Giant on the move
China's dominant position in world commodity markets is as enduring as one of its emblematic Forever bicycles. As Communists, the People's Republic spent years perfecting the art of buying in bulk, dictating prices through sheer mass of demand. Now that the country has become the world's factory, it would make sense for China to take a more refined approach to trading raw materials. It's worth seeing the latest moves by China's $200 billion sovereign wealth fund in that light.
Having been rebuffed in its efforts to purchase offshore commodity assets in Australia, China's purse managers are taking stakes in commodities brokerage businesses. Most recently, China Investment Corp bought a 14.5 percent stake in trading firm Noble Group for $850 million. The purchase comes just days after CIC signed a cooperation pact with commodity trader Glencore.
Some are looking at this as a flexing of muscle -- an "attempt to increase its influence in the sector," the BBC calls it. Our reporter Neil Chatterjee also hits on this angle, talking about Beijing trying to gain "leverage in opaque global markets and access to the raw materials needed to feed its economy."
A 14.5 percent stake in a Hong Kong brokerage hardly seems enough to wield much influence in global markets. And the Glencore deal is seen as more focused on China developing market expertise.
from Global Investing:
All the talk of addressing the global imbalances throws a spotlight on contrasting demographic trends in the world's two most populous nations -- China and India.
Prior to the financial crisis, India's annual growth rate of about 9 percent seemed positively moribund next to China's double-digit economic expansion. But purely on demographics, the dimming power of the US consumer could give India an edge over its neighbour in the longer run.
Since late last year, China’s $200 billion sovereign wealth fund, China Investment Corp., has “borrowed” more than a dozen Morgan Stanley investment bankers, mostly from its Hong Kong office, to give advice in various areas ranging from real estate to debt trading.
Cost to CIC? Nearly Zero.
Benefit to Morgan Stanley? Priceless.
The banker exchange is an outgrowth of the investment bank’s relationship with CIC, in which CIC took a stake in Morgan Stanley. While CIC has taken a loss so far in that investment, it has paid off in other ways.
The U.S.-China tyre dispute threatens to spill into other sectors and further squeeze Chinese exporters’ already razor-thin margins. It might seem mind-boggling to many that Chinese manufacturers are still hanging on to weak overseas markets even though the domestic economy looks much healthier and surely offers more potential.
But there are structural reasons why the grass is greener outside China. The risk of not getting paid, or getting paid late, is significantly lower when dealing with foreign buyers. The cost of international shipping has dropped so much that it can be cheaper to send goods over the Pacific Ocean than across the country.
After Taiwan’s worst storm in 50 years killed hundreds in massive mudslides last month, the government blamed the freak weather while survivors said the government’s slow response after the Aug. 7-9 storm made matters even worse.
Only recently, with reconstruction under way, have officials in the six-county disaster area begun asking what contributing factors may have caused the steep mountainsides to give way, hurling boulders and walls of mud onto riverside villages below. Nearly 770 people are presumed to have died, most of them buried alive.
One of the biggest debates about China today is whether it is at the stage of asset price inflation or has entered into a bubble. Here are some useful quotes from leading bubbleologists to help you decide:
Charles P. Kindleberger, author of Manias, Panics and Crashes: A history of financial crises, uses the term bubble to mean any deviation in the price of an asset or a security or a commodity that cannot be explained in terms of the “fundamentals”. Small price variations based on fundamentals are called “noise”.
First the Olympics and now National Day — China is once more tightening the screws on foreigners living in Beijing, with random identity checks and restrictions on movement, because of worries about security ahead of the 60th anniversary of the Communist Party coming to power, on Oct. 1.
Of course for Chinese, the burden is far heavier when it comes to these controls. Foreigners are generally given much more leeway in China, possibly because many police are uncomfortable dealing with the hassle of language and cultural barriers.
Why are the U.S. and China trading blows about something as mundane as car tyres at a time when the world is trying to avoid slipping back into trade protectionism?
It's not purely about the $1 billion worth of tyres China sells to the U.S. every year. It has more to do with the $100 billion of automotive vehicles, parts and engines America buys from abroad. China is worried about the direction of U.S policy. Beijing fears that the administration may find ways to thwart China's future plans to ship vehicles to America.
China may not yet export cars to America, but it already exports a growing number of parts. Cars are in the pipeline. A recent spate of bids from Chinese companies such as Geely for failing U.S. and European auto brands have shown that it has the ambition to be the next Japan or Korea.
Auto sales are the only bright spot in U.S. consumer spending due to the Treasury-financed "cash for clunkers" program. Fears about stimulus dollars leaking abroad are one of the reasons the U.S. trade unions have been aggressively pushing for anti-dumping tariffs.
The worry is that the U.S. has imposed the tariffs under a law designed to protect domestic U.S. producers from being damaged by a sudden surge in imports from China. Determining whether this has occurred is a bureaucratic exercise in which experts determine whether such damage is occurring and propose remedies. But there is a political circuit breaker -- the president has discretion in whether to implement remedies.
At least four similar, so-called Section 421 petitions were filed during the presidency of George W. Bush, according to the international trade commentator, Scott Lincicome, but none were approved. In this case, Obama came down on the side of the union. This has raised fears in Beijing that there will be more cases in coming months.
The Chinese side seems to fear that Obama is bending too much to domestic constituencies such as union and producer interests. Washington needs to be careful about this. Since it wants to export its way out of recession, it should not agitate China, which is potentially a major purchaser of U.S. exports.
China does not want the Obama presidency to set a precedent by discriminating against Chinese goods at this time. Moreover, it is concerned that other countries might follow suit and start to target Chinese goods as well. Its reliance on exports is potentially the big weak link among China's recovery.
That's why Beijing, which has limited its protest mostly to words in recent years for fear of more retaliation, quickly spun into action this time. China's counterpunch is equally forceful. It is launching an anti-dumping investigation into imports of U.S. chicken products and vehicles.
The idea is presumably to raise the political cost for Obama of taking his pen out of his pocket every time a Section 421 case, which specifically targets China, is presented for his signature.
During the first half of this year, 89 percent of China's chicken imports came from America, representing a fifth of all U.S. chicken exports. In comparison, tyres account for just 0.4 percent of the value of goods what China sells to America each year and 0.07 percent of China's total exports.
While it is no secret that America subsidises its agriculture industry, China also spares no effort in helping exporters and putting up import barriers to protect domestic manufacturers. For example, China agreed in August to stop some discriminatory charges it imposed on imported U.S. auto parts after a World Trade Organization ruling from September 1.
After chicken, U.S. soybeans might be the next target. As much as 40 percent of China's soybean imports came from America last year. And this year, China's soybean imports increased by 28 percent.
The last time China took retaliatory measures was during the "garlic trade war" against Japan and South Korea in 2000-2001.
Washington and Beijing have vowed to cooperate in seeking to revive global economic growth, but the dispute over tyres has laid bare the two countries' continued friction over trade. This could spill into the G20 summit later this month and Obama's scheduled visit to China in November.
In previous meetings between the top leaders of the two countries, mostly the U.S. lectured and China listened. Now Beijing is more outspoken about expressing its own concerns and many at home are calling for more tit-for-tat policies.
It remains to be seen how the U.S. will react to a more assertive China.
Google's former China head Kai-Fu Lee wants to create China's next internet giant in a factory. He believes that by combining the smartest entrepreneurs, the shrewdest business people and the brightest business ideas, he will be able to create five highly sellable companies a year. That sounds like an ideal model for venture capital, but is he being realistic?
Lee's plan, formulated while he spent time in hospital over the summer, follows a battle with Beijing regulators who wanted to censor Google searches that lead to pornographic sites. It has drawn strong support from investors.
Lee has managed to raise $115 million in just one month, winning support from YouTube Inc. co-founder Steve Chen, as well as Foxconn Electronics, Legend Group, New Oriental Education and venture firm WI Harper Group.
They believe that as China embraces a start-up culture, Lee's business, which is a mix of venture capital and development lab, will be well positioned to capitalize. Lee's plan is to hire 100 to 150 young engineers, help nurture their ideas, then spin off 50 to 75 of them a year with
funding from his venture, whiling hiring new people to make up for the loss.
However, it looks as if his company, called Innovation Works, has yet to line up ideas or engineers. This kind of "incubator" model became popular in the U.S. and Europe during the dot-com boom, but most of them just burned through a lot of money and then folded.
Lee and his backers believe that China's market is more favourable, as it is at a crucial point regarding "cloud computing" and mobile technology, and there is a strong need for early-stage funding.
The new fund is still starting off, but Lee plans to expand from its base in Beijing to places such as Taiwan, the Asian hardware manufacturing base and his hometown.
Heard any new theories about the likely shape of the global economic recovery?
At a financial forum in Hong Kong this week, Zhou Yuan, a senior executive from China Investment Corp (CIC), the $200 billion sovereign wealth fund, offered a mischievous twist on some previous formulations, as well as a nod to the importance of China in any global recovery.
In an effort to lighten the mood among a group of foreign economists, who had been arguing about whether the global recovery would be W-shaped or V-shaped, Zhou offered a perspective he said he’d heard from another source.
“Whether China’s consumers will lead the world into a more prosperous stage of economic development, I don’t know, but we certainly hear some comments to that effect,” said Zhou, CIC’s head of special investments.
“It’s clear that the economy (recovery) is something going into the V-shape,” said the English-speaking Zhou. “Someone also told me that the economic development worldwide will take the shape of www.v.cn.”
After a moment’s reflection, his audience understood and broke into laughter.
Zhou explained: Since shortly after the collapse of the Wall Street bank Lehman Brothers last September, global markets have experienced volatility that has often seemed to take a “www” shape.
Now, Zhou said, we are starting to hear more and more economists talking about a V-shaped recovery, although some remain cautious because they are worried there may be a so-called “double dip” in the financial crisis, the worst since the Great Depression.
Whether it’s a V or W shaped recovery, Zhou joked, the ultimate solution to the crisis is China, eg “CN”.
Zhou noted that China’s urbanization in the next few years — turning villages into mordern towns or farmers moving to nearby cities to become workers — will be a key attraction for foreign investments in China, which will in turn help China continue its contribution to global economic growth.
From urbanization comes consumption. And if China can produce enough consumption to help lift the global economy, www.V.cn may sum up the real path of this financial crisis. Or at least some Chinese bankers are banking on it.