China’s commodity demand has risen sharply in the past few months. Its stock market is up and China seems to have dragged commodity prices out of the cellar. However, China seems to be gambling with its stimulus growth. Its demand boom seems to be artificially backed more by government lending rather than sound economics.
Professor Michael Pettis’ article at the RGE EconoMonitor inspired this examination of China’s commodity demand, its existing liquidity, its borrowing spree, and a possible aftermath in the wake of these radical changes.
(Conversion note: ~6.7 RMB/Yuan to a dollar)
1. China’s Commodity Boom
* Oil is up above $65 dollars, driven by hopes of expanding demand in emerging markets.
* “In May, China produced 46.5 million tonnes of crude steel, the highest rate of production since June 2008.” (Hindu Business Line).
* “Chinese customs statistics show record copper imports. For the first five months of 2009, Chinese total copper imports hit 1.76 mt compared with 1.15 mt for the same period in 2008. However, imports are likely to slow after June as demand enters a seasonally weak period. So, until there is clear evidence of a slowdown in copper demand, prices could stay firm.” (Hindu Business Line).
China is demanding a lot of commodities, and is apparently producing a lot of manufactured goods. But it does not appear to be selling a lot of goods abroad, or at home– which implies that China is creating a pseudo-bubble market– and that should be a reason for concern.
(For more sources and citations; See my comments and sources on China’s declining exports and shrinking tax base in section 2b below)
2. Worries About Artificial Growth
Artificial growth, fueling a pseudo-economy and backed by shady investments in real estate and over-extension of debt, contributed to the economy’s crash in America. It is possible that China’s 4 trillion yuan (~520 billion USD) stimulus package may, likewise, create weak institutions and tendencies across its country even as China’s rising commodity orders help drag the rest of the world back into GDP growth.
Including local government debt, according to the Wall Street Journal, China’s stimulus debt is not at the officially claimed sub-20% of GDP level. Instead, China’s debt is nearly 40% of GDP. (Still, this compares favorably with the US’ over 60% of government-held debt as a percentage of GDP– but there is one difference between the two places; China is a developing country, whereas the US is a developed country-Economists will argue whether that means China’s debt is better or worse than America’s). (Wall Street Journal).
2a. Government Borrowing
Some echoes of the United States’ spendthrift ways can be seen Chinese Cities’ spending on bond issuances and construction projects. Caijing has many good articles on this topic (See Appendix below).
As much as two-thirds of Beijing’s 4 trillion yuan stimulus program will be spent by local governments, primarily financed by state-owned banks.
The extent of borrowing in China is massive, even just by cities and provincial governments. “About 2.8 billion yuan in local government bonds were issued across the province last year. But so far this year, municipal bond issues have totaled 8.5 billion yuan. And 7.9 billion yuan in borrowing is pending NDRC approval… Maturity periods range from seven to 10 years. ” (Yu Ning, Zhang Man and Fang Huilei; Caijing)
The borrowing may lead to difficulties since China’s province and township-backed companies are competing with each other for State-backed money and for customers.
The borrowing in China also seems a bit reminiscent of the real-estate market troubles in the United States:
“According to Huang Huidong, the general manager of Liuan City Investment Co., the city’s government has a 1.5 billion yuan budget gap. The company borrowed 1.24 billion yuan from banks and issued 1.5 billion yuan in bonds. Income from land leasing seems to be the only way to make ends meet.
“We can make about 3.6 billion yuan by leasing land to balance the 2.7 billion yuan in debt,” Huang said.
However, Huang admitted leasing will be difficult if the real estate market sours. “If land is not leased, and there are no government subsidies, city investment companies will go bankrupt.”
Liuan collateralized its bonds with 28 properties valued at an estimated 4 billion yuan. But Caijing learned from the local land bureau that the Liuan government earned only 800 million yuan from land leases last year, and the city has had no major real estate sales so far this year. Flats in six buildings near Liuan’s best school are currently for sale at 3,200 yuan per square meter – cheap by Beijing standards, but the most expensive housing in Liuan.” (Yu Ning, Zhang Man and Fang Huilei; Caijing)
Chinese local governments increasingly lack land to collateralize against for loans, an assistant director at CASS (China Academy of Social Sciences), warned. “Some local governments will virtually go bankrupt,” Professor He told BusinessDay. “Previously, local governments got all their money from selling land. This is not sustainable. Some areas have already sold quotas from the next 30 years.”
If China’s stimulus money was mostly being corralled toward infrastructure and long-term investments that can unequivocally help the local governments that are spending the disbursements, the long-term aftermath of China’s bond issuances might be more positive.
However, it appears that the majority of China’s stimulus money is going toward manufacturing- which leads to jockeying amongst the provinces and townships to prove the best rate and the best deals for eventual export or domestic manufacturing plants.(And the manufacturing is generally the dirty low-end kind rather than the high-end kind: See: Tom Miller, Financial Times on Dongguan)
This competition between local governments, financed through state-owned banks, could have grave consequences as at least some provinces will bet poorly and their SOE, TVE, or local government-loan backed factories will go out of business. Then, the provinces may be at a loss to pay their debts. (To say nothing of the possible crowding out of wholly private non-Town and Village Enterprise-owned factories… such as they exist).[Admittedly, the current situation of SOE/TVE/Local Government participation rates is worth a book– and the paragraph above is only a broad overview. Wu Jinglian wrote some comprehensive books on China’s state-business interaction.]
Due to declining demand (and perhaps rising competition??) “China’s consumer price index fell 1.4% in May from a year earlier, the fourth straight month of drops,” (Terence Poon ; WSJ) Increased competition could cause prices in China to continue to decline; still, economists almost paradoxically fear eventual inflation (due to extensive government borrowing) – which should offset the deflation.
Ultimately, the real story and worry here is neither inflation nor deflation, but of Chinese local governments’ backed-enterprises potentially competing each other out of business.
As a Caijing article reported: “Where is the money going? Unlike an economic development blueprint sketched out by the central government that favors infrastructure projects and low-emissions, high-tech industry, the province’s local governments have shown that they still prefer the old standbys — manufacturing.”
2b. Industry Borrowing
“A National Statistics Bureau survey of 22 regions found industrial profits totaled only 323 billion yuan during the first quarter, down 32 percent from a year earlier. That means annual profits for all industries will amount to only about 1.6 trillion yuan this year.
Outstanding loans currently stand at 35 trillion yuan. Assuming companies have kept a moderate debt ratio averaging less than 50 percent, their capital investments now exceed 35 trillion yuan. And profits of 1.6 trillion yuan versus 35 trillion in capital investment means an annual return rate of only 4.57 percent, below the weighted loan interest rate of 4.76 percent we saw in March.” (Lu Lei, Caijing)
“China’s relatively new corporate-bond market, where many local governments also are raising funds, provides a bit more clarity. By the end of May, issues of local corporate bonds — virtually all of which are indirectly backed by local governments — totaled 102.53 billion yuan, already more than the 68.39 billion yuan sold in all of 2008.” (Wall Street Journal).
Although a lot of money is being borrowed, it seems to be borrowed more to prop-up flailing businesses rather than to reflect businesses catering to increased Chinese or foreign demand for services. Overall exports were down 22% year-on-year for April, ” “Electricity generation is down y/y, even though industrial value added it up” (Setser) and this year China’s tax base is smaller. “Looking at tax revenues, local governments nationwide were unable to collect as much in the first quarter as in the same period 2008. In fact, tax receipts fell 1.4 percent, in sharp contrast to the 34.7 percent increase posted a year earlier.”
3. How Long Can the Borrowing Be Sustained?
Economists will debate the complicated question of how long Chinese local governments’ borrowing can be sustained and how long the worldwide economic downturn will continue. Regrettably, those questions are a bit too rich to effectively treat here at this time.
4. What Is Left In The Aftermath of China’s Spending Spree?
It seems that without worldwide economic recovery and a rebound in the demand for Chinese manufactured goods; China’s cycle of bubble-borrowing may lead to inflation and instability, or defaults that may bring its financial system into danger.
However, China’s financial system has the strong backing of the government. (And China’s Investment fund and foreign reserves continue to grow.)
“At the end of March, the State Administration of Foreign Exchange (SAFE)—part of the People’s Bank of China (PBoC)—managed close to $2.1 trillion: $1.95 trillion in formal reserves and $184 billion in “other foreign assets.” China’s state banks and the China Investment Corporation (CIC), China’s sovereign wealth fund, together manage another $200 billion or so. This puts China’s total holdings of foreign assets at $2.3 trillion. That is over 50 percent of China’s gross domestic product (GDP), or roughly $2,000 per Chinese inhabitant.” (Brad Setser; CFR)
Here, although I very much believe in China’s long term economic success, I argue for some sobriety in assessing the extent of the current “Chinese miracle” of recovery.
It is nice to see China take some lead in stimulating a worldwide economic recovery. But it makes one wonder, is China’s debt-fueled growth rising demand for commodities like oil causing an artificial climb in prices that will ironically hurt demand for Chinese exports?
Could the Chinese be doing a disservice to themselves by embarking on a massive borrowing spree? China has benefited over the past 20 years from a high savings rate (30-40% per person), that the country may only now be cashing in so that the country may maintain stability and over 6 percent yearly growth needed to employ the majority of their college graduates. So China may be able to afford its spending spree- it is certainly better positioned to afford a spree than is debt-heavy Japan, for example.
Interestingly, one Financial Times commentator argues that at least in Guangdong, the employment situation seems to be holding steady:
“the local government estimates that of the 10m migrant workers who went home for the lunar New Year, 9.5m have returned to the province. Of these, about 5 per cent (or 460,000 people) had not found jobs… in the context of a province with a total population of 110m, half a million migrants is a sizeable [sic] but manageable army of unemployed.”
However there is a real fear by the Chinese government that a sizable amount of unemployed could lead to real troubles of unrest. And of course, the numbers could be exaggeratedly small– especially given China’s real decline in Q1 tax receipts and in electricity demand (Setser) .
Although China is out borrowing and stimulating the world economy, just as some in the West have called for China to do, there may be a worrisome double-effect of the infusion of so much government-backed “play cash” into the market.
If one believes in the power of the market to correct, then there may be a correction. Without demand for its exports, Chinese demand for commodities will slacken and commodity prices will decline. But at what price for China?
As Professor Michael Pettis stated, perhaps best, this appears to be an opportunity for China to shift its economy’s composition; and the gamble it is taking with its stimulus requires either a rebound in foreign export demand or for an increase in domestic demand.
Although “China will be the first one out of the crisis because it is least likely to be affected by it,… China [still]may be the last one to say goodbye to the recession, because it has to make “difficult adjustments” to transform its economy from exports-driven to domestic consumption-oriented.” (Caijing)
Cities Rush into Debt … Caijing
China’s Stock Market Could See a Huge Drop… MarketWatch
(Interesting Argument: “The answer, I suspect, is that China – unlike many other countries that relied heavily on exports for growth – actually did have an underlying dynamic of domestic demand growth… It is now clear that the majority of China’s stimulus has been off-budget: the huge increase in lending by state owned banks mattered far more than the change in the budget of the central government.”)
From February 26th through the 27th I attended a symposium at the University of Texas in Austin, TX on China’s Emergence: Effects on Trade, Investment, and Regulatory Law.
Here are some thoughts on the more notable issues raised at the symposium:
Trade Imbalances, Subsidies, and the Market Distortion of Prices
Scott McBride of the US Dept. of Commerce, speaking as a private citizen, discussed countervaling duties, world poverty, and market distortions (my terms, not his) that contribute to inflate the real prices of goods. This particular point was only a small portion of his talk on the “US Government’s Recent Responses to China’s Enforcement Problems and Countervailable Programs.”
McBride claimed that one reason for American subsidization of farmers in the cotton industry is in order to combat cheap Chinese cotton. However, although US subsidies are aimed at protecting American farmers from subsidized Chinese cotton imports, the subsidies also hurt the four major C-4 African cotton manufacturing countries (Mali, Benin, Chad, Burkina Faso). These African countries lack the resources to subsidize their crops, or to increase their crops’ efficiency. Although African cotton would be relatively competitive in a trade-barrier-less world, it cannot hope to contend with cotton-subsidizing American policies, and a China that supports its cotton industry and has a relatively weak currency. He went on to state that the US’s position is generally that it will not drop its subsidies until China drops its support for its domestic cotton industry.
Extra research by China Comment revealed that the United States is also bargaining for enhanced market access to developing countries’ markets before it will significantly drop its cotton subsidies (AllAfrica, October 2008).
According to a source cited in a CRS report (Congressional Research Services), “cotton producers in developing countries (not just Africa) face annual losses of about $9.5 billion as a result of subsidies… the United States provides the largest amount of subsidies to its cotton producers, which it estimated at $2.3 billion in 2001/2002. Other countries’ subsidies in 2001/02 included China ($1.2 billion), European Union (EU) countries Greece and Spain ($716 million), Turkey ($59 million), Brazil ($50 million), and Egypt ($29 million).” (CRS). “Washington has paid out $2 billion (1 billion pounds) to $4 billion a year in subsidies in recent years to the 25,000 U.S. cotton farmers who export 80 percent of their output and account for 40 percent of cotton traded internationally around the world.” (Reuters; July 24, 2008 / See Also The Guardian; July 2003)
(1) American subsidy policies that are aimed to combat unfair trade advantages gained by one country often have a double-effect that causes repercussions in (arguably innocent) third-party countries. (This is something to keep in mind when well-meaning NGOs suggest sending aid to Africa. Sometimes, the better policy may be to drop trade barriers first. Still, the African countries often wish to keep their own restrictive trade barriers.)
(2) The more America or China subsidizes their agricultural industries, the more other countries begin to subsidize their agricultural industries. These subsidy policies lead to a market-distorting situation similar to that suffered by the debt-fueled American mortgage-industry boom. Ultimately, the policy benefits no one except subsidy-receiving farmers. Meanwhile, national debts rise to unsustainable proportions.
In the interests of increased efficiency, China Comment supports trade liberalization and progress such as that imagined by the WTO’s heretofore disappointing Doha round. (A full discussion of exactly what details of trade liberalization would be fairest is far beyond the scope of this article. Even full-time economists and government negotiators have difficulty getting their minds around all the nuances of the Doha round in order to craft a compromise. Perhaps that is why Doha has been so much of a disappointment.)
(Part II will include commentary on presentations from Raj Bhala (Law Professor at the University of Kansas), and John Greenwald (International Trade Lawyer).
Nuances and questions abound in discussion of China’s economy and where it is headed. Is it due for a fall? Will exports decline? What about currency reevaluation? What about inflation?
Here, I collect and comment on some recent numbers and articles dealing with China’s economic situation:
“China’s budget surplus for 2008, to July 31, was more than $200 billion, up by 33 per cent year on year in the first half” (Callick, The Australian).
Consumer Spending / Domestic Consumption
“Retail sales, the main measure of Chinese consumer spending, grew by 23.2% year on year in August, slightly less than July’s 23.3% but substantially better than last August’s 17.1%” (Pettis).
Retail sales rose to $128.1 billion in August (Oliver). Interestingly, the Olympics did not appear to provide much of a “bump” in August retail sales.
This leads me to conclude that although industrial construction might rise post-Olympics, consumer spending will likely actually decrease for September as “belts tighten” and reasons for splurging diminish. Although more employees will be “back on the job,” they will not necessarily have extra discretionary income to spend. By October or November, the “Olympic bump” of disruption should cease affecting China’s consumer spending numbers, and it is wholly possible that they will trend downward.
In its Asian Development Outlook 2008 Update, the Asian Development Bank “anticipated China’s gross domestic product (GDP) would grow 10 percent this year, consistent with its April forecast. However, it lowered China’s 2009 predicted growth rate from 9.8 to 9.5 percent… In the first half of this year, the nation’s GDP expanded 10.4 percent, 1.8 percentage points slower than the same period last year” (China Daily).
“Official loan growth, if adjusted to strip out the effects of inflation, expanded a modest 4% in August, according to Standard Chartered estimates” (Oliver).
“Effective Tuesday [September 16], the People’s Bank of China lowered by 0.27 percent, to 7.2 percent, the regulated benchmark rate that commercial banks may charge for one-year loans to business borrowers with strong credit histories… The central bank also lowered by a full percentage point the share of assets that small and medium-size banks must deposit as reserves with the central bank, effective Sept. 25. The so-called reserve requirement ratio is an important tool in China for limiting how much money can be lent by commercial banks” (New York Times).
“Export growth also slowed, to 21.1% year on year in August from 26.9% in July. That left the trade surplus for August at a record $28.7 billion – a number which will help ensure that China’s money supply will continue expanding sharply in August” (Pettis).
“If the “Chinese content” of China’s goods export sector is around 50% (Vox), goods exports account for between 17 and 18% of China’s GDP. Exports of goods and services account for about 12% of US GDP” (Setser.)
Setser’s numbers imply China is susceptible to a global downturn and decline in its export sector. To offset a decline in national growth, domestic spending will need to rise significantly if export demand suddenly drops off. Between rising oil prices, costs of doing business in China, and a developing worldwide economic malaise, it appears China will see some significant declines in export growth from September through October.
FDI Into China
“Foreign direct investment into China rose 41.6 percent in the first eight months of the year compared with the same period last year, Beijing said.
“Overseas companies invested 67.7 billion dollars in the period from January to August, the commerce ministry said in a brief statement on its website” (AFP).
This is an intriguing trend, when contrasted against a couple of alarmist mainstream media articles discussing business flight from China to elsewhere. (At the time of those discussions, China Law Blog, myself, and Business Week among others, notably demurred.)
“Imports grew last month at a 23.1% in August, down sharply from 33.7% in July” (Pettis).
Post-Olympics, Import growth is likely to resume as demand for internationally-acquired resources used in construction will increase.
“Industrial output grew by 12.8% year on year in August, versus 14.7% in July, and 17.5% last August. There was weakness in almost every sector, with iron and automobile production actually contracting versus one year ago” (Pettis).
“China’s industrial production expanded at its weakest pace in six years in August, reflecting factory shutdowns for the Olympics and cooling overseas demand for consumer goods … Merrill Lynch estimates the factory shutdowns, combined weaker demand for steel, cement other materials resulting from the construction freeze, knocked 2.5 percentage points off headline growth. [They] expect a post-Olympic rebound in industrial production growth [based] on both pent-up demand and the post-quake reconstruction.” (Oliver, MarketWatch).
“CPI inflation for August, was surprisingly good, coming in at 4.9% year on year, which is well below July’s 6.3% and also well below market expectations of around 5.5%. The decline in CPI inflation was driven mostly by declining prices in pork and vegetable oil… All the decline in CPI occurred in the food sector – non food inflation was steady at 2.1%.” (Pettis).
“The [Asian Development Bank] bank also lifts its inflation projection for next year to 5.5 percent from [an April estimate of] 5 percent… citing possible price hikes of fuel and electricity, which may lead to higher production costs being passed onto consumers” (China Daily).
“Commenting on the moves, Zhuang Jian, senior economist at the ADB, said the rate cuts indicate the government’s tightening monetary policy is beginning to relax. He also expected more loosening policies to come either later this year or in 2009 in order to ensure the sustainable growth of the economy” (China Daily).
RMB Reevaluation and China’s Foreign Investments
“From June 2007 to June 2008, the foreign assets of China’s central bank increased by $681b” (Setser).
“If China’s total foreign holdings rise to $3 trillion by the end of 2009—an increase that is consistent with China’s current pace of foreign asset accumulation—a 33 percent RMB appreciation against the dollar and euro would produce a $1 trillion financial loss” (Setser, 30).
Value-Added To Exports & Results for Currency Reevaluation
According to a new way of evaluating value-added to products; “the share of foreign value added in Chinese manufactured exports is at about 50%… which is much lower than most other countries. This implies that a given exchange rate appreciation is likely to have a smaller effect on China’s trade surplus than for other countries. The domestic content share is particularly low in sectors that are likely to be labelled as sophisticated, such as electronic devices and telecommunication equipments. This means the competitive pressure China’s exports place on skilled workers in high-income countries is smaller than suggested by a simple-minded look at the raw trade data.” (Vox) (These assertions are well worth a detailed examination at a later time.)
Are Asian Central Banks Still Behind the Inflation Curve?
Arpitha Bykere and Mikka Pineda, Asia EconoMonitor
An Overview of Asian Monetary Policy, with tables, charts, and analysis.
CPI inflation was unexpectedly low, the trade surplus unexpectedly high
Michael Pettis, China Financial Marekts
Something is odd regarding China’s recent inflation numbers, Professor Michael Pettis (of Beida) argues.
How much of Chinese exports is really made in China?
Robert B. Koopman, Zhi Wang, Shang-Jin Wei
A new formula calculates the value-added content of China’s export-manufacturing. It finds the domestic value-added content to be 50%.
Fire and Ice
Michael Pettis, China Financial Markets
China’s falling stock market, declining increases in industrial production, and future economic challenges.
As Economy Slows, China Eases Monetary Policy
Keith Bradsher, The New York Times
An overview of China’s latest monetary policy developments.
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).
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)
Off the Shelf:
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.
* 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.
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 , 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 Foundation. According to China Daily, the amount was $700 million. Leading investor companies included SAB-Miller, Sasol, Anglo-American, and Kumba Resources.
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.
* 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.
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.
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.