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The China Analyst - October 2012

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China's hand-picked next generation of leaders will be tasked with solving deep-rooted problems formed during China's 30 years of socio-economic development. A growing (and increasingly visible) disconnect between top wage earners and the working class, frustrated factory owners, and a rapidly-ageing population are just some of the key issues facing modern China.

Beijing needs to rebalance its economy away from excessive reliance on investment towards a more domestic consumption driven growth model. Beijing will only be able to accomplish this feat through targeted market-oriented reforms such as deepening reforms in the land, labour and financial markets. In the meantime, the vested interests of China's powerful SOEs, who have long enjoyed preferential government policies in an effort to breed global champions, will remain a major hurdle in pushing long-awaited reforms.

China is still on track to become the world's largest economy sometime during the new leadership's 10-year tenure. If China's policymakers fail to push much-needed reforms, foreign investors will look to other markets and marginalised sections of the population will grow even more restless. However, if China can stay on course - while battling increasingly visible signs of strain - it will herald yet another chapter in China's unrivalled growth story.

The China Analyst - October 2012 Cover.png

Click here to download the October 2012 edition

In the October 2012 edition of The China Analyst, we gauge China's progress in implementing these market-oriented reforms and highlight the opportunities that companies need to be aware of as China enters a new, more sustainable growth phase.

This edition includes the following lead articles:

  1. China's Economy: Heading for a Firm Landing?
  2. China's SOEs: Stalled Reforms or Agents of Change?
  3. FOCAC 2012: Sino-African Partnership Gains Momentum

A new Commodities section focusing on China's role in global commodities trade is included to complement other regular sections such as: Procurement, where we take a closer look into China's rising labour costs; Strategy, where we explore China's role in Africa's development as an investor and major trading partner; Investment, where we analyse China's overseas resource investments; BRIICS, a macro economic comparison of the world's six major emerging economies; and four Regional Focus sections with analyses of the latest China-related trade and investment activities in Africa, Australia, Latin America and Russia.

The China Analyst is published by The Beijing Axis, a China-focused international advisory and procurement firm.

To view the current and past editions of The China Analyst online, please visit our website.

The China Compass - August 2012

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The China Compass - August 2012, published by The Beijing Axis, combines basic country data of China, as well as other major world economies, with more detailed analysis of a wide range of macroeconomic and social data; presents a comprehensive picture of the ever-changing and evolving Chinese landscape; contains up-to-date statistics, topical themes and insights; and is presented in a reader-friendly format as a useful desk reference for executives with a China agenda.

The China Compass - August 2012_Cover.jpg
Click here to download the August 2012 edition

Since our last edition, the developed world has been unable to escape from a self-induced sovereign debt crisis, which has fuelled speculation as to whether China's economy is headed for a 'soft' or 'hard' landing. While China's GDP growth has subsequently slowed to 9.2% in 2011 and 7.8% year-on-year in the first half of 2012, fears of 'hard' landing seem overblown. Even growth of 7.6% in the second quarter fits with our core view that China's annual growth rate for 2012 is still expected to be around 8%.

As China attempts to rebalance its economy towards a more sustainable growth pattern that puts a greater emphasis on domestic consumption while sheltering the economy from the global slowdown, we expect many cyclical and structural changes and increased volatility. However, we still do not foresee a hard landing.

Our focus and theme of this edition is 'China Moves Towards Growth Moderation and Sustainability', featuring sections on:

  • Selected Macroeconomic Indicators
  • Domestic Consumption and Foreign Trade
  • Domestic and Foreign Investment
  • Financial Indicators
  • Social Indicators

We trust that this edition of The China Compass will continue to shed light on past developments, current issues and future prospects of the Chinese economy, making this fascinating and complex story slightly more comprehensible.

As always, we welcome and appreciate all feedback. 


The China Compass is published by The Beijing Axis, a China-focused international advisory and procurement firm. 

For more publications by The Beijing Axis, including past editions of The China Compass, please visit the 'News & Media' section of The Beijing Axis website.

A few months ago, as part of a long string of protectionist-oriented disputes involving China, the heads of 30 industry groups from North America, Asia and Europe wrote a letter to Chinese ministers in protest of a recent law involving the procurement policies of the Chinese government. From October 2009 onwards, China’s public purchases were to start favoring domestic technologies. The legislation was deemed a significant blow to trade for international high-tech firms, as China’s government procured USD 88 billion worth of goods and services in 2008, including 14% of the nation’s 40 million PC purchases.

The favoring of domestic enterprises is not an issue exclusive to China, however. Although over 20 countries have signed on to the World Trade Organization’s (WTO) Agreement on General Procurement (China has not), it is scarcely followed at all.

In the WTO’s own words, the agreement, “[has] not worked well”. It requires “non-discriminatory practices and open procedures in government procurement among member states, and covers not only central government purchasing of goods… but also procurement of services, including public works, and procurement at the sub-central levels of government. Procurement in public utilities is also included.” This applies only to contracts valued above a certain threshold, as set by the WTO for various procurement categories; below the threshold, countries can be as discriminatory as they please.

Participants are supposed submit statistics of their procurement activities on an annual basis, to include countries of origin and totals. Only eight countries have bothered to present anything at all. Their submissions suggest anything but engagement in “non-discriminatory practices”.

  • Norway: The most recent statistics are from 2005. Of the USD 1,215 million procured, only 1.3% of supply, 6.9% of service and 1.3% of works contracts went to foreign companies  
  • South Korea: In 2004, the most recent data from South Korea, procurement contracts were valued at over USD 25 billion. Less than 1% went to foreign-based firms, these almost exclusively entered into by the Ministry of National Defense with firms based in the United States, Germany and the Netherlands
  • Japan: 98% was procured domestically in 2008. Ironically, its Foreign Trade Commission did not contract at all with foreign-based companies
  • US: The US submissions to the WTO are not broken down by country of origin. However, the website of the US Federal Procurement Data System does give this data, although buried within around 100 xls files – one for each federal agency. Sampling these files reveals that beneath the column heading “Country of Origin”, if there is anything at all, there is only 'US.' The USD 417 billion procured by the US in 2007 most likely came from its own 50 states
  • Switzerland: Switzerland reports the highest proportion of overseas procurement. In its most recent submission of 2003 data (in French), it lists 60% of its above-threshold contracts going to domestic bidders, 29% to US firms and 9% to the EU, with 2% categorized as “other”
  • Canada: does not list country of origin. The country reports 1,759 contracts made in 2007 valued at USD 1.9 billion
  • Hong Kong: consistently submits a two-page document with their name, the date, and nothing else of informational value.
  • Liechtenstein (yes, Liechtenstein): This constitutional monarchy of 35,000 people is a model of transparency. It lists all 109 of its 2008 government contracts, and even goes so far as to give the name of the company it has procured from. Somehow even tiny, landlocked, mountainous Liechtenstein manages to largely avoid procurement from abroad. Besides domestic contracts, there were only a handful from Switzerland, two from Iceland, one from Germany and one from Austria.


It seems discrimination in government procurement is a worldwide phenomenon. If the heads of these international industry groups want the Chinese government to partake in fairer procurement practices, the first step may be to convince their own governments to do the same.

January 2010 is the beginning of a new decade yet it also inaugurates a new era in international trade with the commencement of the ASEAN-China Free Trade Agreement. The 1.9 billion citizens of its member countries now comprise the largest free trade area in the world. In terms of total trade volume, the ASEAN-China Free Trade Agreement ranks third behind only the European Union and the North American Free Trade Agreement.

After its signing in 2002, China and the six veteran ASEAN members – Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand – have incrementally reduced their tariff levels, typically at 5% per annum. As of January 1 2010, 93% of the commodities exchanged between these countries will have their tariff rates reduced to zero. The newest members of ASEAN – Cambodia, Laos, Myanmar and Vietnam – are scheduled to follow suit with most of their intra-ASEAN tariffs eliminated by 2015.

The trade agreement seems to have been effective. Since the first provisions of the treaty went into effect in 2002, trade has soared between China and ASEAN countries. The exchange of goods among China’s top five trade partners in ASEAN – Indonesia, Malaysia, the Philippines, Singapore and Thailand – expanded at an average rate of 22.9% from 2004 through 2008. In the four newest ASEAN members during this five year time period, imports to China have grown at an astounding rate of 36.1%, albeit with great variation between countries and years.

ASEAN trade graph3.JPG Source: UN Comtrade; Beijing Axis Analysis

From this rapid increase, China has edged out the United States to become ASEAN’s third-largest commercial ally, behind Japan and the European Union. China-Asian trade totalled USD 231 billion in 2008. Although the first half of 2009 saw a decrease of 24% over the same period the previous year, indications of a global economic recovery suggest that expansion should once again resume in 2010.

Currently, trade between China and its southeast Asian counterparts is characterised by China swapping finished products, such as electronic equipment and machinery, for inputs such as oil/lubricants, plastics, rubber and intermediate electronic components. The effects of the free trade agreement may gradually change this. It is expected that a number of Chinese manufacturers may expand into areas with cheaper costs.

Take Cambodia, for example. Due to its net exporter status of cotton and to its low production and labor costs, Chinese garment factories may be enticed to relocate given these factors and the extremely competitive environment of China. Provisions of the free trade agreement, such as fair treatment of foreign investment and impediments to nationalisation make foreign direct investment within treaty participants a more viable option for such manufacturers.

Despite the progress already underway through this new agreement, there are still a number of obstacles that must be overcome in order for it to reach its full potential. Road and rail networks are limited between China and ASEAN members; exchange almost exclusively takes place by sea. The Chinese government has allocated USD 25 billion to alleviate this problem, but the construction process will take years to complete. The fact that the free trade agreement has been made without the guidance of the WTO is also a concern. Given the lack of transparency in China and in several Asian countries, restitution in legal disputes may be difficult to obtain.

But the effects of these glitches seem to be minimal. The ASEAN Secretariat estimates that the agreement will contribute an additional 0.3% to China’s GDP and another 0.9% to the GDP of the whole of ASEAN. One may expect that at the beginning of the next decade, the ASEAN-China Free Trade Agreement may yet truly rival those in North America and Europe.


Beyond language barriers, the negative perception of Chinese products’ quality often hinders their ability to enter the Russian market. Although a prospective deal between a Russian client and a Chinese supplier may make it to the final stages, even to a point just before the contract is signed, reservations on the Russian side may lead to a failed or delayed transaction. All may be ameliorated with a single certification – the GOST R.

GOST R Certification

The GOST R is not an advanced certification, hence for certain industries allows fast access to the Russian market. It is issued by the Federal Agency of the Russian Federation on Technical Regulating and Metrology to ensure that production activities, goods and services conform to Russia’s national standards.

There are two types of GOST R: the Single Shipment Certificate and the Serial Production Certificate. The Consignment Certificate of Conformity for Single Shipments is a trade document valid for one consignment only, i.e. for a certain quantity and product type. It can be issued only if the foreign manufacturer is able to prove that there is a pre-existing agreement with a Russian customer/importer by means of a contract or an invoice.

In contrast, the Serial Production Certificate of Conformity is a trade document whose validity can vary from one to three years, and is issued specifically to manufacturers. In this case, there is no need for the manufacturer to provide documentation from a customer/importer in Russia. This certification enables the foreign suppliers to send an unlimited quantity of goods during the certificate’s period of validity. To obtain the Serial Production license, Russian experts must first inspect the manufacturer’s facilities and test product samples.

Of these two Certificates of Conformity, there are both voluntary and mandatory types whose colours are blue and yellow, respectively.

The GOST R certification system concerns the majority of products sold and/or used in Russia, such as foodstuffs, textiles, cosmetics and toys; mechanical and electrical goods; and equipment for such industries as food, chemical, oil and gas, and construction as well as others.

Regional Applications

The benefits of GOST R certification are apparent in CIS countries. It is officially required and acknowledged in Russia and Belarus. And although not officially required in Kazakhstan, Azerbaijan, Moldova, Lithuania, Latvia, Estonia or the Ukraine – in the Ukraine, UkrSEPRO is the officially required standard – the possession of GOST R certification is widely recognised, and assists in the promotional activities of one's product.

In addition to GOST R certification, RTN certification is necessary for exporting potentially dangerous products to Russia. This applies to manufacturers of such items as lifting equipment, heat exchangers, hot water boilers, pressure equipment, and compressors.


Type GOST R Certificate UkrSEPRO Certificate GOST K Certificate
Certifying Body GOSSTANDARD Derzhspozhyvstandard KAZMEMST
Certificate Types

Mandatory Certificate of Conformity (yellow)

Voluntary Certificate of Conformity (blue)

Mandatory Certificate of Conformity

Voluntary Certificate of Conformity

Mandatory Certificate of Conformity (blue)

Voluntary Certificate of Conformity (pink)

Validity

Single Shipment Certificate

1 Year Certificate

3 Year Certificate

Single Shipment Certificate

1 Year Certificate

2 Year Certificate

5 Year Certificate

Single Shipment Certificate

1 Year Certificate

3 Year Certificate


Another point to mention is that Russia’s individual industries, and even individual leading enterprises, may have their own standards. For example, some steel end-users only buy boiler tube with ОАО "CNIITMASH" certification, and oil major Rosneft has its own qualification standards for providers of its equipment.

Once the language barrier is overcome, obtaining GOST R certification is the next step toward enhancing a product’s competitiveness in Russia and the CIS. It is an indispensable move for making the quality of one’s product recognisable to these countries to ensure that, next time, the deal runs smoothly.

RMB.jpg

US president Barack Obama’s November visit to China highlighted China-US trade relations and the importance of these two major economies in leading the world out of crisis. The US president and other world leaders have charged that China is keeping its yuan currency artificially weak in order to benefit domestic exporters. An appreciating yuan, these foreign leaders feel, would bring greater balance to trade and lead the world out of the current crisis. But is this really the case? Perhaps history and a few economists can shed more light on this issue.

Those in favor of a dearer yuan include the IMF Managing Director, Dominique Strauss-Kahn. In a recent speech he emphasised the need for the global economy to shift away from the old paradigm based upon US consumption, fueled by easy credit and cheap goods from export-dominant countries. Trade surplus countries such as China must fill the consumption void left in the absence of the US. A stronger yuan is needed to increase Chinese buyers’ purchasing power abroad and to stimulate a depressed world economy.

Nobel Prize winning economist Paul Krugman is even more strident in his criticism of China’s monetary policy. He contends that China has engaged in a 'beggar-thy-neighbor devaluation' and that the nation is “siphoning much needed demand away from the rest of the world into the pockets of artificially competitive Chinese consumers” in a time of crisis. He warns that large trade imbalances, such as that between China and the US, could lead to an eventual failure in trade altogether. An appreciated yuan, he insists, is necessary to heal the world’s economic ills.

Not all agree with this sentiment. Justin Yifu Lin, chief economist at the World Bank, warns that appreciating the yuan will not help to improve global trade balances and would spoil what appears to be the beginning of economic recovery. Goods would become more expensive in the US, adversely affecting the already beleaguered American consumer. The trade deficit between the two countries would not diminish significantly because manufactured goods shipped from China are not produced domestically in the US. Mr. Lin advises instead that a growing China and a reformed US financial sector are the keys to global recovery.

Historic precedence also challenges the assertions of the likes of Krugman and Strauss-Kahn. In the 1980s the world’s major central banks worked to appreciate the Japanese yen by around 50% to the USD. The unexpected result was that the US trade deficit with Japan actually increased. The first significant decrease did not occur until 1990, five years after the central banks’ action and three years after the currency revaluation.

There is no simple short-term solution to trade imbalances. In the end, China’s monetary policy is set by China’s leaders who appear content with the yuan at around 6.82 to the USD. The result: China’s GDP once again surpassed the 8% growth rate with indications that the rest of the world is regaining its economic footing. It could be a lot worse. Debates on China's monetary policy will continue, but for now the yuan is staying put, for better or worse.

Building on the last post on this blog regarding protectionism, trade protectionism is now a big concern in China. Chinese GDP relied heavily on foreign trade before the financial crisis. As one of the three engines of China's GDP growth, the exporting sector has just started to recover in 2009, but it now faces the threat of protectionism. The ‘anti-dumping’ cases that some Chinese suppliers are confronting will probably not effect China’s economy and exporting sector too heavily in the big picture, but the protectionism message sent by US government from these cases is a serious concern that China needs to consider and be prepared for.

自9月初美国通过了轮胎特保案的最终裁定,对从中国进口的所有小轿车和轻型卡车轮胎征收为期三年的惩罚性关税开始,贸易保护主义的抬头开始成为国内进出口行业愈加热议的问题。事实上,轮胎特保案只是中国目前遇到的众多贸易争端之一。09年以来,中国很多行业的产品出口遭遇到了类似的问题。(如下表).

国家
美国
行业
无缝钢管
事件
继欧盟之后,美国商务部10月7日宣布对从中国进口的无缝钢管发起反倾销和反补贴税调查。此举可能导致美国对此类产品加征接近100%的新关税
时间
2009年10月7日
影响
无缝钢管可能失去全球最大出口市场

国家 欧盟
行业
无缝钢管
事件
10月6日,欧盟部长理事会发布公告称,裁定中国输欧无缝钢管对欧盟产业构成损害威胁,决定征收17.7%~39.2%的最终反倾销税。
时间
2009年10月6日
影响


国家 美国
行业
轮胎
事件
美国对中国轮胎发起的特保措施,决定对从中国进口的所有小轿车和轻型卡车轮胎实施为期三年的惩罚性关税,意味我国会损失10亿美元出口额,影响10万左右工人的就业。
时间
2009年9月11日
影响
涉案金额高达22亿美元

国家 美国
行业
油井管产品
事件
美国对中国油井管产品进行反倾销、反补贴合并调查,这是中国迄今为止遭遇最大涉案金额的贸易摩擦官司。
时间
2009年4月
影响
涉案金额高达32亿美元

国家 美国
行业
铜版纸产品
事件
美国宣布对中国出口美国的铜版纸产品征收临时反补贴税,改变了美国坚持了23年的不对非市场经济国家实施反补贴法的贸易政策。
时间
2009年3月30日
影响
涉案金额高达22亿美元

国家 印度
行业
高新技术产品
事件
印度对我国同步数据传输器发起贸易救济调查。
时间
2009年2月
影响
涉案金额为8.8亿美元

国家 印度
行业
玩具
事件
印度宣布今后6个月内将禁止进口中国玩具,浙江、广东地区的一部分玩具企业受到不少影响。
时间
2009年2月
影响
浙江、广东地区的玩具企业受到影响。


注:表中数据引自新浪财经

以上数据看起来非常惊人,但整体来说,中国进出口的走势还是在恢复中的,这些单个的反倾销案件对中国某个特定公司或行业造成的损失并不是特别影响大局。比如,根据近期中国海关公布的数据,9月PMI新出口订单指数53.3%,连续5个月超过50%并保持上升。9月季调后的新出口订单趋势53.8%,自09年1月以来持续上升。

但是受金融危机影响,国外市场的消费能力萎缩使得我国这种出口恢复还是非常缓慢。在这种背景下,以美国为代表的国家或地区实施的贸易保护主义所造成的数个反倾销案件对中国造成的心理影响恐怕远远大于经济损失。奥巴马曾在G20峰会上提出针对对美贸易顺差大国(主要是中国)的“可持续及均衡增长框架”协议。美国政府认为,全球经济的不平衡(特别是美中贸易的不平衡)与危机的发生有一定的因果关系。当然,将源自美国而祸及世界的此次危机,归于这种不平衡尤其是中美贸易的不平衡,显然是嫁祸于人的不公平做法。根据克鲁格曼的说法,金融危机的根本原因是因为“美国人花费的比他们挣的多,通过国家借债的方式把借来的钱用于修建房屋和购买消费品以及为联邦预算赤字融资”。

但无论如何,当前美国政府对于贸易逆差的态度从而有可能引发的贸易战或贸易保护主义全球化蔓延才是我们真正值得担忧的。比如近期中国商务部对美汽车产品发起的“双反”调查,也对美国的贸易保护主义明确表明了态度。

毫无疑问,此次奥巴马的访华之行会成为中美双方国内的各相关行业热切关注的事件,甚至在更大的范围内吸引全球各国的眼球。美中双方对于贸易问题的相关谈判结果会成为以后在相当长一段时期内中国的进出口景气风向标。当然早在今年年初的时候中美双方就有过类似的对话,并且没有对以后的贸易环境形成很大的冲击和影响。而这次我们也同样只能拭目以待,希望双方能够在克制的基础上达成一定共识,以更开放的态度鼓励双边甚至多边贸易的运行。而同时对于某些已经或可能受到影响的厂家和行业来说,加速技术升级换代和积极开拓多区域的国外市场无疑也是必需要准备的应对手段。
The European Union's trade commissioner, Catherine Ashton, claimed in a document released last week that despite 223 restrictive trade measures since October 2008, a protectionist worst-case scenario has been avoided, especially as the Group of 20 leaders made commitments to protect free trade. Yet a spokesman from China's Ministry of Commerce over the weekend proclaimed that China has suffered heavily from trade protectionism, which has been rising since the start of the financial crisis. And he gave some stats to back it up. In the first 9 months of the year, the spokesman said, 19 economies launched 88 probes into Chinese products, involving USD10.2 billion worth of export goods. The number of probes is up 29% compared to the same period last year, while the monetary value is up a full 125%. The 88 probes against Chinese products included 57 anti-dumping cases, nine of anti-subsidy and 15 safeguard actions and 7 cases of special protection. The spokesman particularly singled out the United States - responsible for 14 of the 88 probes with a value of USD5.84 billion, an increase of 639% y-o-y.

According to data from the WTO's Global Antidumping Database, in Q3 2009 WTO member governments initiated 44 new product level investigations in response to domestic industry requests for the imposition of import restrictions, most of these (37) occurred under a national antidumping law. The cumulative number of new requests for protection during the first three quarters of 2009 was 30.3% higher than for the same period in 2008, and China continued to be the exporting country most targeted by new investigations in Q3, facing 23 (or 62.1%) of 37 new product-level investigations. For the whole of 2008, industry demands for new import restrictions against China under these policies were up 22.7%, while a 7.8% increase is expected in 2009. Interestingly, however, in the report accompanying the data, author Chad Bown concludes that
WTO member use of trade remedies to target China's exports is not a new, crisis-related phenomenon, as it continues a trend dating back to China's WTO accession in 2001 and even earlier.
So protectionism may have been on the increase since the financial crisis - yet the targeting of Chinese exporters in this regard is nothing new. The series of anti-dumping duties recently levied in the US on imported Chinese products (notably on tires and steel pipe) have, however, caused the contentious shadow of protectionism to fall squarely over US President Obama's impending visit to China. The Chinese have countered with tariffs and investigations of their own, notably on whether cars imported from the US are being sold below market prices in China, yet surely these matters can all be talked out in a civilised manner when the two finally sit down for what is now a well overdue chat. 
China has just increased tax rebates for exporters for the seventh time since August 2008 as part of efforts to support exporters affected by the drop-off in overseas demand. Food companies, electronic and digital media product makers, as well as the ceramics and plastics industries will benefit from the new rebates, according to a statement by the Ministry of Finance. The new rebates are effective from June 1.

The China Sourcing Blog has translated the latest list of commodities, and the full list can be downloaded by clicking on this link:
 
ExportVATRebateAdjustment_16Jun09.pdf

Nearly half of the new items eligible for the tax rebate are food products, an industry not included in the previous six increases. Rebates on canned foods and fruit juices were increased to 15% from 13%. Some food products will get as much as an 8 percentage point increase. The inclusion of food items on the list is somewhat surprising, as demand in this industry is mostly inelastic and the industry itself is not directly affected by the financial crisis.

The rebate is on payments of the 17% value-added tax.

Rebates on products in labour-intensive light industries such as toys, shoes and hats, luggage and bags, and furniture have been raised to 15% from 13%. Toy exports fell 13% year-on-year in the four months to April, while bag and luggage exports fell 0.8% and shoe exports fell 0.6%, according to customs data.

Full export tax rebates, at 17%, are available for the hard-hit electronic products and digital media sectors, makers of products such as television transmitters, sewing machines, compact disks and CD-ROMs, generators, motors, and information processors. Export rebates on certain ceramic products have been lifted to 13%, while the alcohol rebate was pushed up to 5%.

The rebate on textiles and garments, which had already been raised to 16% in previous increases, was not included in the latest list.

(Source: Caijing.com.cn)

white rabbit.jpgIn recent years, a significant number of alarming incidents concerning food safety have taken place in China. These events have reflected that presently China still has numerous problems with food safety, such as food industry management flaws, supervision lags, and inefficient law enforcement.



The following are some of the most glaring food safety scandals that have occurred during the last three years.

2008
  • Several domestic milk manufacturers are involved in a high-profile melamine contamination scandal. Thousands of babies and infants nationwide are affected
  • Man-made jujube appears in the Urumqi market, infused with soluble saccharin and sodium cyclamate liquid in order to make them taste better
2007
  • Big White Rabbit toffee, a famous Chinese candy brand, is found to contain formaldehyde and other deleterious substances in the Philippines
  • Longfeng and Sinian, two famous frozen food companies, are found to have made products that contain pathogenic bacteria
2006
  • In Beijing, 70 people who ate snails are confirmed to be affected with thelaziasis
  • In Wuhan, Hubei, man-made honey syrup is found to have been injected with many kinds of chemicals such as thickening agents, sweetening agents, antiseptics etc.
  • A batch of pork from Zhejiang poisons 336 people in Shanghai due to high amounts of thin carnosine
  • In Yangjiang, all Jiudu fish samples from 7 big agricultural markets are found to contain the antiseptic formaldehyde at ten times higher than the permitted level
  • Some red yolk salty duck eggs produced by a Hebei plant is found to contain tonyred, which improves the colour of the food

These concerns are not merely isolated incidents of negligence or malfeasance, but are closely tied to China’s model of economic development. The dynamic environment of the Chinese economic miracle of the last 30 years is key to understanding these food safety problems. For more than twenty years, China has enjoyed a rapid pace of economic growth, and we can observe a situation where the development of China's legal system has lagged behind the country’s fast economic development. Thus China's not yet fully developed legal framework has limited laws to refer to, or even if these exist, they are mostly out of date.

In addition, since overall social wealth and accumulation of individual wealth are still relatively low in China, social responsibility is not yet fully developed. China’s growing gap between rich and poor, moreover, contributes to the problem, resulting in large numbers of people desperate for instant success and potentially open to the crooked incentives of secretly tampering with food quality.

While there can never be an excuse for deliberate malfeasance with food (or any) products, the issues raised above can serve to contextualize food safety problems in China. The outlook is changing, however, and the Chinese government has stepped up formal regulation efforts to prevent food safety scandals. The latest government initiative was announced on 28 February, when China’s top legislature approved the Food Safety Law, providing a legal basis to strengthen food safety control from the production line to the dining table. The law, which goes into effect on June 1 2009, will enhance monitoring and supervision, tighten safety standards, recall substandard products and severely punish offenders.

Still, there can be no guarantees that food safety problems are completely in the past, yet hopefully most of them are.
China implemented reform of the RMB exchange rate regime from July 2005, and since then the RMB has been appreciating steadily in value against the US dollar. During this time, China's exports have continued to increase, seemingly unaffected by the appreciation of the RMB.

At the end of July 2008, after the RMB had appreciated by about 18%, it suddenly entered a 20-day period of fluctuation. After this period, the RMB continued its general upward trend, albeit much slower. At the same time, however, in the wake of the global financial crisis, China's exports began slowing down, and many factories closed down because of the slump in world demand. As a result, in November China's exports indicated negative growth of 2.2%, an historic regression of hitherto seemingly inexorable export growth.

When the RMB median rate to the US dollar dropped from 6.8349 to 6.8505 on 1 December, it kicked off another round of depreciation. This time it came with a slump, which appeared to be a signal that China will begin a period of steady RMB depreciation in order to support domestic manufacturers and to enhance the current account surplus, which contributed over 7% of China's GDP in 2007.

There's no denying that the depreciation of the RMB will be helpful to Chinese exporters. Yet the general long-term trend seems rather to be one of appreciation. Currently, the drop in China's exports is less connected with the appreciation of the RMB as with the deflated purchasing power from abroad. Hence the critical priority now is to implement industrial restructuring, and to this end the Chinese government is likely to introduce different measures to encourage exports such as duty adjustments and fiscal subsidies.
BRIC.jpgAs the financial turmoil continues to affect the global economy and corporate players implement their best survival strategies, those with a more visionary outlook are considering what the landscape will look like once financial flows go back to some sense of normalcy. Who will survive? Where?, and in what position? It seems no country is completely immune from the consequences of the crisis, yet some economies are clearly in better shape than others. Brazil, Russia, India and China, together the BRIC countries, are good examples.

In general, stock markets in BRIC economies are down, credit is tight and real estate sectors have taken a severe downturn. Weaker demand from developing countries is seriously affecting export sectors, factories are closing and social instability has become a possibility. It is not an optimistic scenario but neither is it for the rest of the low cost countries, nor for companies from the US and Europe sourcing from those markets. Yet BRIC economies are actually reasonably well-positioned terms of (1) their current initiatives and (2) the potential for the future.

In the first instance, large trade surpluses in the past decades and therefore strong foreign currency reserves have enabled BRIC governments to increase spending and boost consumer demand. The 4 trillion yuan stimulus package recently injected by the Chinese government is a case in point. In addition, BRIC governments have shown a leaning towards a more interventionist and/or Keynesian perspective compared the developed world, and this may help to keep markets up in difficult times.

In regard to potential for the future, if the goals of BRIC government intervention can be achieved, we could see internal demand re-emerging before those of developed economies. This is due to the sustained economic growth that BRIC countries have achieved recently, to the low GDP per capita in BRIC countries with large populations (40% of the world population), to higher saving rates, and a growing middle class. In the future, domestic demand could perform a more active role as an engine of economic growth, rather than foreign direct investment (FDI). Moreover, the last five years have seen a notable increase in south-south FDI, that is, bilateral investment between developing economies such as BRIC countries.

The share of developing countries in global GDP is progressively growing, as is the role of these economies in global markets. How BRIC countries - the world's fastest developing nations - react to the current financial crisis will play an important role in reshaping markets and contributing to an altered world order after the current crisis.

Image from www.defesabr.com. 
Part 2: Opportunity.

If one should try to find positives in the gloomy current environment, to identify any new opportunities brought on by the crisis, the situation facing China could be full of possibility.

In the current financial climate, the fact that China has a lot of money - with a record trade surplus of USD35.2 billion and foreign-exchange reserves of USD1.9 trillion, as well as a stable financial system, a USD586 billion stimulus package and retail sales growing at 22% year-on-year - meant it held all the cards at the eminent G20 Summit held in Washington over the weekend. Hence China - one of the few participants with the financial power to aid countries in distress - got what it wants more of: Influence in the machinations of global finance.

Money talks - especially during a financial crisis. And for Chinese companies looking to invest and make acquisitions in Europe and elsewhere, the crisis has created ample opportunities for a bargain. 

Yet despite claims of the dawning of a new world order with a distinct Asian leaning, China has shown no great inclination to expand its focus much beyond protecting its domestic economy, or as government spokesman put it, to put our own house in order, stimulate consumption and ensure domestic stability. Keeping the Chinese economy running smoothly, Wen Jiabao affirmed, would be China's greatest contribution to the world.

But if the crisis is forcing China to put its own house in order, it could also hold the potential for China to significantly reform its economy. This is the view of a Financial Times editorial which urges the Chinese authorities to use its stimulus package not to bolster the Chinese economy as it is, but rather to fashion a new one where consumption at home has more than a cameo role. Priming the economy just so it can start exporting again would only prolong a development model that is no longer sustainable, it concludes, and would forego the golden opportunity of redirecting China's pattern of growth towards consumption.

Irrespective, however, of whether the Chinese government is jumping at any golden opportunities, the financial crisis may yet present its greatest potential not in altering the world order but rather in intensifying China's engagement with it. The hopeful tone of US Treasury Secretary Henry Paulson, speaking recently in New York, is an insightful perspective on the kind of opportunities that China is likely to respond to positively, albeit cautiously, in the wake of the financial crisis (h/t China Economic Review):
Today more than ever the world is looking to China to be a big contributor to global economic growth. While some see China as a threat that must be countered or contained, I believe that they only path to success with China is through engagement. We must recognize that China's growth is an opportunity for US companies and consumers, for our producers, exporters and investors. A stable, prosperous and peaceful
China is in the best interest of the Chinese people, the American people and the rest of the world.


Image: Main Street Meltdown (In the first part of our look at China and the financial crisis, we included a picture of the same ice sculpture, erected in imitation of the melting US economy. The picture in this posting shows the sculpture at the end of its existence in a last, potent image
After recently raising export tax rebates for manufacturers twice (in August for the textile industry, and in November for 3770 types of export products related to labour-intensive industries), China has again reduced export duties on some product categories in the steel, chemical and food industries, set to take effect from December 1 2008.

China has benefited from a significant current account surplus, yet exports contributed over 35% of China's GDP in 2007, which underlines why the Chinese economy is so vulnerable to a decline in exports. The recent declines in export orders has hurt Chinese manufacturers, and with the PPI on the rise, the financial crisis and the reduced purchasing power of foreign buyers have contributed to a rather complicated situation for China sourcing.

Yet the gloomy current outlook may only be temporary. The spate of tax rebates is an indication of the Chinese government's resolve to prop up the domestic manufacturing industry so it can withstand the drop in exports. And due to deepening impact of the financial crisis, more duty rate adjustments may well be in the offing. This is good news for those who purchase from China: A few months down the line there could be cheaper Chinese products on offer. 
IPR image.jpgWith the Games now in full swing, Olympic tourists would be unaware of the concentrated efforts on the streets of Beijing that preceded their visit to the Chinese capital. Foreigners residing in Beijing before the Games would know, however, that cheap DVDs are no longer freely available on the street corners, while Beijing's Silk Street has been put through what Chinese Vice Premier Wang Qishan described as rectification. If there are visible outcomes of the Chinese government's claims of taking Intellectual Property Rights (IPR) seriously, these are part of it.

Crackdowns in China are no small feat: China's scrap with the counterfeit industry has historically been of epic proportions. The tide of Western companies setting up production in China has provided numerous opportunities to copy designs and production techniques, and China's rising middle class (according to Supply Chain Digest) has been eager to snap up realistic looking knock-offs at low-ball prices. 80% of all items confiscated in 2007 by U.S. Customs authorities as counterfeit items, moreover, were produced in China, pointing to an advanced global distribution network for fake goods.

The latest crackdown in China was preceded by warnings in June of harsher punishments about to be meted out to piracy offenders. Copyright Management Bureau Director Xu Chao admitted to a grave piracy situation in China, yet as part of China's new Intellectual Property Rights Strategy, Xu promised better administrative protection of copyrights and harsher judicial penalties. Yet while a sign of changes on the ground, crackdowns in China still occur in a general context of lax enforcement of IPR, a description preferred by the Economist's Intelligence Unit, based on their analysis of China's still fragmented regulatory environment with various toothless agencies and biased courts.

Nevertheless, yesterday's edition of the China Daily newspaper reports of a crackdown planned for the local cultural market in the city of Anshan, Liaoning province. During the crackdown,
law enforcement officials will inflict a stiff punishment on offenders. If the amount of pirated [goods] sold in one time do not exceed 100 items, all illegal goods and income will be confiscated, and the law breaker will be punished a minimum of 10,000 yuan (sic).
Yet if the amount of pirated goods exceeds 500 items, the article concludes with the terse yet ominous proclamation: the law-breaking unit or individual will bear criminal liability.

So despite China's infamous status as the counterfeit capital of the world, with the current crackdown in force, copyright offenders in China have been put on notice: surpass the magic number of 500 and you will face the full might of the law. Yet like with all crackdowns, the real test will be to see what happens after the crackdown, or more to the point, after the Olympics.

Image: China Daily.

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