The giant sucking sound of resources heading to China

Interesting VOX piece of the debate surrounding China's attempt to seemingly suck in huge quantities of the world's resources. China is trying and has the will to succeed.

I guess the answer to the question is "yes". The real question is whether they will succeed.

Is China trying to “lock up” natural resources around the world? [Vox]

The rapid emergence of China as a major industrial power poses a complex challenge for the world’s natural resources. This column argues that the Chinese government-backed investments in natural resource supplies are predominately in areas that will help expand, diversify, and improve competition in the global supplier system. But potential geopolitical consequences remain a reason for concern.

Backed by the Chinese government, Chinese companies have been acquiring equity stakes in natural resource companies, extending loans to mining and petroleum investors, and writing long-term procurement contracts for oil and minerals. These activities have aroused concern that China might be “locking up” natural resource supplies, gaining “preferential access” to available output, extending “control” over the world’s extractive industries (Silk 2006).

The empirical question

The empirical question I address here is whether Chinese equity acquisitions, loans, and long-term procurement contracts help consolidate a tightly concentrated supply base while securing preferential access for Chinese buyers? Or do these actions help multiply sources and diversify the supply base, thus making the provision of output more competitive for all buyers?

This investigative focus is deliberately narrow and precise. It assesses the impact of Chinese resource procurement on the structure of the global supply base. The broader policy discussion in the concluding section raises other separate important issues, including the effect of Chinese resource procurement on rogue states, on authoritarian leadership, on civil wars, on corrupt payments and the deterioration of governance standards, and on environmental damage. Such effects may make patterns of Chinese resource procurement objectionable, on grounds quite apart from the debate about possible “lock up”, “tie up”, and “control” of access on the part of China and Chinese companies.

Business School strategic management literature identifies four fundamental types of natural resource procurement structures for a large buyer.

1. Take an equity stake to create a “special relationship” with a major producer. Buyers and/or their home governments take an equity stake in a “major” producer so as to procure an equity-share of production on terms comparable to other co-owners.
2. Take an equity stake to create a “special relationship” with the competitive fringe. Buyers and their home governments take an equity stake in an “independent” producer so as to procure an equity-share of production on terms comparable to other co-owners.
3. Loan capital to be repaid in output to a major producer. Buyers (and/or their home government) make a loan to a “price maker” producer in return for a purchase agreement to service the loan.
4. Loan capital to be repaid in output to the competitive fringe. Buyers (and/or their home government) make a loan to a “price taker” producer in return for a purchase agreement to service the loan.

These four categories provide the basis for giving operational definition to “tying up” or gaining “preferential access” to supplies. If the buyer-seller arrangement simply solidifies legal claim to a given structure of production (categories 1 and 3), “tying up” or gaining “preferential access” to supplies has zero-sum implications for other consumers. What is noteworthy, however, is that if the buyer-seller arrangement expands and diversifies sources of output more rapidly than growth in world demand (categories 2 and 4), the zero-sum implication vanishes as other consumers have easier access to a larger and more competitive global resource base.

Figure 1 presents the scorecard of the sixteen largest of China’s procurement arrangements showing a few instances in which Chinese natural resource companies take an equity stake to create a “special relationship” with a major producer. But the predominant pattern is to take equity stakes and/or write long-term procurement contracts with the competitive fringe.

A brief review of five smaller Chinese procurement arrangements does not suggest that there is significant selection-bias in looking at these sixteen largest projects.

The rapid emergence of China as a major industrial power poses a complex challenge for global resource markets. On the demand side, Chinese appetite for vast amounts of energy and minerals puts tremendous strain on the international supply system. On the supply side, Chinese efforts to procure raw materials can exacerbate the problems of high demand, or help solve the problems of high demand. Which outcome Chinese procurement arrangements generate depends upon whether those arrangements solidify a concentrated global supplier system, or expand, diversify, and increase competition in the global supplier system. The evidence presented above shows that Chinese efforts – like Japanese deployments of capital and purchase agreements – fall predominantly into categories that help expand, diversify, and make more competitive the global supplier system.

Chinese attempts to exercise control over “rare earth elements” mining may constitute a significant exception, however. The term “rare earth”, according to the US Geological Survey, “is a historical misnomer; persistence of the term reflects unfamiliarity rather than true rarity.” The US was self-sufficient in rare earth production until the mid-1980s, now more than 90% is imported from China ($127 million in 2008). Rare earth minerals are crucial for a growing an array of civilian and military products. Historically the rare earth mining industry has been characterised by excess capacity, and oversupply. In August 2009 China’s Ministry of Industry and Information Technology issued a draft policy to set an annual export quota of 35,000 tons, a potential ban on exports of at least five types of rare earth elements, and a series of steps to control mining and improve environmental practices. These actions may be directed at securing control over international markets; at the same time, they are being deployed as a tool to compel more foreign investment and more value-added in associated in industries in inland China. Concerned about access to supplies, mining companies and buyers have shown interest in developing new sites in Vietnam, Kazakhstan, Sweden, and Canada, as well as restarting production in the US. China meanwhile has pursued an aggressive policy of acquiring equity stakes in new producers, in particular in Australia.

Deng Xiaoping once noted that while the Mideast has oil, China has rare earth elements. How should national authorities react to the prospect of Chinese investment in offshore rare earth elements companies? The foreign acquisition analytics in the rare earth sector fit well within the broader framework laid out here; Chinese investment in a small independent producer whose impact can do nothing except help expand supply and make the industry more competitive should be encouraged; Chinese investment in a more major producer that perhaps puts the Chinese owners (and Chinese government) in a position to control or constrain production should be viewed with circumspection.

The impact of Chinese procurement activities on the structure of supplier industries, however, is only one dimension of the challenge posed by Chinese natural resource acquisition. The natural-resource-strategist-from-Mars might well applaud China’s vigorous support for oil production in the Sudan or Iran, and for oil transport, natural gas, and mineral production in Myanmar. But the US and other allies are rightly appalled at the consequences for regional conflict, support for terrorist groups, violation of human rights, and oppression. Finally, provision of equity capital and loans in return for natural resources form part of larger Chinese strategy toward Central Asia, the Middle East, Africa, Latin America, and the South Pacific.

References

Moran, Ted (2010), “Is China trying to “lock up” natural resources around the world?”, This study is being prepared as a Working Paper for the Peterson Institute of International Economics. The draft study may be received via a request to morant@georgetown.edu.

Silk, Mitchell (2006), “Are Chinese Companies Taking Over the World?” Chicago Journal of International Law.

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Exchange rate pressures build

The rapid recovery in China and the lack of recovery in the US and Europe will increase the pressure on China to revalue the RMB upwards.

This pressure will not decrease but as always China can chose to ignore any requests. The US will not risk a trade war - yet! Th Chinese debt holding in the US also plays a crucial role - an appreciation of the RMB reduces the value of this debt.

Simon Johnson is a respected writer and worth reading. He is not a big fan of China - wrongly in my view. The 20-40% appreciation figure is too high. 10%-25% I would accept. This is issue is a lot more complex that this article gives it credit for.

Time to Press China on Its Exchange Rate [New York Times]

This morning the bipartisan United States-China Economic and Security Review Commission holds a hearing on “U.S. Debt to China: Implications and Repercussions.” I’m on the first panel, which will discuss in part the perception that China’s large dollar holdings confer upon that country some economic or political power vis-à-vis the United States. In particular, I’ll talk about whether Chinese reserves prevent us from putting pressure on that country’s authorities to revalue (i.e., appreciate) the renminbi.

I will argue that this view is incorrect and completely misunderstands the situation. Here’s the outline of my reasoning.

The exact amount of China’s foreign-exchange reserves is not knowable based on publicly available information. But a reasonable working assumption is that China owns close to $1 trillion of United States Treasury securities. That would be nearly half of the stock of Treasuries thought to be in the hands of “foreign official” owners, which was $2.374 trillion at the end of 2009, and just under one-seventh of all American government securities outstanding ($7.27 trillion, of which $3.614 trillion was held by all foreign owners, official and private, at the end of 2009).

China holds such large reserves because it intervenes to buy dollars in order hold down the value of its currency, the renminbi. It is in the interests of both the United States and global economic prosperity that China allows its currency to appreciate. Foreign-exchange market intervention on this scale is a breach of China’s international commitments (as a member of the International Monetary Fund) and constitutes a form of unfair trade practice.

If China were to end its intervention, the renminbi would appreciate substantially, likely in the region of 20 to 40 percent. The primary effect would therefore be an effective depreciation of the American dollar against the Chinese renminbi – and against all other countries’ currencies that are implicitly pegged to the renminbi (more precisely, to the dollar rate with an eye on China’s competitiveness).

Such a change in the value of the dollar would help expand our exports and improve our ability to compete against imports; this would aid in the process of recovery, job creation and broader adjustment in the American economy.

Even a substantial movement in the dollar – e.g., a 20 percent deprecation in real effective terms, which is most unlikely – would have no noticeable effect on inflation and therefore would not force the Federal Reserve to increase interest rates. The “hard landing” scenario for the dollar – feared by analysts since the traumatic experiences of the 1970s – is unlikely for the United States today, given the low level of inflation expectations and the high gap between where the economy is today and where it has the potential to be. (That gap is reflected in measured unemployment near 10 percent and true unemployment — which would include people who have given up looking for jobs — of at least 15 percent).

The effect on short-term United States interest rates would therefore probably be minimal or nonexistent, particularly as the Federal Reserve currently aims to keep rates close to zero. The effect on longer-term interest rates would also be small – and could be offset by the Federal Reserve, as it currently seeks to limit all benchmark interest rates (most recently affirmed by the Fed chairman, Ben S. Bernanke, this week).

In fact, the current stance of monetary policy – and the low, stable level of inflation expectations in the United States – makes this an ideal moment at which to press China to revalue its currency.

In another potential scenario, there is concern that China would threaten to reduce its purchases of United States government securities. But if China continues to intervene, it will accumulate foreign reserves, so it needs to hold increasing amounts of foreign assets of some kind. What else would the Chinese authorities buy?

1. If they buy other dollar-denominated assets issued by American entities, this would push down spreads on those assets relative to Treasuries. This would directly help private American borrowers – thus stimulating growth in the United States.
2. If they directly buy dollar-denominated assets issued by non-American entities, this will still reduce spreads more broadly and help American borrowers – as there is a global market for dollar assets and there is not much high grade non-American dollar debt available for sale.
3. If they buy dollar equities – which is most unlikely – this would help the stock market, household balance sheets and firms’ access to funding (as well as helping to shift our economy from debt to more equity financing, which would a desirable move in any case).
4. If they buy non-dollar assets, given that the Fed will keep interest rates near to zero, this will push down the value of the American dollar and help boost America’s economic growth. Such a move would produce protests from the euro zone and Japan, but this change in currency value would be solely China’s responsibility.

If China stops buying foreign assets altogether, this would of course be equivalent to ending foreign-exchange intervention. This is exactly the policy change that we should be seeking.

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Chinese labour shortages and demand hots up

Apologies for the lack of posts on Chinaeconomicsblog. I hope to catch up soon. The real academic job is taking its toll on my posting frequency.

I will get up to speed with more simple links. Ironically post frequency falls when I am in China to the great fire wall of China.

There is much to talk about. The whole financial crisis leads to more questions than answers. I am not convinced by the Chinese recovery although there is no doubt things could have been worse. The problems now are asset bubbles and bad loans that will cause their own problems sooner rather than later.

One thing I would not have expected would be labour shortages given the massive layoffs over the last two years. The FT reports.

The impact of the massively overdone fiscal stimulus package is still being felt.

Labour shortage hits China export recovery [FT]

An export recovery in the world’s most populous country is running up against an unexpected constraint – manpower.

With Chinese exports back to their early 2008 levels, factory owners are worried about their ability to service a surge in orders now that a new manufacturing cycle has begun after the lunar new year holidays.

The problem is particularly acute in southern Guangdong province and its Pearl river delta manufacturing heartland near Hong Kong, the region known as “the workshop of the world”.

Guangdong accounts for a third of China’s exports and would rank as one of the world’s 10 largest exporters if it were a country in its own right. But the province’s ability to attract and retain migrant labour from China’s vast interior is slipping.

“Labour availability is tight right now in Guangdong compared to other regions,” said Paul Hussey, chief executive of Strix. The Isle of Man company, which dominates the global market for thermostatic controls on electric kettles, maintains most of its manufacturing operations in the provincial capital, Guangzhou.

Quantifying labour shortages is extremely difficult given large variances by region, industry and skill level. Recruiters for Galanz, the world’s largest manufacturer of microwave ovens, were this week offering production line workers a relatively robust monthly base wage of Rmb1,700 ($250). Skilled technicians in much greater demand were commanding 65 per cent more.

In Dongguan, a manufacturing centre near Guangzhou, the local government estimates that there is now just one worker for every two jobs. At the height of the crisis, which for Chinese manufacturers came last spring, local officials calculated there were four workers competing for every three jobs.

Beijing’s successful economic stimulus programme has contributed to a coastal scramble for labour, by increasing investment and employment opportunities elsewhere.

“Fiscal stimulus has spurred jobs growth in the interior provinces,” Ben Simpfendorfer, Royal Bank of Scotland economist in Hong Kong, said.

In December, China unveiled the world’s fastest passenger train service between Guangzhou and the central city of Wuhan, covering 1,100km in just three hours. The Harmony Express line has reduced travel time between Guangzhou and Shaoguan, an industrial backwater in Guangdong’s remote mountain region, to just 40 minutes, anchoring local workers closer to home.

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Manipulation or revovery

Interesting article in China Briefing about the China recovery. H/T: blog comment.

There is nothing new here but the concerns are real and mirror my own. Things are not always what they seem in China.

China’s Exports More to do with Manipulation than Recovery [Chin Briefing]

The news that China’s exports increased by 17.7 percent in December year-on year is impressive. So too, the statistic that China has now overtaken Germany as the world’s largest exporter. In turn, this has lead to commentary about the position of the RMB against other globally traded currencies such as the Euro and the U.S. dollar. However, in announcing that China has overtaken Germany, analysts have been jumping the gun – Germany has yet to release its own export figures for December. As in the news that in 2009 China overtook the United States as the world’s largest vehicle market make for interesting headlines, there is the matter of sustainability. Are these positions sustainable? Let’s examine both of these situations.

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China’s export boom
Also overlooked in the export equation when it comes to China figures is the matter of manipulation of taxes to encourage exports. Again, this is not a sustainable situation in the longer term. China needs tax revenues to pay for the extraordinary cost of continuing its development. Yet here is where the real truth lies: China’s export boom has come largely as a result of the huge incentives given by China’s export rebate program, speeding up repayments of VAT and widening the quantity of products that could be reclaimed. China has enhanced this by extending claim deadlines widened VAT scope to assist with R&D, extended VAT refunds to overseas contractors, abolished VAT altogether in certain construction situations, and increased refund rates.

The argument, when looking at China’s growth, is how much of this is truly sustainable. Massive fiscal handouts for vehicle and property purchases, a stock market that appears fed by loose cash rather than underlying fundamentals from its companies, and exports driven by massive tax incentives is going to be a tough act for China to keep up.

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Humorous article warning: "Google v China"

The Daily Mash take a humorous look at the recent Google v China fight. The impact of Google's new tough stance will be interesting to watch. I suspect Google were not making much money anyway so this is not such a large loss although it is evidence that globalisation is not always a one way street.

Limited tex provided due to bad language and subversive nature of the text.

GOOGLE AND CHINA IN BATTLE TO ENSLAVE YOU [Daily Mash]

THE last great battle of our time was underway last night as Google and China began fighting for control of every living thing on the face of the Earth.

A fragile truce between the world's two biggest powers collapsed as Google accused China of reneging on a deal which would see the search giant control North and South America and those parts of Africa where people can afford netbooks.

Google said China was planning to use Great Britain as a launch pad for a transatlantic invasion instead of simply turning the country into a gigantic pork farm and round-the-clock abattoir.

China is now mobilising the four million troops of the People's Liberation Army, while Google is understood to be upgrading YouTube to allow for faster streaming of those strangely hypnotic, homemade pop videos.

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Professor Henry Brubaker, of the Institute for Studies, said: "It's very evenly balanced. China has millions and millions and millions of people, whereas Google has things like Chrome, Street View and access to every piece of personal information that has ever existed despite what they keep saying in their relaxed, open-necked shirt, hacky sack-playing manner."

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Economic CRASH in China coming soon

As an economist one never likes to dwell on "good news" stories. The previous post on the 56% exporting rebound gave the wrong impression.

There remain a number of issues with the Chinese growth miracle that simply do not add up. The stockmarket and house prices are significantly overvalued.

At least James Chanos has got China's card marked. Good coverage from the New York Times. In this case he may lose his money - he must make sure not to underestimate the Chinese governments ability to plough on regardless.

I am sure China is cooking the books and house prices are out of the range of the vast majority of hard working Chinese. He is right to raise the "crash" possibility.

Contrarian Investor Sees Economic Crash in China [New York Times]

SHANGHAI — James S. Chanos built one of the largest fortunes on Wall Street by foreseeing the collapse of Enron and other highflying companies whose stories were too good to be true.

James Chanos made his hedge fund fortune predicting problems at companies and shorting their stock.

Now Mr. Chanos is betting against China, and is promoting his view that the China miracle has blinded investors to the risks in that economy.

Now Mr. Chanos, a wealthy hedge fund investor, is working to bust the myth of the biggest conglomerate of all: China Inc.

As most of the world bets on China to help lift the global economy out of recession, Mr. Chanos is warning that China’s hyperstimulated economy is headed for a crash, rather than the sustained boom that most economists predict. Its surging real estate sector, buoyed by a flood of speculative capital, looks like “Dubai times 1,000 — or worse,” he frets. He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent.

“Bubbles are best identified by credit excesses, not valuation excesses,” he said in a recent appearance on CNBC. “And there’s no bigger credit excess than in China.” He is planning a speech later this month at the University of Oxford to drive home his point.

As America’s pre-eminent short-seller — he bets big money that companies’ strategies will fail — Mr. Chanos’s narrative runs counter to the prevailing wisdom on China. Most economists and governments expect Chinese growth momentum to continue this year, buoyed by what remains of a $586 billion government stimulus program that began last year, meant to lift exports and consumption among Chinese consumers.

Still, betting against China will not be easy. Because foreigners are restricted from investing in stocks listed inside China, Mr. Chanos has said he is searching for other ways to make his bets, including focusing on construction- and infrastructure-related companies that sell cement, coal, steel and iron ore.

Mr. Chanos, 51, whose hedge fund, Kynikos Associates, based in New York, has $6 billion under management, is hardly the only skeptic on China. But he is certainly the most prominent and vocal.

For all his record of prescience — in addition to predicting Enron’s demise, he also spotted the looming problems of Tyco International, the Boston Market restaurant chain and, more recently, home builders and some of the world’s biggest banks — his detractors say that he knows little or nothing about China or its economy and that his bearish calls should be ignored.

“I find it interesting that people who couldn’t spell China 10 years ago are now experts on China,” said Jim Rogers, who co-founded the Quantum Fund with George Soros and now lives in Singapore. “China is not in a bubble.”

Colleagues acknowledge that Mr. Chanos began studying China’s economy in earnest only last summer and sent out e-mail messages seeking expert opinion.

But he is tagging along with the bears, who see mounting evidence that China’s stimulus package and aggressive bank lending are creating artificial demand, raising the risk of a wave of nonperforming loans.

“In China, he seems to see the excesses, to the third and fourth power, that he’s been tilting against all these decades,” said Jim Grant, a longtime friend and the editor of Grant’s Interest Rate Observer, who is also bearish on China. “He homes in on the excesses of the markets and profits from them. That’s been his stock and trade.”

Mr. Chanos declined to be interviewed, citing his continuing research on China. But he has already been spreading the view that the China miracle is blinding investors to the risk that the country is producing far too much.

“The Chinese,” he warned in an interview in November with Politico.com, “are in danger of producing huge quantities of goods and products that they will be unable to sell.”

In December, he appeared on CNBC to discuss how he had already begun taking short positions, hoping to profit from a China collapse.

In recent months, a growing number of analysts, and some Chinese officials, have also warned that asset bubbles might emerge in China.

The nation’s huge stimulus program and record bank lending, estimated to have doubled last year from 2008, pumped billions of dollars into the economy, reigniting growth.

But many analysts now say that money, along with huge foreign inflows of “speculative capital,” has been funneled into the stock and real estate markets.

A result, they say, has been soaring prices and a resumption of the building boom that was under way in early 2008 — one that Mr. Chanos and others have called wasteful and overdone.

“It’s going to be a bust,” said Gordon G. Chang, whose book, “The Coming Collapse of China” (Random House), warned in 2001 of such a crash.

Friends and colleagues say Mr. Chanos is comfortable betting against the crowd — even if that crowd includes the likes of Warren E. Buffett and Wilbur L. Ross Jr., two other towering figures of the investment world.

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The 56% rebound - Is China back?

The China export crash was expected. The recovery is better than I thought it would be but after something has fallen so far it is relatively simple to achieve large rebounds but this is impressive.

Will it last? Doubtful. The stimulus package is in the front line again. It has a lot to answer for. My posts on the metal stocks and the empty city are also relevant here.

China’s economy rebounds with 56% annual rise in imports [Times Online]

China’s economic juggernaut showed the strength of its recovery with exports rising for the first time in 14 months and imports soaring by a staggering 56 per cent in December from a year earlier.

Chinese government economists, usually cautious in their assessments, hailed the strength of trade in December — albeit from a low base rate after exports slumped a year ago.

Huang Guohua, a customs agency economist, said that the December rebound marked an “important turning point”. He added: “We can say that China’s export enterprises have completely emerged from their all-time low in exports.”

China’s exports leapt 17.7 per cent in December from a year earlier, far outstripping the expected 4 per cent rise to break 13 months of decline, the Customs office figures showed.

The surge in export trade was matched by an even bigger leap in December's imports, which rose 55.9 per cent year-on-year to $112.3 billion (£70 billion), much more than the expected 31.0 per cent rise. That squeezed China’s trade surplus down to $18.4 billion compared with $19.1 billion in November and $39 billion in December 2008.

That rise reflected China’s stronger economic growth, driven by a 4 trillion yuan (£400 billion) stimulus package unveiled in November 2008 and by demand for imported raw materials and consumer goods at a time when demand in the United States and other foreign markets is weaker.

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With China’s trade data for all of 2009 now out, the nation's crowning as the 2009 export champion is expected to be confirmed when Germany releases full-year trade figures on February 9. From January to November, Chinese exports were worth $1.07 trillion, while data from the German national statistics office on Friday showed that exports from the European heavyweight amounted to $1.05 trillion.

The robust figures from China echo similar rebounds in South Korea and Taiwan, which reported growth of 46.9 per cent and 33.7 per cent respectively.

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