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from Expert Zone:

The rare earths distraction

(The views expressed in this column are the author's own and do not represent those of Reuters)

The U.S., EU and Japan are suing China in the World Trade Organisation (WTO), calling Chinese export quotas on rare earth elements an illegal trade practice.

The U.S. will most likely win. But the suit is peripheral to real issues and was brought because the U.S. is unable or unwilling to address the true problems in Sino-American economic relations.

Of the many questionable practices in Chinese trade policy, the rare earths quota is a strange one to pick on. Last year, the quota was barely half-filled; higher prices and expanding supply elsewhere caused demand for Chinese rare earths to plummet.

Last week, the largest American rare earths company, Molycorp, swung a deal that will lead to Molycorp exporting to China. The fear that China would deny rare earths to the world never made much sense and makes even less now.

Still, there is in fact something to see here, folks. What the U.S. really wants to complain about is anti-competitive Chinese behaviour in rare earths both in the global market and in China itself. Globally, China became the dominant producer by driving everyone out of business with low prices.

After doing so, Beijing decided that competition was “disorderly” and suddenly discovered environmental harm in rare earth mining. It is now attempting to force consolidation of its rare earth industry. The export quota is a minor symptom of a major illness -- China likes rare earth competition only for other countries’ firms.

from Expert Zone:

U.S. debt and China

(The views expressed in this column are the author's own and do not represent those of Reuters)

The U.S. Department of the Treasury has released an initial estimate of foreign holdings of U.S. securities, including Treasury bonds, as of June 30, 2011. This estimate serves as a correction of monthly figures Treasury publishes, known as the Major Foreign Holders series.

There are three implications of the new data from Treasury:

China continued direct purchases of large quantities of Treasury bonds from June 2010 to June 2011.

The monthly media reporting of the Major Foreign Holders series continues to be misleading and should be largely ignored. True Chinese holdings of Treasuries and other American assets continued to be difficult to pin down.

The Major Foreign Holders series has frequently shown China reducing its stash of directly held Treasury bonds from one month to the next. But year after year, this turns out to be wrong. In fact, China again increased its direct holdings of Treasuries.

Major Foreign Holders previously showed Chinese holdings of American Treasury bonds as $1.17 trillion in June 2011. The new, more accurate series shows the figure as $1.30 trillion. This correction implies China purchased $194 billion in Treasuries on a net basis between June 2010 and June 2011.

from Expert Zone:

Market reform in China: Should we believe it?

(The views expressed in this column are the author's own and do not represent those of Reuters)

The first step in solving a problem is admitting it. For years, the Chinese government and their defenders overseas insisted first that China was still reforming, then that state-led economic development was superior to market-led development. Evidence to the contrary came as news to many.

There has always been a reform camp in China; it just happened to lose every major political battle in the past nine years. Now the reform camp is trying again.

They're not going to succeed this year or next, but they at least have a chance -- for the first time in a decade.

The current Chinese government, led by Communist Party General Secretary Hu Jintao, took office in late 2002. At that time, China had been pursuing genuine market reform for 23 years, was growing at a sustainable 8-9 percent, and had a balanced economy.

At some disputable point under Hu’s regime, but no later than 2006, the market was shunted aside in favour of the state. Chinese growth actually became a bit more rapid but also wildly imbalanced and, with the financial crisis, dependent on unsustainable levels of stimulus.

from Expert Zone:

The limits of the Pakistan-China alliance

(The views expressed in this column are the authors' own and do not represent those of Reuters)

By Lisa Curtis and Derek Scissors

In the wake of the U.S. raid on Osama bin Laden’s compound last May and deteriorating relations between Islamabad and Washington, Pakistani leaders have sought to play up their country’s relations with China, touting Beijing as an alternative partner to Washington. However, China’s concerns about the future stability and development of Pakistan will limit the extent to which China will bail Pakistan out of its current economic difficulties, and the degree to which China will seek to drive a wedge between Islamabad and Washington.

Chinese security interests in Pakistan are driven primarily by China’s desire to contain India. Beijing has built up Pakistan’s conventional military as well as nuclear and missile capabilities over the years to help keep India off balance and focused on threats emanating from Pakistan. China’s concrete economic and political interests in Pakistan itself are not that extensive. China’s economic commitment to Pakistan, for instance, is not especially impressive in size and has shown clear limits. China has shown little interest in propping up Pakistan’s economy and has not provided substantial economic aid, even during times of need.

In the past, U.S. officials have worried that pushing Pakistan too hard to crack down on terrorists could drive Islamabad more firmly into Beijing’s embrace. But China’s lukewarm response to Pakistan’s recent overtures demonstrates that there are limits to what Islamabad can expect from its “all-weather friend” -- a term often used by Pakistani officials when referring to China. While China has an interest in maintaining strong security ties with Pakistan, the notion that Chinese ties could serve as a replacement for U.S. ties has been overstated by Pakistani officials. The U.S. has provided considerably higher amounts of economic and military aid to Pakistan over the past decade and also serves as a link to the rest of the Western nations, which otherwise would likely be inclined to sanction Pakistan for its nuclear and terrorism activities.

U.S. policymakers must recognise these limits to the benefits that Pakistan will receive from China. China is increasingly concerned about Islamist extremism and terrorism in Pakistan, and there may be room for Washington to seek Beijing’s cooperation in encouraging a more stable and prosperous Pakistan. The U.S. should make clear to China that adopting a more holistic approach to terrorism issues in Pakistan would help mitigate threats to both Washington and Beijing, since Islamabad’s support for some terrorist groups strengthens the ideological base, logistical capabilities, and financial support for all Islamist terrorist groups.

Long-standing security ties Pakistan and China have long-standing strategic ties, dating back five decades. China maintains a robust defence relationship with Pakistan and views a strong partnership with Pakistan as a useful way to contain Indian power in the region and divert Indian military force and strategic attention away from China. The China-Pakistan partnership serves both Chinese and Pakistani interests by presenting India with a potential two-front theater in the event of war with either country. Chinese officials also view a certain degree of India-Pakistan tension as advancing their own strategic interests, as such friction bogs India down in South Asia and interferes with New Delhi’s ability to assert its global ambitions and compete with China at the international level.

from Expert Zone:

Global Economics: When China is not just China

(The views expressed in this column are the author's own and do not represent those of Reuters)

The People's Republic of China's (PRC's) relationship with Iran receives a good deal of attention. As the U.S. considers how to stop Iran's nuclear weapons program short of military action, the PRC is considered vital in ensuring economic sanctions are effective. But it has been difficult to win Chinese cooperation in applying sanctions. One mistake the U.S. may have made is treating China as a unified entity.

It is true, of course, that the PRC has a tightly controlled political system. There is one ruling party, a powerless legislature, and muzzled debate. Even so, distinct interests have emerged.

State-owned enterprises rarely operated internationally a decade ago and, if they did, unfailingly followed the central government line, as when China Unicom was nationalised in 1999. One outcome of state-led development since 2003 is powerful growth by state firms. By some measures, State Grid is the world's biggest power company, China Mobile the biggest telecom, and ICBC the biggest bank.

The PRC's global presence is also much greater. Chinese firms are the world’s biggest exporters. From 2005 to 2011, Chinese outward investment exceeded $300 billion, even excluding bonds.

China's corporate kings are the two largest oil companies, both state-owned: CNPC and Sinopec. Both rank in Fortune’s top 10 globally. They are the two biggest owners of foreign non-bond assets, accounting for more than 25 percent of outward investment -- more than $80 billion -- by themselves. CNPC and Sinopec own stakes in Canadian oil projects; CNPC sends Venezuelan oil to the U.S. for refining; and Sinopec has just made a sizable U.S. shale deal. They also have made large acquisitions in Europe.

Iran has been an important target, with CNPC and Sinopec each having multibillion-dollar projects. However, there are indications that both, along with smaller cousin China National Offshore Oil, have slowed recent work. Why? It probably wasn’t orders from Beijing. Rather, proceeding with their considerable business in Iran in the face of sanctions would put much more of their global business at risk.

from Expert Zone:

China’s economic data (still) not credible

(The views expressed in this column are the author's own and do not represent those of Reuters)

China today announced that GDP growth for 2011 slowed to 9.2 pct. Over the coming days and weeks, there will be a stream of pontificating about what this means. There's a good chance that everyone involved will be pontificating about nonsense.

China’s economic statistics are usually inconsistent, occasionally wildly inconsistent, and do not seem to be improving in quality. For 2011 GDP in particular, Beijing is very likely exaggerating growth (some years it understates). Rather than focusing on reported figures, the U.S. should prepare for a weak Chinese economy but one that may begin to rebalance in 2012. It should also engage in long-overdue independent estimation of China’s performance.

IMPEACHING THE GROWTH RESULT There is a cottage industry that gains directly or indirectly from insisting that Chinese numbers are fairly accurate and far better than the bad old days of 15 years ago. But reasons for scepticism abound.

On one side are 9.2 pct growth last year and 10.4 pct in 2010. On the other is evidence of a far sharper slowdown. Auto sales, for example, plunged to 2.5 pct growth last year from 32 pct growth in 2010. There are also figures which can be corroborated with foreign partners. More than four-fifths of China’s shipbuilding tonnage is for export. New ship orders plummeted 52 pct outright in 2011. Growth in imports of crude oil slipped to 6 pct growth last year from 17.5 pct in 2010.

There are indirect indicators of much slower GDP. Monetary policy has long been extremely loose, featuring negative real interest rates. Yet the central government began loosening further several months ago, a strange reaction to growth still over 9 pct. China still boasts the world’s largest foreign trade surplus and net inward investment. Foreign exchange reserves fell in the fourth quarter, suggesting capital flight. That would translate to a sluggish world economy being more attractive than China’s own.

PREMIER SKEPTICS Problems go well beyond 2011 GDP. It has been over a decade since former Premier Zhu Rongji wondered how all provinces could grow faster than the country as a whole. The problem persists and, in fact, was worse in 2011 than 2008. The trends in national and provincial growth clearly match, but provinces remain unwilling to report accurate numbers. Such unwillingness extends deeply into Chinese statistics.