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| Sun, 05-02-2004 - 10:54am |
Let Us Pray
By THOMAS L. FRIEDMAN
Published: May 2, 2004
Here's what I learned in Tokyo: If you're the leader of Japan, America, Australia, Taiwan, Malaysia, Russia, Thailand, Indonesia, Singapore, the Philippines or the European Union and you're not going to bed each night saying the following prayer for China, then you're not paying attention:
"Dear Heavenly Father, please keep the leader of China, President Hu Jintao, healthy and on an even keel. Please see to it that he moves steadily and carefully toward restructuring the Chinese banking system and ridding it of its huge overhang of bad loans and corruption, before there is a real meltdown that would be felt around the world. Give him the wisdom to cool the overheated Chinese economy without creating a recession that would prompt China to stop importing like crazy and start just exporting like crazy. And Father, forgive us for all the bad words we used in recent years to describe China's leaders — terms like `Butchers of Beijing.' We did not mean it. We meant to say `Bankers of Beijing,' because their economy is now fueling growth all over Asia, bolstering Japan and sucking up imports from everywhere. May China's leaders live to 120, and may they enjoy 9 percent G.D.P. growth every year of their lives. Thank you, Father. Amen."
The most striking thing about being in Asia today is hearing how much more important China's growth engine has become for companies all across the region — and well beyond it. When Chinese authorities told banks last week to cut back their wild lending, commodity prices and stock markets tumbled all over the world. News that China is having regular blackouts because it can't buy enough crude oil is helping push up gasoline prices the world over.
While three years ago the Bush team came to office growling about no longer coddling China — the way those "wimpy" Clintonites did — that talk has disappeared from the Bush vocabulary. It's not just business as usual now. It's business only.
To some degree the world is getting hooked on China — its cheap labor, its voracious appetite for commodities and capital (over $50 billion in foreign direct investment last year) and its emerging middle class. The more hooked we become, the less the world can tolerate any sort of prolonged instability there. If the China bubble bursts, it will be the mother of all burst bubbles. Which is why we need to pray that China's leaders will have the skill to cool things down, just enough but not too much, without some wheels falling off.
"A lot of the world's stability or instability is resting on the leadership in Beijing — there is no question about that," argues Richard Koo, chief economist for Nomura Research Institute. But, he insists, "Chinese leaders understand what world they are living in. They have a general equilibrium view of the world — that what they do affects us all and then comes back to affect them."
That seems true. But one of the ways that China has grown so rapidly in the last decade has been by decentralizing authority to regions and letting governors or mayors attract whatever investment they can. It is not clear anymore how much the center can slow things down.
And considering the huge amounts of foreign investment that have flowed into China in such a short time, "it's very hard to think that they could have invested that much money efficiently," remarked Robert Feldman, managing director in Tokyo for Morgan Stanley. "So the senior leadership is scared, because if they have a hard landing from bad loans you have a regime problem. when they tried to slow the economy, they got real push back from the regions, who said, `You in Beijing have all that infrastructure. Why shouldn't we have a new bridge or road?' "
Given how opaque China's decision-making is, it's hard to predict how Chinese leaders will balance their obligation to behave in a way that promotes global equilibrium with their need to create millions of jobs each year in order to stay in power.
One can only say three things: 1. They've done a pretty good job so far. 2. The job gets harder every day. 3. No one will be immune to the fallout. The relationship of the world to China right now reminds me of that old banker's rule: If a client owes you $1,000, that's his problem. If a client owes you $1 million, that's your problem. China's stability is our problem.
Heavenly Father . . .

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"The problem this time, however, is China's prowess on the world market. For example, steel analysts estimate that if China's internal steel demand falls to that of four years ago, there will be enough excess capacity on the market to account for all of current international steel trade. This could cause a glut so rich that prices would plummet below costs and destroy manufacturers overseas."
When China's economy sneezes ...
By Macabe Keliher
HONG KONG - Not since the great tea surpluses of the late 19th century has China been able to command so much attention from the global economy for its faults. Just as too many leaves in Fujian in the 1880s sent world prices into a spiral, Chinese Premier Wen Jiabao shook the region's - and possibly the world's - financial markets to the core last week when he emphasized the government's determination to curb lending and said China would "take effective and very forceful measures" to reign in a booming and overheating economy.
Fearing a slowdown in a country that could arguably be driving much of the regional economy, investors sent Asia's financial markets and currencies into a tailspin. Taiwan - one of the most heavily China-leveraged markets - shed almost 8 percent after Wen's announcement last week, and Singapore was close behind, losing 5.75 percent. Currencies came crashing down too: the Korean won dropped 1.5 percent against the US dollar, and the New Taiwan dollar was down by almost a percentage point.
Even the US markets suffered heavy losses. The Dow fell 2.4 percent in the second half of last week, and the Standard and Poor's index fell 2.7 percent. Although US macroeconomic indicators were not glowing - lower-than-expected GDP (gross domestic product) growth, anticipated inflation, and expected interest-rate hikes - pundits have fingered China as a plausible cause.
Excess capacity flooding the world market could have disastrous effects on international trade prices. Further, in the past year China has taken in some 40-50 percent of Asia's exports, accounting for all of Taiwan's and the Philippine's export growth last year and more than 50 percent each of Japan's, Malaysia's, South Korea's and Australia's. Such intake has driven more than 7 percent of GDP growth in Taiwan, Malaysia and Singapore, 5.8 percent in South Korea and 4 percent in Thailand, according to Union Bank of Switzerland (UBS) figures (see Replacing US in Asian export market, February 11).
Should China sneeze, investors worry, the region might get very sick. "China has become very visible," says Chi Lo, a China strategist and consultant based in Hong Kong. "It has created a fear among investors; an expectation even if the actual material impact is not that great."
Applying the brakes
The Chinese government has moved cool down its red-hot economy. A 43 percent increase in investment in the first quarter this year, which helped fuel a near 10 percent GDP growth, led the People's Bank of China to raise the capital-adequacy ratio for banks a half a percentage point in April to 7.5 percent - the third time in six months.
Also, the China Banking Regulatory Commission announced this past weekend that commercial lenders have stopped the approval of new middle- and long-term loans. Last Friday the commission ordered the commercial banks to pull back loans extended to rush investment and copycat construction.
Furthermore, in March the government made a list of construction and building industries for which lending for new projects would be prohibited. Beijing also increased down payments for investments in steel manufacturing from 25 percent to 40 percent, and from 20 percent to 35 percent for cement, aluminum and real-estate investments.
Overheated
China's economy officially grew nearly 10 percent last year, although many foreign investment banks estimate the actual growth rate at 2 or 3 percentage points higher. Although the government took some measures late last year and early this year to cool the economy down, for all intents and purposes they failed. In the first quarter of 2004, China's economy officially grew 9.7 percent, and the Ministry of Commerce said first-half growth would certainly exceed 9 percent.
Investment growth this year has also skyrocketed: 43 percent year-on-year, its highest growth levels in recent times, and almost three times the 25-year average of 15 percent. In January and February, growth in 16 of 30 industrial sectors exceeded 100 percent. Investment growth in iron and steel, construction materials, and cement was as high as 170 percent.
But most troubling is the amount of "hot money" flowing into the country. On speculation that certain sectors such as real estate will boom, and that the yuan will devalue, foreign investors have pumped cash into China. In the first quarter of this year, the country got US$30.9 billion in outside foreign exchange, for an increase of 25.6 percent over last year. "If the surging inflows of international hot money continue, China's money supply and outstanding credit will keep expanding, resulting in the excess growth in a handful of industries, causing further economic bubbles and increasing financial risks," says Tung Chen-yuan, a political economist at the Institute for International Relations, Taipei.
The steel industry, for example, will have the capacity to produce at least 330 million tons of steel by next year, an amount the country will not consume until 2010.
Good timing?
Economists expect further curbs on lending for the overheated sectors, and possibly an interest-rate hike of a half a percentage point in the second half. Unlike the early 1990s when the government halted all new loans and recalled outstanding ones, authorities have chosen to be selective here and go after the culprit industries, the aim of which authorities hope will achieve a different result than the deflation that occurred then.
The problem this time, however, is China's prowess on the world market. For example, steel analysts estimate that if China's internal steel demand falls to that of four years ago, there will be enough excess capacity on the market to account for all of current international steel trade. This could cause a glut so rich that prices would plummet below costs and destroy manufacturers overseas.
But more so, if China stops importing at the same rate that it has been, will the region stumble and fall? Probably not. Analysts estimate that it will probably shave less than a half a percentage point off regional GDP growth. But tell that to regional investors.
Macabe Keliher is an independent historian and journalist, and a regular contributor to Asia Times Online. His website is www.macabe.net.
http://www.atimes.com/atimes/China/FE04Ad05.html
Applying brakes to China's red-hot economy
By Li YongYan
BEIJING - Rampant, unfettered and unplanned economic growth, complete with dazzling, sizzling statistics, is not a good thing. Take China.
Two months ago, the sizzling growth in China's economy - a 9.1 percent increase in gross domestic product (GDP) over the previous year - had Beijing worried, rightly, rather than jubilant, about the feverish temperature and underlying health of a questionably sustainable and balanced economy. What the central government did at the time was order a halt in fresh investments in such key industries as cement, steel and aluminum.
Two months have passed since then. Is the country responsive to Beijing's imperial decree? Of course not. The opposite is happening, in a big way. Instead of cooling down in an orderly fashion, China's GDP grew 9.7 percent in the first quarter of 2004, and it shows no sign of leveling off and subsiding any time soon. It is driven again by continued investment in the very industries that China wants to cool. Worry is turning into anger and the central government can take this flagrant defiance no longer.
Last week, the State Council forcibly shut down a giant steel project in the coast province of Jiangsu and disciplined a dozen obdurate local administrative and banking officials in the process.
The steel plant offender, a private entrepreneur who is already under arrest for alleged bribery, had allegedly persuaded local governments and banks to provide the necessary assistance - land allocation, forced eviction of the inhabitants and billions of yuan in loans. He wanted and got virtually everything needed to begin construction on a monumental scale, despite a warning in February from the central government against precisely this type of investment. As the saying goes, kill a chicken to frighten a monkey. The offender happened to walk into the coop when the government, furious over its inability to command anyone's attention, found it convenient to kill a chicken in order to scare the misbehaving monkeys.
Intuitively, a hot economy that keeps rolling is a good thing. It generates wealth, increases tax revenues and creates jobs. But all that glitters is not gold. There is a cost to everything. And cost can and often does exceed benefits. When that happens, a good thing starts to turn bad. China's booming economy is structurally flawed in that it is heavily dependent on natural resources. While a software programmer can sit down at a personal computer and churn out codes that sell for a small fortune - all at the cost of his brain cells, a few kilowatts of electricity and several java lattes - a steel plant consumes mountains of iron ore, coal, coke and vast joules of electricity. The plant also eliminates arable and farming land and pollutes land and waters. A full one-third of the world’s total steel output is now consumed in China, where demand reached 260 million tons last year, 2.5 times more than the entire steel production in the United States.
That, and a host of other resource-guzzlers and heavy polluters, are stretching and undermining China's fragile infrastructure in ways that are disquieting, to say the least. Power consumption grew 16.4 percent in the first quarter of this year, causing country-wide shortages that resulted in both industrial and residential blackouts. Demand for rail cars, the backbone of transport in a highway-challenged China, exploded 75 percent to 280,000 cars per day, far outstripping the supply of 100,000 presently available. Millions of migrant workers who flock to cities in search of jobs, literally must squeeze into packed passenger cars that don't even have standing room. During the peak travel season, like the Spring Festival, many travelers must be on their feet, if not their toes, for hours on end, and many trips are 10 hours or longer.
Economic growing pains mean real suffering, death
If living in darkness or traveling in no-style amounts to growing pains, then the suffering will probably become unbearable. China's labor-intensive, manufacturing-centric development is fraught with the accompanying industrial hazards that kill, literally. And this refers not only to the coal mine explosions and accidents that one hears of frequently. Toxic chemical leaks and fires are far more lethal, and very frequent, as evidenced by recent deaths in Sichuan Province and elsewhere.
Economically, the frothy building up of China's infrastructure and the expansion of its manufacturing capacity will eventually hurt the economy without clearheaded checks and balances. For one thing, bad debts will accrue, undermining the government's master plan to overhaul its seriously ill banking system, laden with bad debts from inefficient state-owned enterprises. Because all banks are state-owned, the government has an obligation to oversee a gradual reduction of dead assets on banks' balance sheets that are the result of previous great leaps forward.
Environmental concerns must also be addressed sooner rather later as more and more rivers have either dried up or turned black because of uncontrolled waste discharge. An increasing number of cities already face acute shortages of water, safe or otherwise. Inflation is also a monster that has to be watched closely - the rising consumer price index is sending the current interest rates, under 2 percent per annum, into negative territory, further fueling the borrowing spree by the industrial sector.
In addition, Beijing is also fighting on the political front, too. Outlying provinces are growing increasingly centrifugal - choosing to carry out only those central directives that they consider beneficial but to ignore those that are harmful to their own local interests. Of course, nobody will stand out and openly defy the central authority, but over the years local officials have perfected this game to an art that they call "skirting the edge" - doing things that are borderline legitimate, or illegal, depending on the perspective. For example, the officials in the above ill-considered steel case approved the project, with its land grab, loans and all, in incremental allotments, each installment being exactly under the Beijing-set limits on the size of the loans and land conversion. When this shenanigan was completed, the scheming officials and the entrepreneur patched up all the allotments and had themselves a nice piece of land totaling 400 hectares, far exceeding the size approved by the provincial government authority.
This central vs local war of smarts has been going on for the past two thousand years and will continue to unfold. Beijing should be able to enforce its policies through both administrative power and economic tools. For now, besides having a few heads on a platter, one thing Beijing's economists can do is jack up the interest rates, making the cost of money more expensive and thus giving eager industrialists a pause in their calculation of their next great leap.
Li YongYan is a Beijing-based analyst of Chinese business.
http://www.atimes.com/atimes/China/FE04Ad02.html
This is not as disastrous in China as it would be in the US because of the Communist government. Globalization is causing trouble all over the world; but trouble is the flip side of opportunity. Asia is adjusting to the inflow of technology and financing, within ten years it will be be a major market. Just saw a headline today, "Can Thailand really achieve Detroit of Asia status." I find this area most exciting and rue the fact that I don't speak any of the languages.
I've heard that the amount of new construction in Bejing is simply unbelievable, not even comperable to the rebuilding of Germany after WWII. My impression was that the great majority of China's new found economic growth was limited to the capital. Does anyone know?
Also, last week I read a statistic that 55% of the world's concrete went to China last year. I'm sure a good portion of it, and the steele, is going into the construction of the 3 Gorges Dam, and the construction of the trans Asian highway, but evenso, the numbers are quite impressive.
Renee
They already are. I can't remember if it was last year, this year or next year, but one of them, China will or has exceeded the number of new cars sold in the US.
Renee
Commentary, Franz Schurmann,
Pacific News Service, May 05, 2004
Editor's Note: OPEC, long one of the main Anglo-American control mechanisms over global oil, may be in danger, the writer says. Recent suicide bombings in Saudi Arabia, combined with China's own efforts to secure a future supply of fossil fuels, threaten not only the old oil monopoly, but also the dollar's position as king of currencies.
The suicide-bombings in the Saudi Red Sea port of Yanbu were not just messages to the Americans and the Saudi monarchy. The attacks could mean the beginning of the end for one of the main Anglo-American control mechanisms over global oil -- the Organization of Petroleum Exporting Countries, or OPEC.
Saudi Interior Minister Prince Nayef bin Abdul-Aziz says he thinks Al Qaeda was behind the Yanbu attacks. If that is correct, then the attacks, by targeting oil workers, might be Al Qaeda's declaration of war on the Anglo-American oil and liquefied natural gas (LNG) industry.
Discovered by former Secretary of State Henry Kissinger in 1970 as an obscure international office in Vienna, OPEC was quickly promoted by Kissinger and President Nixon to one of the most powerful agencies in the world. It helped that Saudi Arabia and Iran, both top-grade American allies, became the two pillars of OPEC. But even after the Iranian Islamic revolution the two countries still worked together to maintain Anglo-American domination of world oil and natural gas.
It now looks like OPEC is in trouble. One cause is Al Qaeda. Al Qaeda wants to overthrow the Saudi monarchy, and its chances have improved since the suicide-bombings in Yanbu. With not only families fleeing Saudi Arabia but non-Saudi technicians as well, a meltdown in the industry is not inconceivable.
Another cause for OPEC's possible demise is China. China is desperately looking for oil and LNG to keep even its pared-down boom going. China seems to be undergoing a capitalist "great leap forward" in which everything it touches makes money. But without fossil fuels, a large part of China's industry will shut down, and a large segment of the population will live without electricity.
The Anglo-Americans have refused membership in their exclusive club to Russia and France. China has no interest in joining the club, but has the clout and the money to roil the oil and LNG markets. In fact, they have already started doing this. China is regarded as the biggest industrial "workshop" in the world. If all China-made products were suddenly to disappear, the elegant gentlemen of the oil and gas club would take their place in the soup kitchen lines.
Italian oil news analyst Mauricio D'Orlando reported last January that Shell Oil and Chevron Texaco reneged on a liquefied natural gas (LNG) deal destined for the booming South China markets. Why the two companies reneged is not clear. But the news laid bare China's energy vulnerability. China now has bigger U.S. dollar reserves than even Japan. But even its immense piles of dollars couldn't help it sway the two big Anglo-American oil companies.
But the Chinese leaders found another way of getting more natural gas. They empowered a state-run energy company, Zhuhai Zhenrong, to sign a $20 billion dollar deal to purchase from Iran 110 million tons of LNG over a 25-year period, starting in 2008. On the surface, it seems that China only trumped Shell Oil and Chevron Texaco. But the deal also gave a boost to the dollar.
With Japan no longer propping up the dollar in currency markets, China has become the U.S. dollar's biggest prop. So when Chinese Prime Minister Wen Jiabao announced that he was going to dampen his country's red-hot economic boom through manipulating interest rates, Japan's all-mighty yen plunged on currency markets. The no longer all-mighty dollar remained stationary because Wen's predecessors had pegged the RMB (a.k.a. yuan) to the dollar.
A big question then follows: will the head (the dollar) still wag the tail (the RMB)? Or could it be that the RMB is morphing into a head and the dollar into a tail?
The answer to the first question is yes, the dollar still wags the RMB. The reason for this is that, aside from big barter transactions, all fossil fuels are denominated in U.S. dollars only. Three-fourths of all fossil fuel fields or off-shore derricks are, directly or indirectly, possessed by Anglo-American companies.
However, Fed chairman Alan Greenspan is deeply worried about oil and LNG prices. Recently he warned that they are going to go up and up. If that happens, the global economy could disintegrate. When, during the October 1973 Yom Kippur War, the Saudis suddenly slapped an oil boycott on the world, Kissinger warned that this could mean the end of Western civilization. And, in fact, the 1974-75 recession was the worst since the Great Depression of the 1930s.
"Western civilization" has many facets, but its current foundation is oil and LNG pipelines that securely pump fossil fuels over long distances. And the Anglo-Americans have control over most of the globe's pipelines.
There is a possibility that China will play a bigger role in Iraq, after June 30 or even before. The Chinese leaders know that, at this point of time, America needs China more than China needs America. If, on June 30, America turns Iraqi sovereignty over to a U.N.-legitimated government, then China -- in return for construction and security services, and even possibly troop deployments -- might be at the head of the line for Iraqi fossil fuels.
But if Saudi Arabia undergoes a revolution like Iran's, the century-old Anglo-American monopoly on oil will crumble. The dollar will then become just another currency and Americans will have to work harder to defend its value.
China's RMB is already showing more and more strength and freely circulates in an increasing number of countries. China already props up the dollar. Maybe at some point soon people will say, "It looks like the RMB is the head and the dollar is the tail."
PNS contributor Franz Schurmann (fschurmann@pacificnews.org) is emeritus professor of history and sociology at U.C. Berkeley and the author of numerous books.
http://news.pacificnews.org/news/view_article.html?article_id=9c2512a389a78ffc2b9c9b773e64b44a
When the Bank of China Wakes.
http://www.techcentralstation.com/051404A.html
Judging by recent global market jitters, Napoleon might very well have been referring to the Bank of China and the global economy when he uttered his famous warning some two hundred years ago that "when China woke the world would shudder." However, it is unlikely that even Napoleon would have anticipated the complexity of the choices now facing China's policymakers as they try to engineer a soft landing for their economy. Nor would he likely have foreseen how vital a Chinese soft landing would be for the continued health of the global economy.<?xml:namespace prefix = o />
The importance of China to the global economy derives not so much from the size of its economy but from the fact that China has continued to grow at a remarkable 9 percent annual rate at a time that the rest of the world half-slumbered. As a result, while China accounts for only 4 percent of world GDP, it has accounted for as much as 15 percent of the world's GDP growth and almost 20 percent of the growth in world exports and imports.
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