beneath the waves. Strategically, if Vietnam starts developing the fields, then its claim to the islands would strengthen since the country would be utilizing the area.

Could this situation escalate? If the June 2007 collapse of the PetroVietnam/BP deal is any guide– then no, the status quo of undeveloped Spratlys could prevail. However, Vietnam and ExxonMobil may attempt to take advantage of the Olympics in order to push hard to shame Beijing into refraining from harsh rhetoric and threats. This would allow PetroVietnam and ExxonMobil to push ahead with developing the oil field and might lead to diplomatic consequences after the Olympics are finished.

ExxonMobil must have known the political consequences after seeing BP’s failure to join Vietnam in investing. Later, I hope to uncover some research on ExxonMobil’s oil interests and investments in China. To what degree would acquiring new sources with PetroVietnam hurt ExxonMobil’s bottom line? Now, ExxonMobil might still pull out of the deal if China exerts enough pressure, but I find it difficult to believe that ExxonMobil didn’t expect China to push back– they must have a  good reason for pursuing talks with PetroVietnam.

What’s certain, though, is that Vietnam seems ready to go ahead with the deal and exploration despite Beijing objections.

24 July, 2008 Posted by | China Diplomacy, China Energy | , , , , , , , | 3 Comments

Rule of Law- Not Human Rights

With Beijing receiving the 2008 Olympics, controversy erupted over China’s alleged human rights violations  and lack of democracy. Many Chinese often argue stability must be valued first before human rights can be guaranteed. While the Chinese might consider the issue too narrowly, international calls for democracy and human rights are a bit too broad and disorderly when unaccompanied by a theoretical basis that can apply to the Chinese situation. Instead of dwelling on broad concepts, China and international critics should join together to help China focus on promoting a standardized, streamlined, non-arbitrary Rule of Law.

China has progressed toward the rule of law. China currently has over 110,000 lawyers (as of 2000),  114,000 lawyers (as of 2005), and allegedly 165,000 registered lawyers (as of 2008). In 2002, the Chinese began having full-time government lawyers who advise courses of action. Still, as Xinhua states, China needs more lawyers. Its ratio of lawyers to populace is surprisingly low, so China has expanded schooling and opportunities to increase the number and quality of lawyers.

To bridge the gap of lack of legal expertise, China expanded its Xinfang system. According to Yale, “Some 10 million complaints are pursued through the traditional “letters and visits” (xinfang) system,” which can best be described as “aggrieved parties send petition letters or visit the xinfang office of a higher level of the administrative government in order to seek compensation, an apology or to correct mistakes made by a lower level of the administration…The xinfang office has its roots in the traditional top-down system of government where ordinary citizens rely on higher levels of government to alleviate their suffering” (China Labor Bulletin).

In China, extra-judicial solutions to problems are often practiced. “Some estimates based on available statistics reasonably suggest that there were perhaps four or five million administrative Xinfang petitions a year during the 1996-2004 period, but only around one hundred thousand administrative complaints filed with the courts” (Zhang, 4). According to the CFR, as of 2007: “There are 10 million to 13 million petitions filed every year as compared to 90,000 to 100,000 administrative lawsuits in China’s courts.

“Petitions, however, carry no legal weight to compel government offices to respond… according to some estimates only 0.2 percent of petitioners received a response in 2005.” That’s a huge problem.

The failure of Xinfang to fully address problems in China underscores a need for further establishment of legal tradition. When cases are administratively blocked or ignored, and root problems go unaddressed, the people lose, become bitter, and may join the over 70,000 protests that occur almost every year. 

A better developed court system can help take some of the stress off of would-be protest-situations such as the harrowing Weng’an Incident. One party secretary stated that although the girl’s death may have been the incident’s proximate trigger, “the deep structural reason is that there had been frequent infringements of citizen rights over the relocation of migrants, demolition of buildings and mining rights disputes.”

The Xinfang system and the courts had failed to properly deal with these problems, which contribuited to the rationale for people to riot. Indeed, in Weng’an’s aftermath, Beijing fired people in the Weng’an government for mismanagement.

Currently, many judges lack full judicial training and sophisticated legal knowledge since many are merely ex-military officers. (Also, Will Hutton’s comments… Although he appears to have a chip on his shoulder about China, so perhaps his data should be taken with a grain of salt.) (Also, for a note on the quality of Chinese lawyers and some theories on why a fair amount of Chinese lawyers are poor in quality, please read this anecdote [also please see the post’s comments for more nuanced views by Chinese].)

Still, if China follows its own Constitution (And see: Human Rights in China’s Constitution), the country would commit few “human rights abuses,” probably no more than the United States’. 

Fear appears to be the basis for China at times falling short of a “rule of law,” since many are locked up for “endangering the state” and “releasing state secrets,” which are often trumped-up charges that supersede other Constitutional rights of free speech in even worse ways than the US’ notorious Alien and Sedition Acts.

Before “human rights” can be guaranteed, China’s existential fears needs to be eliminated. The country, the state, and the party needs to gain confidence that following Constitutional laws can guarantee the “interests of the people.” By following its own Constitution instead of being ruled by fear, China can guarantee a standardization of law that will make living and litigating fairer- which would do more to guarantee human rights than mere foreigners organizing letter-writing campaigns or in governments and Human Rights Watch scolding Hu Jintao.

Conclusion

If China moves from being “ruled by law” to practicing “rule of law,” then grasping of nebulous concepts such as “human rights” and “democratization” will likely follow, since base-lying concepts of freedom of speech and other freedoms are already enshrined in the Chinese Constitution.

It would be nice if Human Rights Watch and Amnesty International and other NGOs dedicated to improving rights in China could focus more tightly on improving LAW in China. It appears a key failure in the Chinese system right now is lack of expertise. If money, time and energy is invested in developing such expertise, then China will more quickly see a modern legal culture emerge! 

Appendix:

* Longer descriptions of Xinfang are in Carl F. Minzer’s article and in Zhang, Taisu, “The Xinfang Phenomenon: Why the Chinese Prefer Administrative Petitioning Over Litigation.”

Zhang gives an interesting theory on the overuse of the Xinfang system, which only results in positive judgements for accusers 0.2% of the time, compared to 30% for administrative suits. As he argues:

“It may be possible to present the explanation proposed here as a more advanced version of the “rational choice” theory. This would necessarily be based on the long-term interests of petitioners: they might value their long-term relationship with local authorities more than their short-term interest in resolving the dispute…Since the heightened “adversarialism” of the litigation system would seem to damage that long-term relationship more than Xinfang petitioning, petitioners are willing to bear with a lower chance of short-term success” (Zhang, 31). 

The main problem with this argument though is, after the Xinfang petition fails, why don’t the villagers bring the problem to the local courts? And Zhang admits that is a puzzle. He eventually conclude that “dislike of “adversarialism” had simply prejudiced petitioners against litigation” (Zhang, 31) and “the best explanation for the Xinfang system’s superior popularity over administrative litigation is the latter’s inflexible and more adversarial procedure, which stems from its prohibitions against mediation and private trials” (Zhang, 32). Ultimately, Chinese citizens’ predeliction for Xinfang is an interesting phenomenon, and one worth further study.

* Chinese Law and Politics Blog also discussed the Xinfang System.

23 July, 2008 Posted by | China Law, China Stability | , , , , , , , , | Leave a comment

Out of China

Canon, Nissan, and Germany’s Steiff Toys are either forgoing China expansions or leaving China to produce in other countries. Other companies are leaving China to find cheaper, less regulated places to manufacture. RMB appreciation, costs of training, the new labor contract law, end of some preferential tax breaks for foreigners, inflation, visa regulations, and energy rationing have made China a little less attractive for foreign businesses and manufacturing. But where will these companies go, and why? Even some of the so-called drawbacks to doing business might be good for the long term. Below, the issue is examined.

Why Leave China?

Booz-Allen and AMCHAM released a March 2008 study that argued “More than half, or 54 percent, of companies surveyed [out of 66] believe that China is losing its competitiveness to other low-cost countries.” And “wages in China now [as of June are] rising close to 25 percent a year in dollar terms in many industries” (IHT). Specific “problems” include:

1.) China’s new labor contract law, which went into effect this year, might increase costs by 8% on average per firm, and will make it more difficult to lay off workers. One provision states; “from January 1, workers who have been with a company for 10 years – or signed two fixed-term contracts – will be entitled to one month’s severance pay for every year worked.” One could argue that this law is well-needed to align Chinese workers’ interests and pay with international norms. But still, it does put upward pressures on costs of doing business.

2.) RMB appreciation. The currency has risen by 7.1% this year against the dollar, which is amazing since the RMB only appreciated 3% from July 2005 through March 2006. (But there are opposing views, namely that the evaluation is overstated due to a weak dollar- since the RMB has actually declined 16% from 2006-2008 versus the Euro.)

3.) Preferential Tax Rates Ended for Foreign Firms; Export Tax Rebates Ended. Now, foreign firms pay a higher rate, generally 25% of taxes. (Information on the new law is from Deloitte, and HERE.) Also, export tax rebates were phased out. A trade manager quoted in AFP claimed, “The yuan appreciation has a huge impact on our business. It costs us much more in the production and delivery costs. What’s worse, the export tax rebates of 13 percent were cancelled so our total costs are up 20 percent,”

4.) Inflation.  “Seven out of 10 respondents cited the rising renminbi as a major reason for China’s decline, while wage inflation was cited by 52 percent of those polled.  Wages for white-collar managers and blue-collar workers have jumped 9.1 percent and 7.6 percent, respectively [on the year],” according to the AMCHAM study.

5.) Visa Regulations. The Wall Street Journal described how, due to the newly onerous visa regulations, one businessman had to leave China for Thailand, even though his company “researches commercially viable ways to sustain water and land resources in China.” In China’s defense, this businessman’s situation was made troublesome because his company had not been legally registered to operate. (Previously, many companies have not been registered). Visa regulations and enforcement of already on-the-book rules may do a little to slow inward-bound China growth. Ultimately, however, enforcement of logical laws will benefit China, so the stifling effect of strict Visa regulations may pass post-Olympics. (Michael at The Opposite End of China explains his visa problems HERE.) 

6.) Costs of Training/Turnover. The experience of Steiff Toys provides an interesting anecdote about the challenges of training and turnover in an emerging market. After being trained, employees might seek to market their talents at a better paying company. In Steiff’s experience, “[t]he company had frequently visited its Chinese partner to try to build up a good relationship. However, once, during a six-month gap between visits, almost the entire work force at one factory had changed.”

“It was no surprise the quality varied so much. New people came, the quality dropped, then they improved their skills and left,” he said, adding that the Chinese-made trampoline parts did not reach high enough endurance standards.”

7.) Energy Rationing. In January, and then again this summer, factories had to shut down power to ensure the grid was not overloaded.

Where to Go? 

Vietnam is the country most mentioned as a relocation place, but it faces surging inflation. In May 2008, food prices were 42% higher than they had been one year ago. China, in comparison, saw food prices increase by only 21% since 2007. Still, inflation worries in both countries only cuts their economic outlook from growth at 1-2% less than initially projected. This allows both countries to grow at 7% (Vietnam), or +9% (China) on the year.

What Vietnam lacks, that China increasingly has, are sufficient infrastructure developments. AmCham Vietnam discusses the problem of infrastructure. Vietnam’s plans for development are available at the World Bank.

Also, Vietnam’s population of 86 million pales in comparison to China’s 1.3 billion. International Lawyer Dan Harris, in informal interviews with several of his clients, believes that Vietnam’s manufacturing processes and human capital still need a great deal more of investment before they can compete with China- which may never happen.

Cambodia. Hailed as the next Vietnam, some garment manufacturers are relocating here. And “South Korea and Malaysia have been pouring in investment. In 2006, foreign direct investment totaled $2.6 billion, up from just $340 million in 2004, according to the International Monetary Fund” (IHT).

Cambodia “is where Vietnam was some 8 to 10 years ago.” [Yeo] likes a lot about Cambodia: its location in a fast-growing region, a young and inexpensive work force, rising productivity, a pro-business government, stable politics and strong GDP growth, which peaked at 13.5 percent in 2005 but was expected to mellow to 7 percent or 8 percent in coming years” (IHT). Still, Cambodia is tiny, with a population of 14 Million. And the vast majority of Cambodians are laregly uneducated and unskilled. Hyping Cambodia as a future economic powerhouse is probably overstated.

Malaysia’s International Trade ministry hopes to position itself to poach manufacturing plants that leave China. Malaysia claims it is interested in investments in “high technology,” less labour-intensive industries. Malaysia’s economy and workforce, however, is much smaller than China’s (at $357 billion PPP [Purchasing Power Parity] in 2007 and a 6.3% yearly growth compared to $6.9 trillion and 11.4% growth in China). More importantly, Malaysia has less to grow than China.  Only 13% of its workforce is in agriculture, compared to 43% of the workforce in China.) While it may attract certain manufacturing industries, a large-scale relocation is unlikely since costs in Malaysia will rise as the pool of workers decrease and compete for better-paying jobs.

India. People like to laud India over China due to its democratization, but India suffers environmental degradation just like China. And India suffers internal dissent, from Naxalites, from Jammu-Kashmir, from Islamist extremists, and from its rival Pakistan. Attempts to deal with water purification, smog, and other challenges will slow India’s growth in the short run, just like such attempts can short-term stall Western countries’ industrial expansions.

India’s Democratic society is also less likely to sanction the painful changes than China’s semi-autocratic government permitted to increase development. China ended or reduced many state pensions, reduced health benefits, and evicted thousands from their homes. As Robert Shapiro, a former undersecretary of Commerce, describes in his book Futurecast:2020, it does not appear India has the political will to carry through needed reforms.

India still faces a large variety of difficulties it must overcome before it can rightly challenge China as a competitive place for companies to relocate their industries. The day of relocations may come, but it is not yet here.

Why China is Still Attractive

China Law Blog believes the Labor Contract law did little to directly dissuade big foreign companies from investing in China. And that makes sense. China is a huge market, well worth the time and effort of investment, both for substantitve purposes (returns on capital), and for prestige (WE have a China office; do you?).

However, CLB also noted that “China has seen a number of factory closings of late, but most of these are very domestic factories that produced low end goods. I also have no doubt that many Taiwanese and Hong Kong and Korean factories producing the same sorts of goods have closed as well [because]… Beijing has instituted a number of policies explicitly aimed at marginalizing such factories so as to push China up the value chain. ”

Asia Sentinel backs up Dan Harris’ comments, calling attention to the closing of marginal manufacturing industries, but also stating that the higher value, better-run factories are staying open.

The Chinese Miracle, of its economic growth, still has a long way to expand. As the Motley Fool’s argues, the China Story is not going to end because wages are rising in coastal provinces. Instead, a new chapter will open as manufacturing and development “Go West” and drive to the interior. China has hundreds of million-person-populated second tier cities like Xi’an, Lanzhou, and Wuhan that can benefit from and contribute to internal development, services, and manufacturing.

China is experiencing teething pains, but it still has vast human resources. Its largest problems appear to be sustaining energy supply, its need to move more toward rule of law, and a need to contain inflation. And China, for the most part, is moving toward those goals (although containment of inflation is an open question). So will businesses depart from China? Some manufacturing might. Other manufacturing will just move farther inland, to take advantage of cheaper provincial labor as the coastal regions move up the value chain.

Extra

* September 8, 2008, the Washington Post presented a story about manufacturing moving from China to the US.

22 July, 2008 Posted by | China Economy | , , , , , , , , , , , | Leave a comment

Brazil’s Passage To China

The BRICs are getting cozier.

In 2007 Brazil finally experienced a trade deficit with China. “Brazil’s official figures show its China-bound exports totaled $10.75 billion in value in 2007, with imports from China reaching $12.62 billion,” according to Xinhua. ” 6 percent of all Brazilian exports went to China last year, while 10 percent of all imports came from China,” according to NPR.  Bilateral trade rose 71.7% in 2007. Trade between the two took off between 2000 and 2003, when trade rose five-fold, and then again from 2004-2007 when trade more than doubled (BBC).

In 2007, the United States, Brazil’s #1 trading partner, exported $24.6 billion to Brazil and imported $25.6 billion; however, China may soon supplant the United States and Argentina in trade importance to Brazil.

In Brazil’s July-launched China Agenda program, the Brazilian Foreign Trade Secretary spoke of hopes to triple exports to China by 2010, which would account for $30 billion. This could mean that by 2011, Brazilian-China trade could surpass US-Brazil trade. However, I think that is unlikely, as I explain below.

China Supplies Mfg. Goods, Brazil Supplies Raw Materials

“96 percent of Brazil’s Chinese imports are high-value manufactured goods, 74 percent of its exports to China are low-value commodities such as soybeans and pig iron,” according to the AP.

According to Agenda China, Brazil hopes to increase exports of 619 product lines, including “Brazilian pharmaceutical products, chemicals, plastics, shoes and metals, as well as expanding the array of agricultural goods, through a higher Brazilian presence at trade fairs and through visiting delegations of businessmen” (AP). Brazil currently has three consulates in China. They are located in Beijing, Shanghai, and Xianggang (Hong Kong).

Implications

Brazil supplies raw materials China will require, such as iron. However, it is difficult for Chinese ships to reach Brazil, which could feasibly increase transport costs. They only have three options; a sea route (through Panama), another sea route around the tip of South America, or perhaps a land/sea route that would need extensive development before it could be widely feasable.

Of the three, transport through the Panama canal is by far the quickest (by days). The planned increase in Sino-Brazilian trade will make it even more vital that Panama’s expansion of the canal (to serve larger ships) is completed by 2014. (Panama Canal Expansion Proposal)

“The current locks are 33 metres (108 feet) wide, but the new locks would be 50 metres (150 feet). A third lane of traffic would be able to handle the wider loads” (BBC).

There are fears, perhaps over-stated, by some in American Ports, that US ports are not prepared to handle the newer large class of ships that can transverse the channel. If US ports are not dredged deeper, the US will lose a percentage of trade to the Venezuelan, or Brazilian economies.

Given the current fuel-price increases and the necessity of long journeys for goods to be transported from Brazil to China, I consider it doubtful that Brazil will increase exports to China three-fold in the next two years. Although the countries have demonstrated an ability to increase trade, the current economic slowdown and Chinese resource investments in Africa and in Australian companies will make purchases from Brazil of less immediate importance.

Trade will increase, since both countries’ are growing despite global difficulties, both will experience slight drags on expansion due to the global slowdown. This will ultimately make unattainable Brazil’s three-fold growth in trade to China .

After 2014, however, with the Panama Canal’s widening, all bets are off. In those circumstances, Brazil-China trade could certainly increase, perhaps exponentially.

* An interesting blog post from MarketOracle on the Brazil-China trade (crica, Feb 2007)

16 July, 2008 Posted by | China Diplomacy, China Economy, China Future | , , , , , , , , , | 6 Comments

Natural Gas – Development

Beijing continues its quest to fill its increasingly high energy needs since demand is up 8.6% in 2006, which is a staggering amount compared to global growth rates of under 2%. To mitigate the problem, Beijing plans to ambitiously expand natural gas supplies.

China’s natural gas industry is growing at a rapid pace. 2007 saw 23.1% growth and this year, Natural Gas output will “likely hit 76 billion cubic meters,” on around 15% a year growth!). 

International agreements signed from 2003-2005 are finally coming on-line, and new agreements are being made. Below, I examine what this can this mean for China’s energy security and future geopolitical purposes.

First, for orientation purposes; 1,200 cubic meters of gas equals about one ton of oil (People’s Daily); or a conversion rate of 8.3×10-4.  (Conversions will vary between sources depending on how oil companies rate the density of materials, but for simplification purposes, all numbers below are approximations.)

In 2006, China received 69.6% of its energy from Coal (1.19B tons of oil equivalent in 2006, but 2.5B “natural” tons of coal are expected to be consumed in 2007)^, 21.1% from Oil (350M tons; 183.7M produced domestically, around 47% imported), 5.8% from Hydroelectric, 2.7% Natural Gas (55.6B cubic meters- in 2007 this rose to 69.8B cubic meters), and 0.8% from Nuclear Energy [data from: Rosen (17), and China Daily (2006)]

To make the data easier to compare, cubic meters have been approximately converted into tons:

Tonnage and Percent of Energy Mix (2005-2006)

Coal

1,190M  

69.6% 

Oil

350M

21.1%

Natural Gas                                

 58M*               

 ~3.5%*

 * Roughly converted into tons, thus is estimated down from the 69.8B cubic meters as per the formula explained above. Also, Natural gas data is for 2007.

^ 1 m.ton of coal = 4.879 barrels of crude oil equivalent (Source)
(Chart Data from Rosen and China Daily; 2005 and 2006 numbers except as stated.)

(2009-2010) – New Sources of Imports Coming on line

The Chinese government hopes to double use of Liquid Natural Gas from 2.5% of the energy mix (as of 2005) to 5.5% of the energy mix by 2010, and expects to utilize 200B cubic tons a year (166M tons, or roughly half of current oil consumption) of LNG by 2020 (IHT).

China is fast approaching its goals. In order to facilitate foreign imports, pipelines are being built, and China National Offshore plans to build an additional 10 LNG (Liquid Natural Gas)-capable ports (CER).

In August 2007, PetroChina and Chevron agreed to develop the Luojiazhai natural gas fields in Sichuan. The fields are believed to hold 2.03 trillion cubic feet of natural gas reserves (57,483,144 cubic meters or roughly 48M tons.) (CER).

In July 2008, PetroChina proclaimed “Sulige Gas Field in China’s Inner Mongolia Autonomous Region” can now produce  4.5 billion cubic meters (steres) a year (3.8M tons). By the end of the year, Petrochina hopes to increase output to over 7 billion cubic meters (steres) annually (5.9M tons) (China Institute).

Turkmenistan will be able to export Natural Gas to China, starting in 2009. Under an August 2006 deal, China plans to purchase 30 billion cubic meters in 30 years; averaging to 1 billion cubic meters, or around 833,000 tons a year. 

In June 2008, China signed a deal with Qatargas Operating Co. for delivery, starting in 2009, of 2 million metric tons of LNG annually (CER).

TOTAL: (2009) 8.9M tons yearly
Sulige Gas Field (5.9M yearly) [2009] (Inner Mongolia)
Qatar (2M yearly) [2009]
Turkmenistan (833,000 yearly) [2009]
Luojiazhai Fields (43M reserves) [~2010] (Sichuan)
 

Long Run Forecast

In July 2008, Kazakhstan started a natural gas pipeline (IHT) that should be “completed by June 2010.” When finished, it will carry 30 billion cubic meters of natural gas each year, or around 38M tons.

Sinopec also has high expectations for the Dayi Gas Field in Sichuan. They claim possible natural gas reserves of 100 billion cubic meters (85M tons) (China Institute).

China also, in June 2008, signed a cooperation agreement on natural gas extraction and transportation with Myanmar, which has over 5.7 to 10 trillion cubic feet of natural gas (283,168,199,078 cubic meters; or 238M tons) (China Institute).

In a July 10, 2008 statement, “Russia plans to export 68 billion cubic meters of natural gas to China annually by 2020 [58M tons], the president of the Russian Gas Union said. Valery Yazev, who is also deputy chairman of the State Duma, the lower house of Russia’s parliament, said that Russia planned to supply up to 30 million metric tons (220 million barrels) of crude oil to China via a branch line of the East Siberia – Pacific Ocean pipeline (ESPO)” (China Institute).

TOTAL: (2020) 96M tons yearly
Kazakhstan (38M yearly) [2010-2015]
Russia (58M yearly) [2015-2020]
Dayi Field (85M reserves) [2010-2012] (Sichuan)

 

Geopolitical Security

Future pipelines from Kazakhstan will carry imports that equal half the amount of LNG consumed by China this year. As a result, Central Asian security will become more integral to Beijing’s foreign policy. The pipeline from Kazakhstan crosses Uzbekistan and goes through China’s sometimes-volatile Xinjiang province. New pipelines originating from Central Asian countries will require more People’s Armed Police patrols to guarantee safety, which will tie down a modest amount of troops since the lines present an energy security vulnerability. Anti-terror crackdowns  will  increase in Xinjiang, and possibly Islamic Mosque worship will be more restricted. (Children under a certain age are not allowed in Mosques; although when I visited, it appeared this practice was not entirely enforced.)

Also, Beijing will strengthen ties with the SCO (Shanghai Cooperative Organization) economic and defense grouping of Central Asian states, perhaps attempting to marginalize the United States’ regional influence. Beijing already surpasses the US in trade partner significance to several Central Asian States, trading $12 billion in 2006 (CRS, 71) with the region, compared to 2006 US trade of slightly over $2.3 billion with the region.  (Data from HERE, HERE, HERE, HERE, and HERE for exports; HERE for imports)

With a future pipeline to Myanmar, Beijing might increasingly coddle that regime, like France and Russia at times did to Baghdad in the leadup to the Iraq War.  However, given Myanmar’s undeveloped economy, it may be years before they practically exploit their natural gas. An Indian and a South Korean company are also involved in the explotation. The Myanmar issue will prove to be a complicated one, geopolitically.

Ultimately, Natural Gas is but one of several sources for China’s energy, and it will only account for 5.3% of Beijing’s energy mix by 2010. Coal is currently, and will remain the most important piece of Beijing’s energy plan for the next twenty years. And oil will remain the most vulnerable part of Beijing’s energy plan, since over 47% of China’s oil demand is imported.

Still, the importance of LNG will cause Beijing to bring in foreign experts (such as Shell, and Chevron), and will increase its influence in the Central Asian states. It will be interesting to see how relations and rights negotiations develop over the next two to ten years, given energy prices’ recent fluctuations.

 * Some conversions attempted using this chart and this one. Also of note. “Steres” is another word for “cubic meters.”

Also of Note: Daniel Rosen and the Center for Strategic and International Studies’ AMAZING analysis of China’s Energy Future –  http://www.iie.com/publications/papers/rosen0507.pdf

* China’s Nuclear Power, Wind Power in China.

14 July, 2008 Posted by | China Energy, China Future | , , , , , , , , | 1 Comment

Beijing Smog

Every winter, Beijing skies darken with pollution’s gray fog. Exercising becomes dangerous to the health since too much bad air is drawn in and and not enough good. Soot merges with Beijing’s snowfalls, solidifying the snow and making these dense packed black and white masses last.

Beijing’s foul air contrasts greatly to air quality elsewhere. Good air, which rates a 50 on the AQI (air quality index) means air absent of “ground-level ozone, particle pollution, carbon monoxide, sulfur dioxide, and nitrogen dioxide,” according to airnow.gov. When air rates over 150, it is considered unhealthy and a red pollution day is declared. Several American cities experience red, or purple (201-300 AQI values) pollution days a few times per year. Beijing’s index, by contrast, suffers over 110 days each year in excess of AQI 100. Several days in December 2007, air quality hit 500- meriting a hazardous maroon rating (US air quality scale).

In Winter 2006 and 2007, the pollution index also hit 500. On those days, we could not even see buildings less than a block away. Bleakness oozed. Chinese wore white face masks.

“Beijing lung”, our endearing term for hacking up black spittle, became a common sight and ailment among not just foreigners, but also among locals. People felt dizzy, lethargic, and disoriented. Food took on a slightly tinny tinge, and eyes watered.

Is Beijing’s polluted clime livable- yes. As bad as my description sounds, thousands of Beijingers more or less live, and work- hanging 30 stories off construction beams, or carting bales of cardboard and crushed plastic on precariously balanced bikes. According to a New York Times article by Aaron Kuo-Deemer, hospital visits and deaths do rise significantly during high pollution days. But it is amazing how much pollution the human body can withstand. Even though just walking on a 500 level pollution day feels like smoking several cigarettes, one recalls some heavy smokers live long lives. In fact, Jeanne Calment, the world’s oldest lady smoked until she was nearly 117. Other smokers at least live into their sixties.

But living a relatively healthy life among increasing pollution is not sustainable. Pollution cuts into productivity as asthma cases increase and lung diseases strike, creating pressure on China’s health care system. Last year cancer accounted for nearly 20 percent of Chinese deaths, according to China Daily. Estimates state “70 percent of China’s 2 million annual deaths attributable to the disease were pollution-related,” according to China’s State Environmental Protection Administration; also “a World Bank report said about 750,000 Chinese die earlier due to air pollution every year.”

The situation, despite government claims to the contrary, may be worsening. Although Beijing can celebrate an alleged 244 blue sky days where the pollution index remained below 100, part of the reason for the achievement attributes not to greater environmental sustainability, but to movement of monitoring stations to new locations- farther away from highway intersections.

Cleaning up sulfur-spewing factories and particulate-emitting coal plants, Beijing has progressed in reducing airborne particulate matter. However, with over a thousand cars added daily to Beijing’s streets, automotive pollutants are merely replacing industrial pollutants. Although Beijing has made great strides in improving car and bus emission standards and although it has increased mass transportation, opening two subway lines, and a light rail in 2007 and 2008, Beijing’s rapid growth and unfortunate location negate much of its environmental gains. Smog originating from northern provinces’ factories blow into Beijing’s dry mountain-surrounded plateau and is trapped. The dust only dissipates with a rain or strong wind. Otherwise, bleakness looms.

Despite recent environmental advances- the preponderance of cars, influx of people and high energy demands will contribute to increased pollution. Beijing will grow and the government will struggle to limit pollution. People will endure, but as the city grows, so too will the dark clouds looming above.

Economist Quotation

 (This article was originally written in March 2008 )

10 July, 2008 Posted by | China Environment/Health, China Future | , , , , , , , , , , | 1 Comment

Maslow’s Hierarchy

The People’s Republic of China’s growth since 1949 mirrors development of not just the rise of great powers; but it also surprisingly reflects psychologist Abraham Maslow’s Developmental Hierarchy of Needs (Quotations from HERE).

1.) “Physiological Needs

These are biological needs…They are the strongest needs”

To sustain the country in the late 1950s, collectivization programs were instituted, farms were consolidated, and backyard furnaces smelted steel. Then, the Great Leap Forward bust, and a famine began that would cost the lives of millions. China recovered, eventually, but it embarked upon increasingly insular policies. (PBS) In Wild Swans, Jung Chan discusses the struggle for survival.

From 1966-1976, China suffered the Great Cultural Revolution, when students were sent into the countryside to labor alongside peasants, and intelligensia were humiliated (some were murdered). Even cadres suffered, but former “landlord-class”, “entrepreneurs”, and professionals like doctors, lawyers, and teachers suffered the most.  To increase crop yields and to raise the Socialist spirit, people were forced into collectivized farms.

The Mao Jacket (Photo) became a popular form of clothing, paens to the great Chairman were sung, and the loyalty dance was danced. Ritual was embraced, and individuality was considered putting the self above the collective, thereby damaging productivity (Xing Lu’s book has more on the Cultural Revolution).

The Cultural Revolution might be argued to have domestically fulfilled security needs to ensure Mao’s superiority more than physiological needs. Internationally, however, it was most definitely an example of physiological needs. Because the regime was so concerned about internally maintaining order, China recalled ambassadors from abroad (Xiaohong Liu’s excellent book describes this) and basically walled itself off from the outside world, helping justify the phrase, the “bamboo curtain.” Instead of reaching out, China criticised Moscow and embarked on an extended period of isolation. 

In essence, the 1960s saw China concerned with itself, and its survival as a revolutionary Communist state.

2.) “Safety Needs

When all physiological needs are satisfied and are no longer controlling thoughts and behaviors, the needs for security can become active. ”

Post 1976, a new set of regimented order emerged. Out of the crumbling of the collective farms and state-owned enterprises during the 1980s-1990s, came a brief “Beijing Spring” and opening 改革开放 under the leadership of liberals such as Hu Yaobang, and Zhao Ziyang. This opening came to an end in 1989.

Arguably, need for security is still paramount even today, as is evident when Beijing cracks down on Tib#*#*tan protests, and internet censors monitor communications. (James Fallows of the Atlantic has a really interesting article on censorship  and concepts of security.)

In terms of international security; in 1979 Chinese troops crossed the border to punitively punish Vietnam for becoming involved in the unrest in Cambodia. After seizing a few objectives, the Chinese withdrew. Also of note is the 1995-1996 Taiwan Straits crisis.

3.) “Needs of Love, Affection and Belongingness

When the needs for safety and for physiological well-being are satisfied, the next class of needs for love, affection and belongingness can emerge. Maslow states that people seek to overcome feelings of loneliness and alienation. This involves both giving and receiving love, affection and the sense of belonging. ”

Look at the cute Olympic monsters, the fuwa, and consider China’s “Panda Diplomacy,” then consider how China coveted the Olympics because having them will demonstrate that China is a great country. The CS Monitor and other journalistic outlets have often repeated; “The Chinese government is treating the Games as a symbolic end to 150 years of humiliation by outside powers and a confirmation of its status as a global power to be reckoned with.” As a student said in response to Beijing’s reception of the Olympics; “I feel our motherland is already a great power in the East. Our nation has stood up.”

Nowadays, China wants the respect of its neighbors.  China emerged from the alienation of the 60s,70s, and post-1989. In 2001 it joined the WTO- acting as though it belongs in the company of great nations (Why China Wants to Join the WTO).

Thus, China is more susceptible to public opinion. In response to intense lobbying over the Darfur issue in Sudan, China sent more peacekeepers and has shown a greater willingness to cooperate with international bodies.

4.) “Needs for Esteem

When the first three classes of needs are satisfied, the needs for esteem can become dominant. These involve needs for both self-esteem and for the esteem a person gets from others… When these needs are satisfied, the person feels self-confident and valuable as a person in the world. When these needs are frustrated, the person feels inferior, weak, helpless and worthless. ”

China needs to be respected by others. Thus, “Chinese rage has focused on the alleged “anti-China” bias of the Western press,” according to the Economist. When foreign media outlets misrepresented pictures of Nepalese mistreating Ti#$$$$ans as Chinese mistreating Ti%%%%etans, Chinese were outraged. Also, when Chinese saw Western press as feeling sorry for T^^^b#t, they demonstrate the Ti&&&etans in France horribly mistreated one disabled Olympic torch bearer.

Peter Hays Gries discusses China’s new assertive nationalism in detail in his book: China’s New Nationalism.

By winning in the Olympics and putting on a good show, China will feel validated and have its esteem needs satisfied.

Also, China has established Confucius Insitiutes around the world to spread Chinese language and culture.

5.) “Needs for Self-Actualization

When all of the foregoing needs are satisfied, then and only then are the needs for self-actualization activated. Maslow describes self-actualization as a person’s need to be and do that which the person was “born to do.””

China has yet to reach this stage. When it does, it might explode onto the international scene, justifying territorial rights in claiming Taiwan, and settling oceanic disputes. At the self-actualization stage, China’s pursuit of these rights will be similar to its pursuit of rights during the security stage, but more sophisticated. China might press its demands through use of diplomatic isolation, economic pressures, or show of military force (not necessarily invasion). When China has become self-actualized, it will be confident in its strengths, capabilities and goals as a nation. Chinese military plans currently suppose the PRC will be a regional power by 2020.

Self-actualization comprises more than mere territorial claims. After China gains confidence to act on the world stage, it might try to remake the world in its image, much as the United States, the USSR, and Great Britain have done in past ages.

China will seek to set up its own international groupings and economic bodies. China already supports ASEAN and may be able to assume a leadership role in this USA-excluding trade body. The US’ group, a more expansive APEC, is confronting some problems due to its ambitious nature, and will confront more in coming years given America’s Democrats’ distaste for free trade.

When and if China will arrive at the highest level of Maslow’s hierarchy is debatable. Much can happen that might hinder China’s full development, from socioeconomic unrest, to internal splittism, to a slowing of the economy. Any of those items might cause China to turn in on itself and become less a leader and more preoccupied with solipsistic concerns.

(Note: Minor edits enacted on July 15th)

9 July, 2008 Posted by | China General, Isn't That Odd? | , , , , , , , , , , | 4 Comments

Isn’t That Odd? : Segways & Flamethrowers

Here’s an amusing article describing Chinese preparing for anti-terrorism drills.

Proximately from Engadget-but originally from Xinhua

Xinhua’s photo gallery is here: Although the Segway use can be justified (sort of- though they would seem to be pretty difficult to balance under stress conditions), a question arises looking at Xinhua’s photos, why is a flamethrower necessary for anti-terrorism drills at the Olympics?

 From Xinhua

In recent years, China installed fire extinguishers in Tiananmen to prevent people being lit on fire, after certain high-profile self-immolation protests in 2001.

One wonders how much danger the Beijing security details are expecting to handle– and with what degree of deadly force. I spoke with an Olympic volunteer and was told they were very concerned, as all people at all Olympics are, about incidents at entrances to Olympic venues.

Another especial reason for Beijing’s security worries; As recently as May 2008 an unexplained explosion that may have been intentional, went off on a Shanghai bus. Xinhua didn’t initially attribute the explosion to terror, but TIME Magazine and people on the ground have suspicions. At minimum, following the explosion, Shanghai instituted new regulations about carrying certain materials on buses and increased anti-terror patrols, which leads one to believe that there may be some reason for these heightened concerns.

With luck, nothing untoward will happen in China during the Olympics. For China’s sake, if something does happen, hopefully the police/military response is proportional and appropriate and that the coverage of said problem is transparent.

One thing that seems quite Odd is China has long believed very strongly that ignoring a problem, even after the problem has become well known, allows the country to save face. By covering-up details, forbidding publication of negative stories, and making everything seem happy, Chinese officials seek to win accolades (As I discuss in an earlier article).  Thus, they barred reporters from T$$$bet during the recent disturbances, then denied Chinese-instigated abuses (which may or may not have happened- since the West lacked independent reporting all it really has is a “monks said/Beijing says” dichotomy).

Simon Elegant at TIME Magazine thinks the media’s coverage style is changing and the Chinese government is more willing to admit to problems rather than covering-them up; but he also points out difficulties suffered by Chinese trying to discuss incidents online.

Oh China, such an odd and amusing, but often frustrating place.

7 July, 2008 Posted by | China Stability, Isn't That Odd? | , , , , , , , , , , | 2 Comments

Need China Experts

It appears that once again, the Wall Street Journal needs more China experts, if not geography experts- either that or more photographers.

I was perusing page A6 of the Saturday/Sunday July 5-6, 2008 edition and saw an article titled “Political Unrest in Mongolia May Hinder Mining Investment.” (by: Patrick Barta and Jason Leow) I looked beneath the title and saw a photo identified as “A Chinese worker shovels coal in Baotou, nestled in the sand-sculpted ravines of Inner Mongolia, on Tuesday,” and wondered why a photograph of Inner Mongolia, which is part of China, is used to illustrate a point regarding Outer Mongolia, which is an independent country.

I read the article and could find no particular reason the WSJ used a photograph from Inner Mongolia, save that perhaps an editor became confused and thought Inner Mongolia referred to the country of “Mongolia.”

I wouldn’t be mentioning this trifle, save that back during the T%%betan rioting, the WSJ made a similar geographical mistake. In the March 15, 2008 article “Protesters’ Message Spread By Activists World-Wide,” by Alistair MacDonald, Suzanne Sataline, and Peter Sanders, a city- Xiahe, was described as being located in T%%%bet. Xiahe, actually, is in Gansu province. I wrote to the Journal and received an email commendation for correcting their faux-pas

Around three days later, a graphic clearly demonstrated Xiahe was located in Gansu province, a couple of hundred miles away from T$$$bet. A week and a half later, a correction was printed. Admittedly, Xiahe is located on the T***betan plateau, so I can understand how a mistake was made. Still, in a newspaper the caliber of the WSJ, a simple geographical mistake like that, or the current Mongolia faux-pas should not happen.

These mistakes, along with other press outlets’ embarassing mislabling of photographs detailing police oppression of T%%%betans in Nepal as police oppression of T$$$$betans in China, need to be avoided. The world needs to increase its China-literacy considering how economically important the country has become of late. [Of course police oppression happened in both countries, but mislabeling and misrepresenting photographs does much to damage the agenda of people seeking sympathy (Jim Yardley of the NYT mentions the mislabeling in a March 31st article on page 2 of this piece.)]

Oh well, here’s to hoping the WSJ looks a little closer at the geography next time they do a story on China. I love the WSJ and hope it can still continue as one of the world’s most respected newspapers.

6 July, 2008 Posted by | China General | , , , , , , | 1 Comment

Isn’t that Odd?: Plastic Bag Entrepreneurs

China has long been a country of entrepreneurs, from its urine merchants, to the indigents who walk around recycling plastic bottles and aluminum (they are ubiquitous, despite some efforts to remove them, both high and low tech [The former is an electronic recycling machine; the latter, a poignant transcript of a UK special on a “clean up” of homeless who make a living collecting plastic bottles]), to the proprietors of hundreds of mom and pop shops.

What follows is an amusing prediction for this week’s Isn’t That Odd.  If you’re in China and you see this happening, please post here- I’m asking my contacts to look out for this.

I predict that China’s new plastic bag policy is going to create a new wave of self-employment for their urban poor. Why? Well, first, let’s examine the policy:

1.) A National Policy Designed to Reduce Plastic Bag Waste
The policy of charging for plastic bags (at .2-.6 yuan), and phasing out the ultra-thin bags will hopefully decrease waste as people begin toting canvass and bamboo bags to the stores. However, some problems have been realized due to this policy, as a recent Xinhua article examined; ranging from vendors who are still utilizing the ultra-thin bags, to others who are not charging for bag usage.  “At a small grocery near the Carrefour, the shopkeeper still offered customers free plastic bags. As he said: “I sold vegetables worth 0.7 yuan. How can I charge 0.5 yuan for a bag?”

Other problems include:

It is more difficult to tote canvass bags everywhere when one goes outside. Penny-pinching people have to plan before going shopping, instead of previously being able to use free store-supplied plastic bags or to purchase new canvas bags at the grocery.

Also, at markets, fish-sellers now wrap fish in newspapers instead of inside plastic bags. This causes newsprint to leak onto the fish, which makes the food untasty and unsanitary. And places where the plastic bags are still used have suffered problems of people grabbing extra bags to use for private purposes- creating a shortage at some stores, as the Xinhua article goes on to explain.

Consequences: Depending on how much of a price these plastic bags might be oversold at, I wouldn’t be surprised to see some Chinese entrepreneurs standing outside stores, selling and undercutting the stores’ prices for plastic bags. They might grab a few extra bags when they are in the stores, they might repurpose previously-used bags, or they might (if they have some capital) go to a manufacturer and purchase bags in bulk.

If you’ve ever read Carl Crow’s venerable 400 Million Customers, you know how hardscrabble the Chinese can be in seeking out entrepreneurial opportunities.

My favorite tale of Mr. Crow’s (he wrote in the 1930s but his words are still relevant and amusing today- and inspired another informative book- James McGregor’s One Billion Customers.) is how Crow organized an ad promotion with a US manufacturer who wanted to introduce a better brand of soap (I think-I read the book a few years ago so my memory is slightly hazy) in Chinese stores. The manufacturer gave stores free soap samples to hand to their customers.

A month later, the manufacturer was quite upset, because brand awareness hadn’t increased. So Crow went to investigate. He found the stores and discovered several problems.

1.) Many stores were selling the “free” samples; because they figured it didn’t matter if one brand of soap was more popular than another; because they weren’t in the business of selling soap, consumers could buy their soap anywhere so giving soap for free would do nothing for their store! (They didn’t believe they could build store-brand loyalty with customers by giving something away for free- see point 2). And by selling the soap (cheaper than other brands), they could gain extra money that their neighbor stores wouldn’t get and could still win a little customer loyalty since customers would be glad that store A offered better prices!

2.) If something was free, many customers figured, it must be lower quality, or spoiled. So they didn’t want to take free samples. Only the poorest of the poor took the free samples, and they couldn’t afford to purchase this expensive soap anyway, so the marketing tactic fell flat!

 Oh, China- such an Odd and wonderful Capitalistic place.

4 July, 2008 Posted by | Book Review, China Business, China Environment/Health, Isn't That Odd? | , , , , , , , , , , , | 1 Comment

The Visible Hand of China in Latin America

Off the Shelf:

The Visible Hand of China in Latin America (2007), edited by Javier Santiso of the OECD, is a great pamphlet with a lot of hard data about China’s role in that part of the world.

While much is often stated of China’s trade surplus with the rest of the world, China actually ran a trade deficit with Latin America for much of the 2000s. China is the continent’s third largest trading partner, after the United States.

Eduardo Lora opens the book with a discussion on whether Latin America should fear China. From the data he presents, the answer appears to be “not yet.” He points out several economic weaknesses faced by China.

1.) Allegedly, China still has poor corporate governance and inefficient state-owned companies. Lora notes that the amount of state-run underperforming assets has massively declined over the years, but he makes much of the nonperforming loans and debt that burdened Chinese banks until restructuring and bank sheet balancing resulted in NPLs at only 9.5% as of late 2006. Considering how flush with reserves, investment and other cash China currently is, and how their companies are modernizing business practices, I do not think corporate governance questions is necessarily a crippling problem for China to overcome with investments in Latin America… especially when compared to indigenous Latin American companies’ problems with inefficiency and corruption.

To back up his assertion, Lora goes on to argue (27) that the three largest firms in main economic sectors are state owned and that China is propping up 30-50% of those firms as “national champions” by giving them loads of state support so they will become globally competitive multinationals by 2010 (27). He argues this will lead to inefficiencies.

For comparison for how strong China’s companies are. As of 2007, China managed to get eight companies into Fortune 500’s World’s Most Admired Companies (The US had 135; Japan, 61; Britain, France, and Germany, 26 apiece) . A good amount of the top companies, however, are state owned. [I find it odd though that Huawei, Lenovo, Haier, Baidu, and Galanz were not listed as admired companies– a lot can be said for them as Donald Sull (2005) discussed in Made In China.] And indeed, being listed on Interbrand’s listing of Top Global Brands still escapes Chinese companies. As of 2007, China still had no companies on the list (Here’s the report). The Best China brands are examined here. An easy chart of them is here.

2.) Lora gets a bit technical by discussing how China’s financial system is still undeveloped (28-30). Keep in mind though that a lot he discusses as being undeveloped has evolved since his article was written (in late 2006). He complains how until 2006, foreigners could only buy nonvoting B-shares in several sectors (infrastructure, utilities, and finiancials). Now, he says foreigners can purchase A shares, but to ensure stability they are required to buy over 10% of shares and hold for longer than 3 years. Lora argues this lack of easy-foreign investment will eventually damage Chinese companies’ ability to efficiently expand. (Then again, China has a lot of money even within its country, so maybe it will escape these problems.)

3.) Allegedly 50% of GDP (31) is locked up in savings and investments. Lora states this could be good, but it prevents capital and labor from moving to the most efficient sectors.

4.) Lora points out that 40% of private entrepreneurs with companies that have incomes over $120,000 USD are CCP members (31). This could be a neutral comment, or it could imply possibility that corruption rather than efficiency might govern China’s future capital markets.

Lora then discusses weaknesses that are shared between the countries:

5.) Weak higher education. (More on that in a later article)

6.) Corruption/Weak Rule of Law

As of 2007 there were 122,000 Chinese lawyers at one per 10,650 people [In the US the ratio is 1 per 270]  (“Chinese Seek a Day in Court”, WSJ, July 1, A12) but most judges are retired from the PLA and lack legal expertise.

I don’t particularly believe Lora’s view that China’s companies are doomed to not meet expectations of world-dominance, since China is confronting many troubles he identifies. However, the points he raises have at times been overlooked by people willing to too-quickly crown China the next world hegemon.

Chapter 2, by Jorge Blázquez-Lidoy, Javier Rodríguez and Javier Santiso discuss whether China’s markets complement or threaten Latin America’s.

China’s export-mix competes the most with Thailand, Hungary, and Mexican goods (53). Costa Rica also, to a lesser degree, faces competition (54).

Brazil and China are highly complementary in trade (55).

In a chart on (54), Santiso excellently documents, through use of his own data tables, how Venezuela, Peru, Chile, Columbia and Argentina have very little competitive overlap with China.

Mexico and China share interest in IT, consumer electronics, clothes, and manufacturing. Transportation equipment is Mexico’s only advantage.

Latin America allegedly has too inefficient ports, so they cannot gain in transport cheapness vis-a-vis China in trade with other countries and regions. Customs are too slow, taking up to seven days on average to clear across the region. However, Latin America will still not be overly burdened by China competition since the two regions specialize in different products.

Latin America, for example, gains in trade to China by sending copper, oil, soybeans, and coffee.

According to the article, “in 2004, 1/2 of Chinese FDI went to Latin America, exceeding the 30 per cent that went to Asia (70).” I’m not sure that’s completely true and will have to consult my other sources, but it bears examining, because it’s quite interesting, given all the media attention lavished on China-Africa relations.

In essence, Santiso concludes that “China will benefit other emerging economies in [Latin America in] the long term.” “Latin America faces few if any short-term trade costs” (55), except in Mexico and Costa Rica, of course.

Chapters 3-5 were okay, but didn’t reveal too much of immediate interest. The pamphlet-book is a good read, and I’ll recommend it even though it is fast getting out of date. There simply aren’t that many good articles/books written on China-Latin America relations, but of the ones that do exist, Santiso’s is certainly a gem.

OTHER RESOURCES

* Mohan Malik, writing for PINR has a digestable version of Sino-Latin American Relations.

* There is a 2005 CRS Congressional report on China’s influence in Latin America.

* PBS had a radio program on China-Latin America ties. One Brazilian disagreed with Santiso’s statement that China benefitted the Brazilian economy. He called attention to textile competition.

2 July, 2008 Posted by | Book Review, China Business, China Economy, China Future | , , , , , | Leave a comment

China and South Africa

China’s total direct investment stock in Africa accounted for only 1% of global foreign direct investment in Africa, as of 2007 according to the US Department of State (Keep in mind though, as an earlier article stated, this number probably does not include Hong Kong assets invested in Africa- the US Government needs to get on the ball about that).  But by other measures, China-Africa cooperation is increasing exponentially.

Bilateral trade between China and Africa rose from $10 billion in 2000 to $70 billion in 2007, making China Africa’s second largest trading partner after the United States. This rise in influence has led to a spate of articles in recent years focusing on China’s interest in Africa. The topic is broad, and would require pages upon pages to properly evaluate.

However, one particularly intriguing aspect of Chinese involvement in Africa that can be focused on are their relations with South Africa- one of Africa’s leading states. In recent years China has benefitted from resource agreements with South Africa and the number of Chinese living in South Africa has risen almost exponentially. So here I examine to what extent China is benefitting from South Africa, and vice versa.

China-South Africa Trade Ties

“Trade between SA and China stood at $9.9bn last year [2006], which represented a 36% increase on the previous year,” according to a Chinese trade minister quoted on AllAfrica.com. In 2007, trade between the two rose to over $11.2 billion.

“South African imports of Chinese products [were] valued at $7.5 billion (R49.1 bn) and South Africa exports to China valued at $3.64 billion (R23.7 bn) in 2007,” according to the Jamestown Foundation.

South Africa “has become China’s main trading partner in Africa over the past few years — its trade with China accounts for more than 5% of total Sino-African trade — and ranked 21st on the list of the Asian giant’s trading partners worldwide.”

Chinese in South Africa

In June, South Africa put its Chinese citizens on an equal footing with its black and Indians by classifying Chinese as “black people,” according to the BBC. This classification allows “ethnic Chinese [to] benefit from government policies aimed at ending white domination in the private sector.” According to Sky Canaves of the WSJ China Journal, however, this will only directly benefit the 10,000-12,000 Chinese who were citizens of South Africa in 1994, and their descendants. If this is true, the declaration will not directly benefit the Chinese who are foreign investors in South Africa, merely the residents.

According to the Jamestown Foundation, South Africa has nearly 300,000 Chinese living there as of 2007. This implies an exceedingly huge post-1994 immigration of at least temporary Chinese to the country.

Chinese Investments in South Africa & South African Investments in China

China’s investments in South Africa are mainly centered around acquisition of resources. Even the ballyhooed purchase of a stake in a South African bank had some link to resource-driven investment.

In November 2007, ICBC Bank of China agreed to purchase a 20% stake in South Africa’s Standard Bank Group. The stake is valued at $5.6 billion and is one of the largest foreign acquisitions ever made by a Chinese company. As a result of the purchase, according to the Economist “ICBC will get access to Standard Bank’s extensive banking network in 18 countries across the continent—not to mention its expertise in commodities.”

According to Keith Campbell of Mining Weekly, “the Chinese companies involved in South African mining are Sinosteel, East Asia Metals Investment (a subsidiary of Sinosteel), Jiuquan Iron & Steel (Jisco), Minmetals and Zijin Mining.” In African nations, China only has more companies (6) active in the Congo. These companies in South Africa account for millions in investment.

According to the World Bank book Africa’s Silk Road, South Africa is the leading African exporter to China of Iron ore  (94.03%), Diamonds (99.27%), Iron or steel coils (100%), Platinum (100%), Aluminum and alloys (99.8%), Acrylic alcohols (100%), Ferro-alloys (99.99%), Copper ores and concentrates (40.67%– Tanzania accounts for 39.74%), and Aluminum and Aluminum alloys (100%). South Africa is second in provision of Copper and copper alloys at (29.25% to Zambia’s 48.36%).  (Percentages in the paragraph were listed as a percent of total African trade to China compared to other African countries’ trade between 2002-2004.)

In February, Sinosteel invested an additional $440 million in investment in its South African Joint venture, Sinosteel South Africa Chromium Industry Co., Ltd. (founded 1996) in which it owns a 60% equity stake.

Sinosteel also has a 50-50% joint venture with Samancor established in 2006 and called Tubaste Chrome. At the time, the JV was valued at $230-million. The JV produces 280,000 to 300,000 tons of chrome a year.

Sinosteel’s subsidiary “East Asia Metals owns 60% of Asa Metals, the other 40% being held by Limpopo Economic Development Enterprise.”

China additionally entered into an agreement with Sasol, the world’s largest maker of coal to oil, to build a coal-to-oil plant. It should be completed by 2014 and produce 80,000 barrels a day.

The investments of the other companies are more thoroughly discussed HERE. In general, it appears that Chinese investments into South Africa are accelerating, but still represent only a small part of China’s foreign investment, and a small percentage South Africa’s foreign market. (40% of trade and billions in investment is accounted for by the EU-which, by use of a crude currency calculation came out to $38 billion US in two-way trade; calculated from a stated $300 billion Rand). This would make China’s two-way trade account for just under 10% of total SA foreign trade.

In 2006, South African companies made over $200 million in investments in China, according to the Jamestown FoundationAccording to China Daily, the amount was $700 million. Leading investor companies included SAB-Miller, Sasol, Anglo-American, and Kumba Resources.

Diplomacy

Both China and South Africa have urged restraint in involvement in Zimbabwe’s electoral chaos, and in dealing with Sudan. This conjunction of aligned views on the international system and beliefs about the supremacy of state sovereignty can bring the two countries closer together. Chris Alden, writing for the Jamestown Foundation, discussed this fact.

Challenges

* The high rate of crime in South Africa can deter many Chinese investors, as both the Jamestown Foundation and a Chinese official, Zhou Yabin, can attest. People’s Daily had a February 2006 article on the rising crime against Chinese nationals.

Crime in South Africa took at least 14 Chinese lives in 2006. In December 2006, overseas Chinese “established a special fund designed to protect their security in the country… The fund will be used to award police, detectives and informers, who make contributions in solving cases.”

* The Jamestown Foundation also believes that if Jacob Zuma eventually succeeds President Thabo Mbeki in South Africa, that China relations might degrade. Zuma is said to listen closely to labor unions which tend to oppose immigrant China labor and China-run businesses. That being said, Zuma is reaching out to China, in June visiting the country. And Zuma has previous experience with China, co-chairing at least one bilateral commission with China’s top leaders in 2004. Concerning Zuma’s apparent interest in China, and China’s willingness to at times cater to the South Africans (Such as when China imposed voluntary textile export restraints) it appears that unless there is massive anti-Chinese backlash among South Africa’s citizenry, Chinese investments will continue to benefit SA, and SA resources will continue to benefit China.

* Other challenges are a possible trade protectionist backlash that could manifest against the Chinese. Planning for a South Africa-China Free-Trade pact agreement might fall through, or indeed it could become too successful and China-South Africa trade might become too unbalanced and threaten South Africa’s indigenous manufacturing industries, textiles, and communications technology.

Conclusion

It appears China-South Africa ties can continue to accelerate, especially given Beijing’s penchant for investing abroad in resources. But it bears remembering that they will have to compete with the US and the EU, which is currently a larger player in South Africa’s economic policy.

* China Daily’s timeline of China-South Africa relations 1998-2003.

* Chris Alden’s excellent article on China-South Africa relations.

1 July, 2008 Posted by | China and Africa, China Diplomacy | , , , , , , , , , , | 1 Comment