Expert Zone

Can BRICS evolve into a power bloc?

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

The fourth BRICS meeting held in New Delhi on March 29 did not end with mere rhetoric; it agreed to some substantive mutual arrangements that would promote common interests.

These common interests include intra BRICS trade and investment and to facilitate that, agreement was reached on extending credit facilities in local currencies and multilateral letter of credit. These arrangements will reduce currency risk as also transaction costs and help trade expansion.

There are obvious reasons why trade and investment should be the first issue to be discussed and resolved. For one, trading opportunities with developed countries, including the U.S., EU and Japan are not expanding fast enough because these countries are in recession or moving in and out of it. For another, the BRICS are developing fast, creating expanding opportunities for trade.

There are also significant complementarities between these countries which, if exploited, can expand trade much further. Brazil and Russia have great potential for export of raw materials while China and India have the potential to export manufactures and services. Hence, a change in trade routes can keep growth in BRICS going.

In investment and technology, the conventional flow pattern has undergone considerable change. Investment is no longer one-way traffic from developed to emerging market economies. China and India have made huge investments in the U.S. and EU. The desire for BRICS Development Bank was expressed and may be pursued later to expand investment in developing countries.

Trade and investment opportunities will remain the substantive issues on the agenda at many more meetings in the future. But to become an effective power bloc, the agenda will have to be stretched much beyond that. That appears unlikely at least in the near future because there are internal contradictions within the BRICS that make it difficult to forge an acceptable comprehensive global agenda. Even the EU has not quite succeeded in that respect.

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.

China’s rise and India’s obvious partner (the U.S.)

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

The release last week of an Indian think tank report entitled “Non-Alignment 2.0: A Foreign and Strategic Policy for India in the 21st Century” has prompted robust discussion about Indian foreign policy in the age of a rising China.

Indian national security adviser Shiv Shankar Menon provided remarks at the report launch and apparently participated in some of the private discussions in preparation of the report.

U.S. strategic thinkers who are eager to improve ties with India will be disappointed by the report, as it provides few imperatives and recommendations for solidifying a U.S.-India strategic partnership for the 21st century. While the report acknowledges that the U.S. (and China) will be global power centers and that a robust American maritime presence in the Asia-Pacific will help delay the projection of Chinese naval power in the Indian Ocean, it also says that it would be “premature” to conclude that India would benefit from close ties with the U.S.

Demonstrating distrust toward American intentions, the authors highlight that it would be risky for India to rely too heavily on the U.S. since an Indo-U.S. strategic partnership “could become a casualty of any tactical upswing in Sino-American ties.” The report says the American alliance system is in decline and that it is uncertain “how the U.S. might actually respond if China posed a threat to India’s interests.” The report further notes that another potential downside of focusing too much attention on building ties to the U.S. is that it could “prematurely antagonize China.”

Non-Alignment 2.0 spends considerable time addressing India’s competition with China and the threats New Delhi is likely to face from Beijing in years to come. The report states that the “challenge for Indian diplomacy will be to develop a diversified network of relations with several major powers to compel China to exercise restraint in its dealings with India, while simultaneously avoiding relationships that go beyond conveying a certain threat threshold in Chinese perceptions.”

The report recommends building up India’s naval capabilities to ensure it remains dominant in the Indian Ocean region, investing in infrastructure development in the border areas, and preparing for asymmetric responses to any possible Chinese aggression regarding their border disputes.

China defence spending rises as U.S. budget declines

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

As China prepares for the final plenum of the 17th Party Congress, it has announced that the new defence budget would amount to 670 billion RMB (approximately $106 billion), which equates to a 11.2 percent increase. This is in sharp contrast to the United States, which, despite a so-called “pivot to Asia,” is busily reducing its defence budget.

The increase in China’s defence spending, atop last year’s 12.7 percent increase, highlights that China’s defence spending is now larger than that of all other Asian nations combined — a sobering statistic when one considers that this includes the world’s third-largest economy (Japan) and North and South Korea, which remain locked in a Cold War-era standoff.

Many look at the U.S. defence budget and decry the fact that it is larger than the next dozen or so states combined. Yet the U.S. is a key enforcer of international norms and safety. It is the American Navy, more than any other, that keeps the world’s sea lanes safe. It is the U.S. Air Force that provides space situational awareness, including conjunction warnings, to all other space-faring nations (including China) and manages the GPS constellation to global benefit — both without charge.

By contrast, China’s military budget is spent almost entirely on Chinese interests. Of course, as the second-largest economy in the world, one would expect China to have a substantial military, and one should not draw alarm simply from Chinese defence spending increases. Yet instead of providing support for maintaining international order and sustaining global trade, Chinese military capabilities appear to be focused more on countering the U.S.

Moreover, China’s military can focus on contingencies in close proximity to itself, whereas the U.S. military has global responsibilities. Thus, China can asymmetrically commit its resources against only a portion of the U.S. military and, in the event of a crisis, would likely try to defeat the U.S. in detail.

What should be of concern, then, is that the Chinese Communist Party appears to be increasingly asserting itself against its neighbours, whether it is expanding its forces opposite Taiwan or making claims of sovereignty over the South and East China Seas. In this regard, the People’s Liberation Army (PLA) is a tool, rather than the agent, for China’s growing antagonism with so many of its neighbours.

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.

Is 2012 the tipping point for China steel?

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

The 2011 outcomes in China’s steel and related industries have ratcheted up the risks faced in China’s and the world’s steel and steel-making raw materials industries in 2012. Q411 steel production in China was particularly weak, down 12 pct from the levels enjoyed in the first 3 quarters of 2011.

Steel elasticity in the quarter was negative, as GDP rose 8 pct while steel consumption fell 11 pct q/q. This raises questions whether the steel production patterns since October, annualising at 625mt to the end of January, are an aberration or a harbinger of much lower than expected steel outcomes in 2012 and beyond.

History cautions about the extrapolation of near-term weakness. Government policy response, seasonal factors, potential restocking and the improving global sentiment can turn Chinese steel outcomes quickly.

The government’s response remains pivotal, and recent re-affirmation of social housing in the government’s 2012 plans is an example. The near-term market conditions may therefore prove to be more positive if Chinese steel production lifts relatively from its current lows. The fact that iron ore prices and steel prices have sustained firm levels over the last quarter despite very low Chinese steel production and record levels of iron ore output cautions one about being too bearish near-term.

Nevertheless, there is an undeniable pattern of slowing steel activity. Crude steel production growth of c9 pct in 2011 follows a decade of 18 pct pa average steel production growth. Apparent crude steel consumption growth was up less than expected at 8.5 pct, following a decade of double-digit growth. As a consequence, the longer-term patterns of steel intensity of use, expressed in terms of steel per unit of GDP, appear to confirm an apparent peak in 2009, after a stunning and unprecedented decade of growth.

The strong correlation between property construction and steel use suggests a sustained property construction slowdown within the oversupplied and overpriced commodity housing is the biggest risk for China steel consumption. UBS China property team estimates that commodity housing construction could potentially fall by 25+ pct to establish a market balance in commodity housing.

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.

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.

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.

News Flash: Pakistan is NOT a U.S. ally

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

U.S. media commentators acted with surprise about reports that Pakistani officials may have given the Chinese access to the downed helicopter left behind in Pakistan following the May 2 bin Laden raid.

What is more surprising is that some media outlets still refer to Pakistan as a U.S. “ally” in the fight against terrorism. Pakistan is neither an ally nor an enemy to the U.S.

Rather, Pakistan has entirely different security objectives from the U.S. in Afghanistan and in fighting terrorists more broadly. The sooner U.S. policymakers come to grips with this reality, the better chance we stand of achieving U.S. objectives in the region.

There was always a great deal of concern that the Pakistanis would allow the Chinese access to the downed helicopter. China has been Pakistan’s “all-weather” friend for the last 50 years, and Islamabad would likely relish an opportunity to help the Chinese by providing them information on sensitive U.S. military technology.

China, after all, was willing to break international rules for Pakistan by providing it ballistic missile technology and nuclear know-how during the 1980s – 1990s. More recently, China has agreed to provide Pakistan with two new civilian nuclear reactors, despite that such transfers would violate the rules of the Nuclear Supplier’s Group, an organisation China joined in 2004.

The Pakistanis had even hinted to the U.S. shortly after the bin Laden raid that that they would consider showing the Chinese the downed helicopter. So, if Pakistani officials did indeed give the Chinese access to the aircraft, it should hardly come as a surprise to anyone.