China Comment

Energy, Environment, and Economy

Citizen Influence on Mega-Projects

China added 330 gigawatts of electricity from 2005-2008. Some commentators state that China will need to add the equivalent of Britain’s electrical capacity every year for the next several years to keep up with current demands (Britain’s total capacity is 83.6 GW; the US added 105 GW from 2005-07).

China’s government sees energy security as a vital part of their country’s stability, and citizen challenges to already-planned projects that involve power plants, refineries, or hydroelectric dams meet stiff resistance from the Government. Despite this resistance, citizen-input has been present in several cases.

Chinese citizens have used public participation through the involvement of legislators and some alternative dispute resolution techniques in order to influence development of several power projects. Whether ordinary citizens can influence power projects’ development seems tied to local official involvement, face,  political power, and potentially the province’s economic wealth.

How Public Influence Works

Public involvement in processes is often expressed through informing legislators who take issues to higher levels and act as “champions” for citizens.

It is rare in China for a citizen to affect power projects’ development by sitting down with officials and a neutral third party agency to determine what will happen. Instead, government officials trade power and influence to decide how power projects will be developed and where they will be placed. Ordinary citizens, however, get involved in the process by informing legislators about issues and hope they take concerns to higher levels and act as “champions” for the citizens.

Citizens Without Power (But About To Gain Power Generation)?

Chinese citizens may protest some power projects, but outright protests tend not to gain positive results.

Citizens protested the building of dams near Pubugou in 2004. These dam projects would result in many citizens in losing their land. Pubugou is located in a poor part of Sichuan where the average per capita income was 12,930 RMB in 2007. Rural residents’ net income per capita was 4,120 RMB. (average per capita income in Beijing was 21,864 RMB in 2006).

“More than 100,000 people protested over several days. . . until riot police crushed the demonstration,” and several people were killed at Pubugou over the development of the planned hydroelectric dam. (Jim Yardley, NYT, 2).

Prior to the rioting, citizens communicated with government officials and lodged complaints when the country decided to construct dams that would flood and destroy land.  However, the national need for development preempted those people’s attempts to preserve the status quo, as is detailed in Andrew Mertha’s book China’s Water Warriors.

Citizens With Power (Moving Power Generation)

A different situation prevailed in Guangdong province, where citizens are richer.

Sinopec and Kuwait National Petroleum Company agreed in 2007 to construct the Nansha oil refinery between Hong Kong (xianggang) and Guangzhou in order to ease “the tension of Guangdong’s petroleum supply, [promote] . . . energy security and . . . social stability.”(Yang).

The refinery was estimated to cost around $5 billion to complete, making the project China’s largest joint venture.1 The project would process 15 million tonnes of crude oil a year2 and produce 800,000 tons of ethylene.3 The Nansha Refinery would produce refined crude oil and ethylene.4

Following the project’s approval by the NDRC in 2007, residents inside eight square km of land were removed to make room for the project. However, the project still needed to complete an Environmental Impact Assessment (EIA) and then a half-month public comment period.

An EIA was made, but there was concern that the EIA would not be made public. Groups from Hong Kong lawmakers, to bloggers, to Greenpeace called for the EIA to be made public. The Government pushed back, telling media not to run “comprehensive coverage” of the EIA, but that they would in due time make the report public. (Chloe Lai & Shi Jiangtao, Nansha Refinery ‘Likely to Move’: Delta Petrochemical Plant Could Shift to Western Guangdong After Opposition From HK, Macau, S. China Morn. Post, Mar. 21, 2009.)

Although some citizens hoped the EIA would come out in March; as late as May the EIA was not released. (Wang).

Ultimately, disputes surrounding the Nansha Refinery situation were resolved through general administrative processes and the interference of several political movers-and-shakers in Guangdong Province.

The public push-back against the Nansha refinery found champions in government agencies to support their ideas. There was institutionalized lobbying on the part of 14 Guangdong provincial People’s Congress deputies, but there were no publicized mass protests or marches.

Guangzhou’s Special Champions

The government eventually decided to move the refinery. Government champions were noted for succeeding but little attention was paid to the citizens who initially suggested changes. Lobbying by powerful representatives in Pearl River Delta cities was likely vital to reconsideration of the refinery’s location. (See Chloe Lai & Shi Jiangtao, Nansha Refinery ‘Likely to Move’ Delta Petrochemical Plant Could Shift to Western Guangdong After Opposition From HK, Macau, S. China Morn. Post, Mar. 21, 2009).

Perhaps as a result of public cries for the Environmental Impact Assessment (EIA) report’s release, the report was issued in the same year it was made. This is quite a feat considering that historically, EIA reports have been significantly delayed or not released.

The political power of Guangzhou’s local representatives, when coupled with Hong Kong residents’ affluence and the important central policy of lowering pollution in the Pearl River Delta (PRD) region helped encourage higher officials to sit down with representatives and ultimately decide to to relocate the refinery further west along the coast, to Zhanjiang.

In the wake of the EIA statement, Zhanjiang, a place that only has a yearly GDP per capita of “17,973 yuan (HK$20,400), nearly 20,000 yuan lower than Guangdong’s average”, became the new planned home for the refinery. (Ivan Zhai, Guangdong to Help its Backward West Prosper: Region is Earmarked for Heavy Industries. S. China Morn. Post, Sept. 30, 2009.)

Citizen Involvement and Power Projects in Conclusion

The Nansha refinery case demonstrates that power project permitting can be influenced and local concerns can be addressed when local officials express distaste for nationally approved policies. Local officials’ may have considerable power even when state-owned corporations such as Sinopec are involved in the siting process for large projects.

However, the Nansha Refinery situation could be an isolated case where politics and or money influenced the State’s willingness to conduct, and then release an EIA assessment and relocation, as well as the State’s openness to dialogue.

Footnotes

1 Chloe Lai & Shi Jiangtao, Nansha Refinery ‘Likely to Move’: Delta Petrochemical Plant Could Shift to
Western Guangdong After Opposition From HK, Macau
, S. China Morn. Post, Mar. 21, 2009.

2 Zeng, supra note 212.

3 Chloe Lai, Key Report on Nansha Refinery Under Wraps, S. China Morn. Post, Mar. 20, 2009.

4Winnie Zhu, China Approves $5 Billion Sinopec-Kuwait Oil Project, Bloomberg, Dec. 4, 2007, available at http://www.bloomberg.com/apps/news?sid=aP3B6lsQZ3QA&pid=20601080 (last visited Nov. 1, 2009).

1 April, 2010 Posted by | China Democratization, China Energy | , , , , , , , | Leave a comment

“Rule by Law” Reform

Stability, modernization, and success as a globalized 21st Century state are goals for which the Chinese government is reaching.

However, a culture of weak intellectual property rights and “Rule by Law” rather than the “Rule of Law” present unique challenges. In China, modernization means more choices for the common people. As choices become attainable, common people often clash with established authority.

Inspired by the Shanghai police officer stabbing case, I examine approaches China might take to deal with lawlessness and to craft “pressure valves” to permit its system to adapt and to address emerging challenges. (Note: The NYT had an excellent series on “Rule by Law.”)

The Pressure Builds

When people feel powerless, they can take out their aggression against public authority figures. In Shanghai, one man sought “revenge after officers from the station interrogated him last year for riding an unlicensed bicycle.” He “sued the officers who had interrogated him for psychological damage, but the claim was rejected,” and ultimately he attacked a police station and stabbed six officers to death.  

What drove Mr. Yang to such an act? People wonder if “injustices carried out by the Shanghai police” led to his brazen action. Some postulated that his genitals had been damaged by the police (AP), others assumed less or more vicious forms of punishment. Others argue Yang was just insane.

Option 1: Ignoring the Situation

What is important, however, is not the status of Yang’s guilt or innocence, but the reaction of Southern Weekend, a Chinese newspaper, and those of a number of Chinese. When the trial was held behind closed doors, some people clamoured for it to be heard in the light of day so people could know the trial was conducted fairly. The case concluded behind closed doors despite their protests, and Yang was sentenced to death. He is currently appealing the decision.

Closed-door trials can work, but if people believe the government is abusing power, then support for the government can decrease. For a system to work “above the heads” of the common people, the common people must either trust the government is morally superior, intellectually superior, or both. And with rising education and wealth spreading across China, more and more people are beginning to doubt whether or not the Communist Party really has all of China’s “best and brightest.” Still, in a 2008 Pew Global Attitudes Survey, 89% of Chinese were polled as satisfied with their government. Interestingly, only 34% were satisfied with their own life. There is possibility that as more Chinese become middle class, they will begin to demand the government “help” them more so they can achieve happiness. Comparatively, the US numbers were 51% and 65% [h/t Mei-Zhong Guanxi]).

This article by Prof. Carl Minzer suggests an attempted governmental cover-up of social unrest.

Option 2: Expanding Rights

Discontent directed against closed trials, presumed abuse-of-authority and lack of disclosure is bubbling stronger and stronger with nearly 87,000 “mass incident” protests in 2006, even though by all measures, Chinese citizens’ legal rights are expanding. “[T]his summer, criminal defense lawyers got the right to meet with their clients without official permission, request evidence from prosecutors and call witnesses in court” (AP). And that is in addition to China’s Labor Contract Law (June 2008) (Also see HERE), and its Property Law (2007), both of which expanded citizens’ rights and remedies.

These laws have spurred citizens to litigate. China Law Blog noted that in the wake of the Labor Contract Law; “[s]ince last year, labor disputes have increased in Beijing’s Chaoyang District People’s Court by 106%, by 231% in Nanjing’s Qinhuai District People’s Court, 126% in Shenzhen, 132% in Dongguan and 92% in Guangzhou.”

Option 3: Stop-Gap Patches

Weng’an County’s riots, proximately precipitated by a girl’s drowning, provide another example of China struggling to deal with accountability in the midst of a system that regrettably allows a good deal of opportunity for corruption and abuse-of-power.

Often, China’s central authorities deal with injustices and abuse-of-power by applying stop-gap fixes, like dismissing the Weng’an Party commissar and police chief. But finding ringleaders or scapegoats will only succeed in quashing corruption and abuse if the Chinese system is not plagued by systemic problems.

It appears, based on the NYT articles and prior unrest, that China’s “rule by law” may result in significant systemic problems. Still, the Chinese could prove Western analysts incorrect; their problem may not be systemic- even though 87,000 mass incidents in 2006 seem to imply the problem is widespread and beyond possibility of being addressed by stop-gap fixes.

Conclusion

Societies in socioeconomic and legal flux are presented with unique problems. In the 18th Century, the French system exploded into rioting and unrest. Louis XVI and his regime were overthrown, and in their wake, there was chaos. In 20th Century Russia, the Tsar was brought down, likewise in flames, even though he, like Louis XVI, was by some measures “liberalizing” the country in steps. In contrast, China’s path to modernity could be more like that taken by the United States in the early 20th Century.

In the United States, the late 19th and early 20th Century saw the expansion of rights for millions of previously oppressed groups that culminated with the 1960s Civil Rights Movement. A system of “rule of law” and an understanding by citizens, judges, lawyers, and juries of what that means took nearly 200 years to develop (and is still developing) in the United States.

Over the course of a century, America confronted turmoil with first the Progressive Movement, and later the Civil Rights Movement. In China, it can be argued that a “rights reform” movement is already underway. China often likes to describe how it is “different” and “unique” (Fool’s Mountain has an opinion on this phenomena.), so perhaps it will not suffer the social upheaval of 1960s-America or Industrial Age Europe.

Regardless of any perceived differences, China will still need to confront problems similar to those suffered by these countries as the Chinese people gain wealth, leisure time, become more involved in the market, gain greater mobility, and discover political power.

Hukou registration saw reform in 2003 after public outcry reacted to an embarassing situation where a legal city resident was beaten to death by police officers during questioning. At least lip-service to further reform continues (March 4, 2008). [The Chinese Law and Politics Blog, by Prof. Carl Minzer has a discussion on difficulties surrounding hukou reform.]

To respond to people’s demands for more attention and more autonomy, the government will choose whether to expand rule of law; encourage people to accept the status quo (which appears to be increasingly less likely an option); or close off influences that encourage the common Chinese 老百姓 to demand greater power.

Lawlessness might result from a society that fails to create a pressure-release valve for pent-up emotions. Rule of Law would allow China to follow the path taken by Europe and the United States. It will be interesting to see which choice China takes.

Appendix

* Or is this really a dualistic “either/or” choice of increasing lawlessness/tension or ultimate reform toward “rule of law” in China? Will China turn insular again if it must confront chaos? I welcome your opinions on the subject in the Comments.

* EastSouthNorthWest almost always has the most in-depth stories regarding mass incidents in China, if you’re interested in doing further research on that issue.

* Previously, in Rule of Law, I discussed why establishing a legal culture in China is key to ensuring “human rights” and to empowering individuals.

17 September, 2008 Posted by | China Law | , , , , | 3 Comments

The Other Challenges

Last week, I discussed John Pomfret’s Washington Post article that described challenges China faces to becoming a superpower.

What Is A Superpower?

In comments on my site, and on the China Law Blog, Here and Here, several readers indicated it would be useful to define “superpower” when discussing China’s future propensity for achieving “superpower” status.

The debate about what defines a “superpower”, whether it is a high ranking on the Human Development index, whether it is equivalent or not to “hegemon”, whether it is “force projection”, or merely “military” or “economic” force, is quite expansive.

For the purposes of my post, I’ll take a simplified position. From what I gather, when the hoi polloi (common people… the laobaixing 老百姓) discuss “superpower” or what makes a nation great, they mean an entity that can project its force overwhelmingly and has the ability to influence geopolitical events on a worldwide scale. Other countries need to plan around this country’s policies. In that sense, the United States and the USSR were “superpowers”; to some degree, the economic Japanese juggernaut was a superpower in the late 1980s and 1990s. Increasingly, China is becoming an economic superpower.

While I acknowledge this definition can be debated, I hope to keep the definition simple so I can move into the point of the post.

Another issue perhaps worthy of consideration is that my article and Pomfret’s did not set a timetable on when China might achieve said “superpower” status. I assume Pomfret was taking Keidel’s statement of China surpassing the US in total GDP around 2030 as the date most people assume for China’s arrival at superpower status.

In listing possible challenges facing China, I’ve tried to base statements on the time horizon of 2020-2025, shortly after the sixth generation of PRC leaders comes to power. One inspirational source was the roundtable discussion of Cheng Li, Pieter Bottelier, Fenggang Yang, and David Lampton in “China in the Year 2020.” 

China’s Challenges

To continue its rise to an economic and soft power status that can “shake the world” by 2025, China’s pressing challenges include a need to ensure energy supplies, tame inflation, confront environmental degredation, deal with dissent/protests/petitioning by instituting a rule of law and providing social services.

Below, I briefly cover these ideas. Eventually, I hope to deal with these challenges at length– a lot of good articles and books have been written on all of them and they are all large issues and deserve more treatment.

Energy Supply Maintenance

China will require 11.6 to 12.3 million barrels of oil a day, up from 6.9 million/day in 2005, and around 7.5 million/day in 2007, and allegedly 8 million/day in 2008 (according to IEA-2004 and DOE-2005 estimates, respectively (Kreft, 2) and more recent energy statistics.) Nearly 75% of this capacity will have to be imported since China can only produce around 3.7 million/day domestically.

China could also experience a deficit of 620-770Mt/a of coal in 2020 alone, according to He Youguo in a 2003 report by China Coal Industry Development Research and Consulting Co. Ltd. (7).

If current trends continue, Herculean efforts at ensuring an uninterrupted energy supply will need to be undergone to ensure that the lights stay on at China’s factories.

More on China Energy:  Nuclear Power, Wind Power, Natural Gas.

Taming Inflation

In 1989, part of the impetus for the protests was runaway inflation, rising unemployment and lowering standards of living. And as Pieter Botellier also argued; “the Communists’ defeat of the Nationalists in the Chinese civil war of 1945-1949 was greatly assisted by the run-away inflation of those years, which sharply reduced the popularity of Chiang Kai-shek’s Republic of China (ROC) government. “

China’s economic system today, however, is more sophisticated. Still, this is the highest inflation we’ve seen in China since the mid 1990s, with over 20% price hikes on food and double-digit growth in gas prices.

Currently, policy priorities appear to be toward promotion of economic growth rather than inflation containment. Arguably, maintaining growth could contribute more toward long-term stability. Still, if growth only goes to the middle and upper classes and the poor bear the brunt of inflationary increases, and their lives stop becoming noticably better- and their standard of living stagnates… there may be problems. Every year, China’s ranking on the GINI coefficient, which measures wealth distribution, becomes increasingly unequal. Currently, China’s GINI hovers between .37 and .46 (depending on measurement), either slightly more equal than the US’ GINI rating, or much less equal.  

Environmental Challenges

China faces severe environmental challenges. Pomfret, Economy, and other experts have discussed this in detail. For China to continue 10%+ yearly GDP growth, it will have to clean up its polluting industries. According to China’s Green GDP, in 2004, pollution cost China at least 3% potential growth. The Green GDP numbers for 2005 were never released, and arguably China’s pollution increases every year.

Energy efficiency per unit of GDP improved 3.66% in 2007, and arguably should improve this year as energy-intensive factories are shuttered. But, partially due to rising car ownership, pollution expanded significantly in the 21st Century. China hopes to reduce energy consumption per unit of GDP 20% by 2010, but it is a little behind its goal of yearly reduction percentages. Small coal mines and plants have been shut to ensure compliance, but to avoid power disruptions, many mines have recently been reopened.

Stability and the Rule of Law

China could arrest dissidents en masse, growing more repressive, but this will increase tensions in its relations to the outside world, and might stifle ideas and innovation.

However, as China’s economic influence becomes felt around the world, it is possible that it might set up its own international framework in competition to the West’s APEC, WTO, and IMF. (See the last section of my article on Maslow’s Hierarchy and Rule of Law- Not Human Rights for more info.)

With sovereign wealth holdings of over $1.7 trillion, China has extensive ability to affect the world… Unless of course, that wealth becomes tied down in foreign non-performing assets, declining currencies, and a need to invest in overpriced resource markets.

China is a giant in terms of wealth, so it can take quite a beating in economic losses from its funds, but poorly performing assets can lead to public opinion backlashes.

Without strong development of a domestic consumer economy, China will have difficulty in existing isolated from international economic forces.

Providing Social Services

Pomfret identified China’s demographics, its aging, and its peak of a working age population around 2015 as being a large problem. I rebutted that. However, with China’s GINI coefficient rising (at increases of 6%, the fastest in the world for the past decade), and with a degrading environment, and 350 million smokers, perhaps 1/3 of the world’s total smokers, health care costs will rise and create public tensions if the government fails to aid sick people.

Fear of these tensions could be a reason the Party prevents cross-provincial NGOs from organizing, and is cracking down on Sichuan post-earthquake support organizations and people who threaten to challenge the Government’s handling of the incident.*

Crafting an efficient social safety net, or preventing unrest in response to lack of said net, will be an important challenge for future Chinese administrators.

* Note: I realize this particular person, Huang Qi, has a history of challenging the state which might lead it to be more repressive. However, the point still stands; the state has harassed and/or  paid off families not to complain about allegedly faulty construction that may have caused more schools to collapse than should have if codes were followed.

Conclusion

To solve its many challenges, China could turn inward and become repressive, or turn outward and allow development of civil society, or it could mix the practices. While some commentators might paint China’s future as that of a “negative” (closed-society) or a “positive” (democratic society), both I and the commentators in “China in the Year 2020” tend to see opportunities from many points along the choice continuum.

China could “succeed” in achieving superpower status even in spite of democratization. Or it could fail to achieve said status even despite democratization and liberalization. 

Once again, I welcome your comments regarding challenges China’s development could confront in the coming 20 years.

* On August 25, 2008, The Wall Street Journal presented its own ideas about which challenges China faces. (Inequality, Resources, Population/Aging).

5 August, 2008 Posted by | China Future, China Stability | , , , , , , , , | 5 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

Consequences of China’s Oil Price Hike

China has finally raised the prices on its oil. It came a bit sooner than I expected, but as I stated in “China’s Oil Price Freeze,” the raise was a lot lower than needs to be done (China’s prices are still 1/4 cheaper than gas in the US and 1/3 cheaper per liter than oil in the UK). The United States’ prices on oil have risen over 50% since December 2007 (based on calculations of average gas prices of 2.71 in 2007, according to the EIA);

China only raised their oil prices 16 to 18%. (In November, they raised prices 11% to confront $80/barrel oil;  China’s oil companies appear to still have a shortfall of $21 dollars per barrel from current prices of nearly $130 a barrel.)

Rising oil prices will affect Chinese stability, inflation, and government openness.

STABILITY

According to Xinhua, the Chinese State news agency: “more subsidies would be offered to farmers, public transport, low-income families and taxi drivers to cushion the crunch of price rises.” According to FT, “the finance ministry said the targeted subsidies would amount to Rmb19.8bn ($2.9bn, €1.8bn, £1.5bn).”

Given  China’s huge trade surplus, the burden of cost can be arguably borne by the government (And the amount of subsidies direct to the people currently is far less than the amount of subsidies ($50 billion plus) the Chinese government would have needed to give to state oil corporations forced to do business at under-market prices. Apparently,  Sinopec was losing money on imports when “the international price exceeded $78 a barrel.”)

The problem with the Chinese government pumping a lot of money into the hands of its poor peasants, however, is that it can lead to inflation. In a similar situation in Indonesia “the [Indonesian] government forecasts inflation will rise to 12% in June — up from 8.96% in April — as the fuel-price increase feeds into the broader economy.”

INFLATION

Remember, in 1989, part of the impetus for the massive protests was runaway inflation, rising unemployment and lowering standards of living. And as Pieter Botellier of the Jamestown Foundation also argued; “the Communists’ defeat of the Nationalists in the Chinese civil war of 1945-1949 was greatly assisted by the run-away inflation of those years, which sharply reduced the popularity of Chiang Kai-shek’s Republic of China (ROC) government. ”

This is not to say China’s government is in any danger of losing its grip on power– but rising inflation might cause its leaders to look to past lessons of history and react skittishly to the consequences of unrestrained inflation. According to Prof. Victor Shih of Northwestern, this is the highest inflation we’ve seen in China since the mid 1990s. Also according to Shih, there is a current factional dispute in China’s leadership about whether to continue to tighten the monentary supply, or to reevaluate the RMB upward to correct the domestic inflation problem. It’s a complicated situation, and I recommend reading his article for more details.

OPENNESS

In light of increased tensions as a result of upwardly spiraling inflation and energy costs; President Hu Jintao might be encouraged to crack down more on free press and coverage of unrest that will likely emerge as people are able to afford less and less.

The Chinese belief has long been that silencing opposition makes it go away. We’ll see what happens over the coming months.

RESULTS

Due to transportation costs, Chinese food prices will increase even more than the 22% percent they have already appreciated since last year. (In all, according to the BBC, China’s inflation as of April was up 8.5% on the year.) Rising inflation could lead to big problems and the end of 4 kuai (.50 cent) meals that sustain many low-paid migrant workers who labor in the cities and send remittances to their farming families.

Already, there has been a slight decrease in the amount of migrant workers in China’s coastal cities (regrettably, I can’t currently find the Journal article I saw the numbers for this cited in- I will post it as soon as I find it), driving up prices for construction and leading to more inflation. The eventual return of these workers to their villages and second-tier cities might be good for the economy in the long-term as some population stress is removed; but in the short term, their return with big city views, and big city demands for quality of life, these returnees could have big cosmopolitan demands for their local governments- demands that might not be met and could cause social unrest.

IN SUMMARY:

ONE Beijing still needs to subsidize a gap of around $20 in international purchases of oil. Its importing companies are still losing cash, but ultimately China can weather slightly cheaper oil prices than the rest of the world since “average Chinese [domestic] production costs were about $US20 ($21)”. It’s the internationally-bought oil gap that China has to pay for.

TWO China also has to manage the social unrest that will originate due to the rising oil prices. Subsidies to the right populations should take a lot of the bite out of that unrest. Prof. Victor Shih of Northwestern speculates a little on what needs to be done to prop up the Chinese middle and lower classes after gas prices rise. 

THREE There may be citizen-government clashes over the increased oil prices, much as there were in March 2007 during the Yongzhou Mass Incident,  sparked over rising public transportation costs. This could be why public transport costs are being kept steady. (According to the FT, “CSFB, the investment bank, estimates that an 8 per cent increase in fares would add 2.3 percentage points to inflation. “)

FOUR If there are clashes, the government will likely clamp down, and try to keep the media from reporting on negative developments since China does not want to look bad in the year of its Olympics (as noted in my earlier article.) How successful they are remains to be determined.

FIVE And certainly, other reprecussions will be demonstrated, from migrant worker movements, to wage price increases, to possible capital flight from China. Remember, it’s China… Anything can happen.

—-

Also of note: An article on hidden cost of fuel subsidies explains why China needed to reevaluate its oil prices.

And Forbes discusses in more detail the weird situation where one of China’s national oil companies, Sinopec suffered under the system and required billions in state subsidies to prop up its foreign oil acquisitions.

http://www.eeo.com.cn/ens//Industry/2008/06/25/104320.html Also had an interesting article on the possible reprecussions of the price rise on China’s national oil companies.

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

China’s Oil Price Freeze

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

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

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

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

1.) China is not backward

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

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

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

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

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

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

3.) China wants its economy to keep growing.

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

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

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

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

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

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

BUT WHY WOULD RAISING GAS PRICES HURT THIS?

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

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

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

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

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