Monday, December 10, 2007

Honey, they shrunk the Chinese economy

EDUARDO PORTER writes in the New York Times:
According to new estimates, the colossal Chinese economy that has been making marketers salivate and giving others an inferiority complex may be roughly 40 percent smaller than previously thought: worth $6 trillion rather than $10 trillion. That means it lost a chunk roughly the size of Japan’s output.

The problem is that the World Bank’s measure of China’s [PPP - purchasing power parity] rate, everybody’s benchmark, had been based on a 1980s survey of Chinese prices. This year, the World Bank did its own survey to update the measure. While the bank has not published it yet, Albert Keidel of the Carnegie Endowment for International Peace extrapolated the figure from another set of exchange rates published by the Asian Development Bank.

It turns out that things in China are more expensive.

The reassessment does not just involve China. India is also likely to be downsized. And, by the way, global growth has very likely been slower than we thought.

If China is less wealthy, and less a rival, maybe some members of the United States Congress will not press it so hard to revalue its exchange rate.

Guambat is always baffled by lies, damned lies and statistics.

Along a China-theme, Guambat noticed the following articles in the morning Marianas Variety (and reported elsewhere), and followed up with a bit more. This is all somewhat related, but only indirectly.

Chinese Chemical Company Ordered By Beijing Court To Pay $65M For Airbus Damage

the Dalian branch of the China National Chemical Construction Corporation has been ordered to pay a record $65 million in compensation, plus interest, for destroying a Malaysia Airlines Airbus A330 jet with falsely declared cargo.... the $130 million aircraft was so badly corroded that the damage could not be repaired.

Half-cremated bodies dumped to save fuel
China was hit by its worst fuel supply crisis in four years from October to November, as a widening gap between low, state-regulated domestic prices and market-driven international prices forced Chinese refiners to cut output.

Fuel in many parts of the country was rationed and there were long queues at petrol stations.

Villagers in Hengyang county, in the southern province of Hunan,... sent people to investigate the smell and The South China Morning Post said they saw "crematorium workers putting half-burnt human remains and organs in plastic bags and throwing them into a nearby ditch".

"As the price of diesel rose, we saw more and more bags thrown out from the crematorium," the paper quoted Xiao Gaoyi, a village representative and one of the witnesses, as saying.

Living the diesel shortages in China - coming soon to a city near you
Trucks are lining up in their hundreds at three stations in Chengdu, China, in the hope of getting 40 litres of fuel each. In this city of 10 million, only those three are still selling diesel.

The story goes something like this: Inflation is out of control at 6.5 per cent and prices of everything have at least doubled in the last year and a half. Wages remain almost stagnant with no upward rise to match the inflation rate. Five years ago, when China’s economic boom started, dreams were alive in the air: a new car, a new apartment and a better life filled with possessions if you came to the cities and worked really hard. That is exactly what happened, a flood of workers came to man the factories, build new skyscrapers, and fill offices by the hundreds of millions.

The carrot dangled in front of 1.3 billion people was simple: come, work and be rewarded.

That was then, this is now. The dream is dying on the vine. A majority of Chinese citizens now realise that car ownership will not occur for them, same goes for the apartment. Property values are skyrocketing, from 2,500 yuan for a square metre in 2003, to 10,000 yuan for a square metre in today’s high-rises.

To highlight the social stress inflation is causing: “Stampede leaves three dead, 31 injured” is a headline that sums up the situation. Carrefour supermarket had a special on cooking oil which was discounted $1.55 from the regular $7 price. The promotion saw bargain shoppers lining up at the store entrance at 4am. When the doors opened at 8.40am, there was a stampede through the aisles. Fights over the bottles of oil began, and shoppers were pushed to the floor. Some were trampled to death.

Cancelled orders and partial delivery to customers overseas is now standard. A number of logistics company vehicles are grounded all along the coast from Shanghai to Shenzhen, waiting for their 40 litres of fuel as lines spill out onto highways, creating traffic jams on interstate highways. Company vehicles are in a parking lot not moving at all.

his shortage in China is diesel only. All other fuels are available at the moment.

Trucks Power China’s Economy, at a Suffocating Cost
Trucks are the mules of this country’s spectacularly expanding economy — ubiquitous and essential, yet highly noxious.

Trucks here burn diesel fuel contaminated with more than 130 times the pollution-causing sulfur that the United States allows in most diesel.

The 10 million trucks on Chinese roads, more than a quarter of all vehicles in this country, are a major reason that China accounts for half the world’s annual increase in oil consumption ... and has propelled China past the United States as the world’s largest emitter of global-warming gases.

fear of inflation — not to mention political and social unrest — has led Beijing to prevent the country’s mostly state-owned oil companies from increasing diesel prices at the pump in pace with global oil prices. Raising fuel prices for farmers, whose incomes have lagged behind those of city dwellers and who need diesel for their tractors, is one concern. Lower diesel prices also essentially subsidize every manufacturer in China’s elaborate export machine.

[This is a long and detailed depiction of the Chinese truck industry and how it compares to Europe and US, written for a trucking industry, and makes an interesting read in its own right.]

Doing business in China: Yahoo and Baidu both face challenges
The families of two jailed Chinese dissidents got an apology from Yahoo Inc.’s Jerry Yang last week as the CEO was grilled by a congressional committee – and now they are getting some compensation.

The two journalists who are still in jail after Yahoo HK gave Chinese authorities information about their Internet activities, have reportedly received a settlement from the California-based company.

The case highlights challenges Western companies face when doing business in China. Yahoo also owns a 40% stake in, China’s leading business-to-business Web site.

For more on China's Internet policies, read the FT's package, including a piece on trapping online dissent and one on search. [Links omitted but available in original article.]

ArcelorMittal Compelled To Bid For All Of China Oriental
Billionaire Lakshmi Mittal is caught between a rock and a hard place in a theatrical drama to force an opening in China’s large but closely guarded steel industry.

backdoor dealing and wheeling, documented in lurid detail in the Hong Kong authority’s ruling, offered a rare glance into the sort of under-the-table maneuvers often essential to doing business in China.

The wild card, however, remains the Chinese government. From ArcelorMittal’s standpoint, its share purchase agreement with Han is far from legally binding, as it is conditional on obtaining antitrust approval from the Chinese government, the Ministry of Commerce and the State Administration for Industry and Commerce.

That approval is expected to take time, and it is difficult to say whether Beijing would give its regulatory blessing. Without it, the general offer ArcelorMittal is now required to tender to China Oriental shareholders could, farcically, give it nominal proprietary status over the Chinese steel maker while depriving it of its entitlement to exercise ownership rights inside China.

Should You Think Twice Before Doing Business in China?
A lack of transparency in terms of regulations, complex laws, and fundamental cultural differences can be huge stumbling blocks for businesses. Furthermore, since many foreigners aren't huge supporters of China's government, the prospect of working in China also has the potential for backlash in the U.S.

MI5 warns firms over China's internet 'spying'
The head of the MI5 sent a letter to more than 300 senior executives at banks, accountants, and legal firms earlier this week warning them of a web-based attack from Chinese state organizations.

The letter warns that British firms doing business in China are being targeted by the Chinese army, which is using the internet to steal confidential information to benefit Chinese companies.

China says it is cyber-espionage victim
The Chinese Foreign Minister today denied his country is using the internet to spy on others and said China has itself been a victim of cyber-espionage.

Yang Jiechi said: “The Chinese government firmly opposes hacking attacks ... these are prohibited by law.”

A Chinese Foreign Ministry spokesman yesterday claimed that the report was slanderous and prejudiced and ignored the political, economic and social progress made by the country. China also alleged that the report was an attempt to put obstacles in the way of improved ties between Britain and China.

Asia’s roaring economy
“Here in the United States, we seem to be driven by contract law, that’s not the case in China,” Verrecchia said. “In doing business in China, it’s all about relationships.”

Modernization brings with it problems of which China is only now becoming aware and which its leaders are only now beginning to address, the panelists said. Among the difficulties are worsening pollution, manufacturing quality issues, wage pressures, resource scarcity and inflation.

“I think China wants its share of the pie, whatever the growth rate, they’re going to put enormous demand on resources,” Verrecchia said.

Such demands will put China at odds with its neighbors in the Far East, the United States and other major economic powers, the panelists said.

“There are tensions as well in a relationship that is multifaceted and complex,” Flynn noted.

American businesses, and their workers, will have to come to grips with that complexity and understand that China will not always adhere to this country’s demands or rush to alleviate its concerns, the speakers noted.

“Any time the United States isn’t the center of something, it’s a bad thing,” some Americans believe, Verrecchia said. “I don’t necessarily agree with that.”

BHP/Rio Tinto: Chinese frustrated by inability to impact merger with US-EU style anti-trust legislation
China could look to draw up new regulations to restrict BHP and Rio Tinto’s business in China if the two commodities giants merge, said a Chinese government advisor. But the adviser warned that it was not clear who would take the lead in proposing the idea to the central government decision maker or legislator.

According to the government advisor who is familiar with the metals sector and related legislation, China’s anti-trust law, which will take effect from 1 August 2008, does not include any clause which emphasizes its overseas effectiveness and therefore does not have any power to influence the proposed merger of BHP and Rio Tinto. However, the government advisor argued that some new regulations should be drawn up to restrict BHP and Rio Tinto from doing business in China and with Chinese companies. China should learn from the US and EU and try to protect domestic players that are affected by overseas mega mergers.


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