China and metal - playing the long game

It is my considered opinion that the West is underestimating China on a number of different levels.

If we want to talk superpower politics, then China has always been a superpower albeit one that has been slumbering for 60 years. Remember the last 100 years is a very short period in China's history. In 10,000 years communism will be a mere footnote.

China is playing the long game - it can afford to and has the confidence of thousands of years of civilisation behind it. In contrast the US is a little like the playground bully. The US is young, has grown up quickly and become fat, bloated without losing its arrogance. The US has no friends - merely those that want to be seen to hang out with the playground bully and hope for a few crumbs. China is more like the teacher, simply sitting back with a rye smile and watching the children fight it out on the playground and doing its own thing for the long term good of China.

Where am I going with this - a recent post EAFE Pro looked at China's recent buying of copper and aluminum. I knew such buying was taking place but was surprised at the sheer scale. So why? China is taking advantage of the global recession to buy cheap and stockpile. China knows it will need the metal eventually just to construct the buildings, machines and cars it knows it will need in the future.

Here is the remarkable figure that caught my eye.



These reflect massive increases in imports over a short period of time. Is this all down to the stimulus package? If you have to vast reserves then buying up commodities that you will need in the future is a decent use of the money. Politically this enables China to be even less reliant on Western mining companies.

If one was an investor one would have to consider whether shorting copper is the way to go. If Chinese demand falls will the price follow it or does China intend to keep buying at these brakeneck levels.

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The pungent smell of money

What has been the best investment in China this year? Gold? Copper? No, the humble garlic bulb. Why? Because of swine flu.

Simple.

What is more sinister is the rumours of "bulb hording" - the Chinese are learning about the dark arts of capitalism very quickly indeed.

I like this story. I am not sure why, but I like it.

Hold Your Nose: Garlic Is Best Investment In China [PlanetArk]

BEIJING - The price of garlic in China has nearly quadrupled since March, propelled by its very pungency to rank ahead of gold and stocks as the country's best-performing asset this year.

The trigger for the bull run may have been the idea that the potent bulb can ward off H1N1 swine flu, Morgan Stanley economists said.

That chimes with some anecdotal evidence. The China Daily reported last week that a high school in Hangzhou, a prosperous city in eastern China, had bought 200 kg of garlic and forced students to eat it every day for lunch to stay healthy.

"I don't know about H1N1, but it can prevent ordinary colds," Zhang Ping, 74, told Reuters at a vegetable market in Beijing. "Take me. I've not had cold for many years and every year I buy several dozen pounds of garlic."

Others have been looking for darker forces behind the surge.

China Business News said coal mine bosses -- who are often depicted as being both extremely rich and nefarious speculators -- had been playing the garlic market, hoarding bulbs and hauling them between storehouses.

Garlic served as a case study of the asset price appreciation that Morgan Stanley thinks China will have to contend with after a flood of lending by banks to help fight off the global financial crisis.

In some parts of Shandong province, the wholesale price of garlic is up as much as 40-fold.

"Too much liquidity in any market can lead to speculation," analyst Jerry Lou said in a research note this week. "The most recent evidence of asset speculation in China's commodity markets has been for garlic."

But a more mundane factor may lie at the root of it all.

Garlic prices were extremely low last year, convincing many farmers that it was not worth planting the crop again, a wholesale trader was quoted as saying in the Nanfang Daily.

Supply could not keep up with a pick-up in demand from home and abroad, sending prices sky-high, the trader said.

Yi Xianrong, a researcher with the Chinese Academy of Social Sciences, a top government think-tank, said there was no need for panic.

"The garlic market is cyclical. Price rises are short-term and they will fall again before long," Yi told Reuters.

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Earthquakes and monetary policy

China Financial Markets looks at the monetary implications of the earthquakes. Economics does not stand still.

The devastating earthquake is also bad for monetary policy [China Financial Markets]

This has been a sad week for China, and it has certainly not been easy to watch on television the heartbreaking scenes of the effect of Monday’s earthquake. Sichuan is a heavily populated province, and many of my students have friends and family in the affected areas, so the disaster has hit us very hard. The fact that so many of the victims were schoolchildren makes it all the more horrifying. Bless China, as my student Gao Ming wrote me earlier today, a phrase many worried and dismayed students around campus have been repeating. Next week my friends and I will organize a concert to raise money for the earthquake victims. It’s not much, but everyone feels helpless and wants to do something to help, however small.

Unfortunately the earthquake and its corresponding devastation are almost certainly going to complicate matters horribly for the PBoC in its attempt to manage monetary policy and fight inflation.

Things are likely to get very tricky indeed.

Clearly the earthquake in Sichuan will not only impact agricultural production and the ability to deliver products to the market, but its reconstruction will fuel a boom in demand for energy, materials, and a wide variety of related goods and services. Recognition of the impact of the earthquake both on loosening monetary policy and on increasing the demand for a variety of goods seems to have powered the stock market today. It closed up 2.73% today, driven by smelters and banks.

The government’s automatic response to this potential surge in demand is to clamp down even tighter on price increases, but this cannot possibly have any but the most adverse effect. After all it is one thing to freeze prices in order to drive out inflationary expectations, but the earthquake has caused a real increase in demand and a real decrease in supply – and the stock market immediately recognized that fact. How can price freezes possibly eliminate the disequilibrium?

In fact yesterday’s China Daily had a very long article on the difficulty of maintaining existing price freezes. The article is called “To raise oil prices or not, that is the question” and starts out very bluntly with: “Diesel sold out. This notice can be seen at many gas stations in the country.” It explores both the difficulty of keeping prices at current levels – shortages and an increasing fiscal subsidy – and the difficulty of letting prices rise – the inflationary impact. People like me of course will point out that price freezes simply convert inflation from one kind, the kind that’s measured in CPI, to another, the kind that shows up as shortages and higher taxes, but the idea that China does not have monetary inflation, simply a temporary food-supply problem, has become so ingrained in policy, even though fewer and fewer people believe it, that its impact will stay with us for a while.

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Can China feed itself?

Today the FT has a front page article on China's attempt to guarantee food supplies.

This article dovetails nicely with a recent World Bank paper looking at the role of climate changes on China's ability to feed itself.

The economics of this move and quite profound. So profound in fact that I need to think about it a bit more. Capitalism should not object to vast tracts of Africa being farmed by the Chinese or for the Chinese if they pay the market rate. But what happens when the host country needs to feed its own people? I suspect property rights will be worth very little then. The other aspect is the classic tragedy of the commons externality with land being cleared for farm land with the usual environmental consequences.

This "factoid" surprised me initially:

China has about 40 per cent of the world’s farmers but just 9 per cent of the world’s arable land.

It is important to remember that China is not all about exports and skyscrapers. Underneath the new wealth is a large underbelly of the population still living a hand to mouth existence.

China eyes overseas land in food push [FT]

Chinese companies will be encouraged to buy farmland abroad, particularly in Africa and South America, to help guarantee food security under a plan being considered by Beijing.

A proposal drafted by the Ministry of Agriculture would make supporting offshore land acquisition by domestic agricultural companies a central government policy. Beijing already has similar policies to boost offshore investment by state-owned banks, manufacturers and oil companies, but offshore agricultural investment has so far been limited to a few small projects.

If approved, the plan could face intense opposition abroad given surging global food prices and deforestation fears. However an official close to the deliberations said it was likely to be adopted.

“There should be no problem for this policy to be approved. The problem might come from foreign governments who are unwilling to give up large areas of land,” the official said.

The move comes as oil-rich but food-poor countries in the Middle East and north Africa explore similar options. Libya is talking with Ukraine about growing wheat in the former Soviet republic, while Saudi Arabia has said it would invest in agricultural and livestock projects abroad to ensure food security and control commodity prices.

China is losing its ability to be self-sufficient in food as its rising wealth triggers a shift away from diet staples such as rice towards meat, which requires large amounts of imported feed.

China has about 40 per cent of the world’s farmers but just 9 per cent of the world’s arable land.

More FT comment here:

New eating habits force revolution on China's farms [FT]

China, a small net exporter of rice and largely self sufficient in wheat, has been something of a spectator in the global food crisis of recent months, with Beijing's role confined to tightening scrutiny of exports to prevent profiteering.

"There is no grain crisis in China at the moment, and there won't be for some time into the future," says Cui Xiaoli, a researcher at the development research centre, a think-tank under China's cabinet.

The country's inflation hit 11-year highs in recent months, almost entirely because of an increase in food prices, but the government and many economists argue that these rises are a temporary phenomenon.

The above line depends on the classic "supply and demand" diagram. There has been a demand shock or supply should increase right? Prices will then fall. In the long term this should work but as the first article notes, supply, at least in China, is constrained.

Here is the academic article.

Can China Continue Feeding Itself? The Impact of Climate Change on Agriculture

JINXIA WANG
Chinese Academy of Sciences - Center for Chinese Agricultural Policy
ROBERT O. MENDELSOHN
Yale University - Department of Forestry & Environmental Science
ARIEL DINAR
World Bank - Agriculture and Rural Development Department
JIKUN HUANG
Chinese Academy of Sciences (CAS)
SCOTT ROZELLE
University of California, Davis - Department of Agricultural and Resource Economics
LIJUAN ZHANG
Affiliation Unknown January 1, 2008

World Bank Policy Research Working Paper No. 4470

Abstract:
Several studies addressing the supply and demand for food in China suggest that the nation can largely meet its needs in the coming decades. However, these studies do not consider the effects of climate change. This paper examines whether near future expected changes in climate are likely to alter this picture. The authors analyze the effect of temperature and precipitation on net crop revenues using a cross section consisting of both rainfed and irrigated farms. Based on survey data from 8,405 households across 28 provinces, the results of the Ricardian analysis demonstrate that global warming is likely to be harmful to China but the impacts are likely to be very different in each region. The mid latitude region of China may benefit from warming but the southern and northern regions are likely to be damaged by warming. More precipitation is beneficial to Chinese farmers except in the wet southeast. Irrigated and rainfed farmers have similar responses to precipitation but not to temperature. Warmer temperatures may benefit irrigated farms but they are likely to harm rainfed farms. Finally, seasonal effects vary and are offsetting. Although we were able to measure the direct effect of precipitation and temperature, we could not capture the effects of change in water flow which will be very important in China. Can China continue feeding itself if climate changes? Based on the empirical results, the likely gains realized by some farmers will nearly offset the losses that will occur to other farmers in China. If future climate scenarios lead to significant reductions in water, there may be large damages not addressed in this study.


Keywords: Climate Change, Crops &Crop Management Systems, Global Environment Facility, Common Property Resource Development, Rural Development Knowledge &Information Systems

Water shortages in China

A snippit on the problems resulting from drought in Liaoning Province. We will see more stories like this in the future. The economic implications are potentially large. Digging wells is a short term solution. Ground water is becoming polluted and in short supply.

Once lack of water leads to crop failures the pressure on food prices in the region could be severe. The Chinese government needs to keep a close eye on the water supply.

China drought leaves 670,000 without drinking water [ABC news]

A drought in China's north-east Liaoning province has left nearly 700,000 people without drinking water after rainfall in the first three months of 2008 tumbled to one-fifth levels last year, the Xinhua agency said.

The area is a top grain producer, and maize and rice farming is due to begin next week, but from January to the end of March it had got less than 2 centimetres of rain.

Some 66 reservoirs have dried up, but the area has raised cash to build 1,700 new wells and expand and upgrade water conservation systems to try and ensure spring planting can go ahead, Xinhua said, citing local sources.

China's weather administration said in early April that drought parching other parts of northern China was the worst in several decades and would continue this month.

Drought and floods are perennial problems in China, which has per capita water resources that are well below the global average. Its meteorologists have said global climate change is exacerbating extreme weather, including droughts.

About 30 million Chinese in the countryside and more than 20 million in urban areas face drinking water shortages every year despite huge government investment to address the problem.

Dying Chinese towns - economic restructuring in action

The UK has been through the pain of resource based contraction after the closure of UK coal mining and steel making with the loss of hundreds of thousands of jobs and the economic decimation of local villages and towns. The the same experience is beginning to come to China despite the current economic boom.

For the UK is marked the transition from a manufacturing to a service based economy. However, this transition took 100 years - China appears to be on a fast track to .....who knows where?

In China, political unrest is only one crisis away (see previous stockmarket post).

FEATURE - Dying China Oil Town A Warning To Beijing [PlanetArk]

Dying towns are rare in booming China, but the expanses of rubble and abandoned homes that ring the once-wealthy oil centre of Yumen mark it out as one of them.

And though it is home to just a few thousand people, in a nation of over 1.3 billion, Beijing's stability obsessed bureaucrats are fretting about their fate.

They worry because Yumen's poor, disgruntled inhabitants are the thin end of a wedge of discontent that could engulf hundreds of thousands of people within a decade unless the central government can tackle one of the more obscure but troubling legacies of past socialist policies.

The potential troublemakers live in dozens of "resource towns" scattered across China, which were built by Mao-era economic planners to exploit energy or mineral deposits regardless of how remote or inhospitable the location.

Now some seams of oil, coal and ores are starting to run out, pushing up unemployment and migration while leaving behind shells of towns that are impoverished tinderboxes of unrest.

These towns like Yumen should never have existing and are a result of central planning gone mad. However, the human misery tales are all too real.

"I can't eat well, I can't buy clothes, I can't even think of travelling or having fun. All I can do is try to slowly pass my days," said a laid-off worker who gave only his surname, Quan.

"We have all been out to protest."

The article goes to to point out the link with the UK and US:

Resource towns everywhere shrivel up or suffer when their key source of income fades. Texas is dotted with ghost towns and industrial centres of northern England struggled for decades after coal and heavy industry slipped into decline.

Perhaps most damning of all is the lack of progress in the attitudes of officials. In the face of such obvious economic hardship we get the following:

Officials declined repeated requests for statistics on budgets, population, and the economy of the new town, and trailed a journalist who tried to interview residents of new Yumen.

And the provincial government seems equally oblivious to Beijing's concerns about unrest, poverty and marginalisation.

Asked about the impact of the move, Gansu provincial governor Yu Shoucheng said: "Today's Yumen is glowing and in its prime."

The problem is that whilst the government can keep a firm lid on the changes in economic circumstances and the protests it throws up it is simply building up the pressure so that when it blows the result will be all the more catastrophic.

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China: the NEW Master of the Universe

Standard over the top Daily Mail article but it makes for interesting reading:

Why China is the REAL master of the universe [Freerepublic.com]

Cecil Rhodes, the businessman-imperialist of Africa, the creator of Rhodesia, suffered no flicker of doubt about who were the masters.

"To be born an Englishman," he mused, "Is to win first prize in the lottery of life."

It wasn't idle boasting. In the jingoistic triumphalism of the late 19th century, when waving the Union Jack was a simple pleasure, people sang: "Rule Britannia! Britannia, rule the waves" without any irony. It was a statement of fact.

A quarter of mankind lived under the British flag in the largest empire the world had ever known.

And many of those parts that weren't under Britain's rule - such as the U.S. - had been created by Britain.

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Napoleon III compared China to a sleeping giant and warned: "When China awakes, she will shake the world."

After a long hibernation, China, and her 1.3 billion people - twice the population of the U.S. and EU combined - is awaking almost overnight.

And not just China. The world's second most populous country, India, is industrialising at a historically unprecedented pace.

Their economies are growing on a long-term basis about four times the speed of the UK's and that of the United States. Goldman Sachs, the bank, recently predicted that by 2050, China and India would have overtaken the U.S. to be the world's first and second biggest economies.

We have long heard about the benefits this brings, in terms of plentiful cheap goods from toys to TVs, and huge opportunities for Western companies to sell their wares in these booming markets.

But there are also downsides, which are becoming more apparent. Unskilled workers in the West have become unsettled by the threat to their jobs as production moves East.

The most vulnerable Western workers have found their wages stagnate as they struggle to compete in an increasingly global market place.

And competition for raw materials is pitting East against West.

The economic explosion of China, and to a lesser extent India, has given them an almost overpowering hunger for raw materials with which to build their factories, homes and cars.

Wherever you turn, the rise of Asia is making its impact felt on our existence.

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China is spending 35 times as much on crude oil as it did eight years ago, and 23 times as much on copper.

As it builds gleaming skyscrapers on its fields, China alone consumes half the world's cement and a third of its steel.

What is happening is so extraordinary that economists have had to invent a new word for it - this is not an economic cycle, but a supercycle, a shift in the world economy of historic proportions.

When demand increases and supply stands still, prices shoot up. Iron, wheat and oil are all at record prices, despite slackening demand in the faltering Western economies.

Typical Daily Mail but entertaining nonetheless.

FDI reversals - high costs leading to fleeing Koreans

After years of spectacular growth in FDI in China the tide might be turning in the face of rapidly increasing costs.

The International Herald Tribune highlight this problem in a recent article. The word of the day is "flee" which gives the impression of a less than orderly exit from the China.

There are two issues here:

1. If China is no longer the cheapest location to produce goods where is? Costs are rising everywhere.

2. The "fleeing" of thousands of factory owners in the face of increased costs merely represents reality kicking in. Rising costs and a US recession mean that easy money can no longer be made and it is merely the least efficient firms going out of business.

What all of this does mean is that prices of consumer goods may well rise in the UK and elsewhere (on top of all the other energy and food related price increases).

Just when the West wants to be cutting interest rates to help with the credit crunch we get inflationary pressures suggesting that the opposite is required.

Interesting times.

Rising costs forcing some South Korean factory owners to flee China [IHT]

Scores of South Korean-owned factories are closing surreptitiously in eastern China as their owners flee rising costs, leaving behind embittered workers like Li Hua.

Li and more than 200 colleagues have been fighting for a year to get the six weeks' wages they were owed when the owner of the toy factory where they worked fled during the 2007 Lunar New Year holidays.

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Her case is not a rarity in Qingdao, a major seaport and industrial city in eastern China that sits across the Yellow Sea from South Korea. A two-hour flight from Seoul and home to about 100,000 South Koreans, the city is a hub for South Korean factories benefiting from cheap labor.

But lately, a growing number of South Korean factories have abruptly closed down and the South Korean owners have disappeared as a slew of policies, including rising labor costs and an end to tax breaks, bite into their profit margins.

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Qingdao mirrors, on a smaller scale, what is happening in the Pearl River Delta near Hong Kong. There, thousands of factories, mostly run by Taiwan and Hong Kong companies, are moving inland or abroad or are simply closing as rising costs undermine the assumption that China is the world's cheapest manufacturing location.

A ravenous dragon in Africa

The increasing presence of China in Africa has been a topic of hot debate in the press, blogs and for academics.

The Economist has now entered the debate with a special issue. Better late than never.

There are a whole series of article most of which are worth a read. The quotes include the standard scare stories. There is some truth in these stories but Western companies also fear being frozen out. Is this a race to the bottom taking place? If so the West will find it very hard to compete.

This issue will become increasingly important in years to come and is something I will be working on.

A ravenous dragon [Economist]

Unwelcome advances

But China's sudden global reach is generating as much anxiety as prosperity. In 2005 America's congressmen, citing nebulous national-security concerns, scuppered the proposed takeover of Unocal, an American oil firm, by CNOOC, a state-owned Chinese one. The opposition candidate in Zambia's presidential election in 2006 made a point of attacking the growing Chinese presence in the country. Residents of Russia's far east fear that China is planning to plunder their oil and timber and perhaps even to colonise their empty spaces.

Some non-governmental organisations worry that Chinese firms will ignore basic legal, environmental and labour standards in their rush to secure resources, leaving a trail of corruption, pollution and exploitation in their wake. Western companies fret that the Chinese state-owned firms with which they suddenly find themselves competing have an agenda beyond commercial gain. The Chinese government, they say, is willing to pay over the odds for mining or drilling rights to secure access to physical resources. It also intervenes unfairly on its companies' behalf, they claim, by offering big aid packages to countries that welcome Chinese investment. All this, it is feared, will dent the profits of big oil and mining firms, stoke inflation and imperil the West's access to resources that it needs just as much as China does.

Diplomats and pundits, for their part, fear that the West is “losing” Africa and other resource-rich regions. China's sudden prominence, according to this view, will reduce the clout of America, Europe and other rich democracies in the developing world. China will befriend ostracised regimes and encourage them to defy international norms. Corruption, economic mismanagement, repression and instability will proliferate. If this baleful influence spreads too widely, say the critics, the “Washington consensus” of economic liberalism and democracy will find itself in competition with a “Beijing consensus” of state-led development and despotism.

Such fears are not entirely groundless if the recent conduct of some of Congo's neighbours is anything to go by. Angola, to the south, has been receiving so much aid and investment from China that in 2006 it decided it had no need of the International Monetary Fund's billions and all the tiresome requirements for transparency and sound economic management that come with them. Sudan, to the north, has shrugged off Western threats and sanctions over the continuing atrocities in Darfur, thanks in large part to China's readiness to invest in Sudanese oilfields and buy their output. Farther afield, China's eagerness to do business in Myanmar, and its consequent reluctance to chide the tyrannical generals that run the place, helped to prevent a forceful international response to the violent repression of peaceful demonstrations there last year.

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Aid from China and Human rights abuses

Excellent article reflecting on a recent academic paper on Chinese aid and human rights abuses.

Instead of going through the arguments again I point you to Chris Blattman's Blog that has the appropriate links. I believe the economists have got it about right here - it is crucial to identify the order of causation.

I believe that this will become an increasingly important topic for empirical researchers and something I will be looking at in the near future data permitting.

Do trade and aid from China increase human rights abuses?

Yesterday, the New York Times lamented the worsening war in Sri Lanka, the rise in human rights abuses, and the emasculation of rights observers. "Gone are the Nordic monitors," it writes, "independent journalists are not allowed anywhere near the front lines."

Today, the blame is apportioned. "Take Aid From China and Take a Pass on Human Rights" proclaims the newspaper. The argument: unconditional aid and trade from China insulates regimes from Western mores and threats of sanctions in a dirty war.

China fear-mongering? Taking the story beyond the evidence? Maybe not.

The Times misses a paper posted last week by economists Erik Meyersson, Nancy Qian, and Gerard Padró-i-Miquel, but it gets the story right. Here newspaper anecdotes get support from some powerful statistics: trade with China predicts human rights abuses. At least in Africa.

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Can China continue to feed itself?

China is no stranger to famine and mass starvation. The cause this time might not be megalomaniac politicians but ruthless capitalism leading to global warming.

This recent research paper addresses an interesting issue in my opinion. Given the cold spell in China at the moment this might appear to be a badly timed article.


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Can China continue feeding itself ? the impact of climate change on agriculture

Date: 2008-01-01

By: Zhang, Lijuan
Rozelle, Scott
Huang, Jikun
Dinar, Ariel
Mendelsohn, Robert
Wang, Jinxia

URL: http://d.repec.org/n?u=RePEc:wbk:wbrwps:4470&r=env [PDF]

Several studies addressing the supply and demand for food in China suggest that the nation can largely meet its needs in the coming decades. However, these studies do not consider the effects of climate change. This paper examines whether near future expected changes in climate are likely to alter this picture. The authors analyze the effect of temperature and precipitation on net crop revenues using a cross section consisting of both rainfed and irrigated farms. Based on survey data from 8,405 households across 28 provinces, the results of th e Ricardian analysis demonstrate that global warming is likely to be harmful to China but the impacts are likely to be very different in each region. The mid latitude region of China may benefit from warming but the southern and northern regions are likely to be damaged by warming. More precipitation is beneficial to Chinese farmers except in the wet southeast. Irrigated and rainfed farmers have similar responses to precipitation but not to temperature. Warmer temperatures may benefit irrigated farms but they are likely to harm rainfed farms. Finally, seasonal effects vary and are offsetting. Although we were able to measure the direct effect of precipitation and temperature, we could not capture the effects of change in water flow which will be very important in China. Can China continue feeding itself if climate changes? Based on the empirical results, the likely gains realized by some farmers will nearly offset the losses that will occur to other farmers in China. If future climate scenarios lead to significant reductions in water, there may be large damages not addressed in this study.

Economics of reforestation in China

China is one of those countries that is reversing years of deforestation with planting schemes on a massive scale.

Surely this can only be a good thing? It depends. The problem as always is economics - the irony is that the tree planting frenzy is leading to more pollution not less as the wood is processed (an inherently dirty industry).

As always, you need to dig beneath the headline behinds China's forestation miracle to seek the unpalatable truth.

This interesting article from ChinaDialogue discusses the Chinese tree planting trend.

China's "Green Deserts"

China’s tree-planting movement continues down a worrying path. The planting of artificial, single-species forests has not abated in China; in fact, it has worsened. The country’s original distribution of trees: fir trees in the south, poplars in the north, has made way for poplars everywhere – north, south, east and west. There are even attempts to start poplar plantations on the southern tropical island of Hainan.

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Why are poplars such a common choice? Put simply, they are profitable. Poplars can be sold in the cities and increasingly in towns; the wood is shaved into two-millimetre thick boards that are used in high-density materials for fitting out buildings and constructing cheap furniture. This huge market has lead to an entire industrial chain planting, felling, shipping, processing and selling poplars. One northern city has several hundred wood processing plants alone. Wood processing is a polluting industry, which releases toxic chemicals due to the glues that are used. These can also harm – or even kill – workers who are regularly exposed to them.

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Many will ask why we should not cultivate this fast-growing tree. It has a wide range of uses, after all. However, a quick-growing tree does not mean long-lasting wood. The artificial boards that poplar is used for only last five or six years. They are cheap enough to be thrown away and replaced as China frantically remodels its homes and offices. As a result, we are rapidly exhausting our non-renewable materials, including sand, concrete, bricks, plaster and stone. The short life-span of poplar products mean they do not fix carbon dioxide from the atmosphere for any significant length of time, unlike furniture or building materials made with quality woods, which can last a century or more.

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China has the largest area of artificial forests in the world, but ranks last in terms of these forests’ productivity. These single-species require the constant use of fertilisers and other chemicals. They are weak ecosystems that are vulnerable to disease and pests, which can devastate large areas. They are also unattractive; artificial forests in scenic areas and along roads and railways are nothing to look at.

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"A Bull in China": New book of the month

Jim Roger's new book on China is called "A Bull in China: Investing Profitably in the World's Greatest Market".

A Bull in China: Investing Profitably in the World's Greatest Market

This book is now the current book of the month (it was book of the week but I am too lazy, so much so that it really should be book of the 1/2 year).

The reason I have been jolted into action is that Jim Rogers is one reason for my interest in China after reading his previous book "Adventure Capitalist".

Adventure Capitalist: The Ultimate Road Trip

If the book contains the vision of his previous book it will be a valuable read. It will also be an entertaining read I am sure.

I have similar concerns to the reviewers on Amazon. It seems a little late to bring out a book on buying Chinese equities given the current bubble. Moreover, buying Chinese stocks in not that easy for foreigners. However, I said this about commodity stocks in 2002 and got that spectacularly wrong as prices soared.

Click HERE for an interview with Jim Rogers from August this year.



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Politics of China's Energy Hunt

In a follow on from my previous post relating to China's increasing interest in Africa comes a Financial Times editorial that touches on many of the same issues that I raised in my introduction.

How Western multinationals and countries react is of political importance. China's defence is also valid - the US is not entirely guilt free when it comes to working with corrupt regimes.

Dark side of the hunt for energy [FT]

China's apparently insatiable thirst for energy to fuel its industrialising economy is having severe consequences for international security and the global environment. In both areas, Beijing needs to develop and then demonstrate a sense of responsibility to match its awe-inspiring demand for oil and electricity.

To secure supplies of oil since the country became a net importer 14 years ago, Chinese companies have scoured the globe and not hesitated to strike deals with unsavoury regimes such as the one in Sudan. This week, Gholam-Hossein Nozari, Iranian oil minister, announced a $2bn contract with China's Sinopec to help develop the Yadavaran oil field. Mr Nozari issued a pointed warning to other countries that hesitated to invest. "They will lose opportunities," he said.

The effect of China's indiscriminate dealmaking in energy is often to undermine concerted international efforts to make resourceexporting countries change their behaviour, whether the target is Iran's nuclear programme or suspected genocide in Sudan.

Another victim of China's energy demands is the global environment. So far this year, China has added 90 gigawatts of new electricity generating capacity, more than the entire installed capacity of the UK grid. Almost all the new capacity is in coal-fired power stations, which produce large amounts of carbon dioxide (a contributor to global warming) and other pollutants.

By any measure, China's overall production and use of electricity is grossly inefficient and its pollution controls are poor. Chinese leaders, however, are reluctant to accept that China must play a leading role in tackling climate change, the subject of the international talks now under way in Bali.

There is some logic to Beijing's defensiveness. The US buys much of its oil from corrupt states in Africa and human rights abusers in the Middle East, and US protectionism prevented CNOOC of China from buying the respectable oil company Unocal. It is also true that western countries have contributed most over time to the accumulation of carbon dioxide in the earth's atmosphere. Even so, the evil, folly or carelessness of others are no excuse for China to behave irresponsibly.

Fortunately, there are tentative signs that China is beginning to grasp the geopolitical and environmental implications of its energy needs. Beijing is investing heavily in renewable energy, for example, and has shut some of China's least efficient coal-fired power plants. But these are small steps towards the distant goal of becoming a responsible superpower.

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What Drives China's Growing Role in Africa?

China's role in Africa has important economic and political implications. In one sense, China is filling a gap left by the West who tend to tie aid and FDI to good governance. Therefore China could be criticised for helping to support corrupt and inefficient regimes. Finally, Chinese involvement is part of a wider "land grab" for resources. China knows that to support its current rapid rate of growth it will require huge quantities of natural resources. Africa at the moment provides easy pickings. The reaction of Western multinationals will be interesting to watch as they try to free themselves from the constraints Western governments to ensure they continue to win contracts against the Chinese. Not easy.

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"What Drives China's Growing Role in Africa?"
IMF Working Paper No. 07/211


Contact: JIAN-YE WANG
International Monetary Fund (IMF) - European
Department
Email: jwang1@imf.org
Auth-Page: http://ssrn.com/author=348512

Full Text: http://ssrn.com/abstract=1012994

ABSTRACT: What role does China play in Africa's development? What drives China's increasing economic involvement in the continent? This paper attempts to provide a quantified assessment of China's multifaceted influence as market, donor, financer and investor, and contractor and builder. Though in the past official development aid predominated, the paper argues that government policies, markets for each other's exports, Africa's demand for infrastructure, and differences in China's approach to financing have together moved commercial activities - trade and investment - to the center of China-Africa economic relations. While China's public sector, state financial institutions in particular, has been instrumental in the process, the influence of its private sector is increasing. Implications for the future of China-Africa economic relations are briefly noted.
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China makes the most of the Iranian boycott

China is not to be underestimated when it comes to securing future commodity stocks. While the West take the moral high ground over Iran's nuclear developments China is busy behind the scenes signing lucrative oil deals.

An entirely rational decison but one that may undermind the US' position on Iran.

Iran signs $2bn oil deal with China [FT]

Iran signed a $2bn oil contract with Sinopec of China on Sunday, sending a signal to western companies that they might miss out on potentially lucrative contracts with one of the world’s biggest energy exporters if they continued to heed US-inspired sanctions against Tehran.

“If other countries who like to invest in oil and gas hesitate, they will lose opportunities,” said Gholam-Hossein Nozari, Iran’s oil minister.

It will be interesting to see whether Western policy changes in light of this deal and those like it that are sure to come in the next few months and years.

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The dead get short changed due to high fuel costs

It is rare to find a story that combines the high price of fuel and the dead.

It just goes to show, when price increases really begin to bite it is those groups in society without a voice that suffer first. These usually include animals and the poor. We now add to that list "the dead".

The question is whether the half burnt body dumping was a direct result of the increase in fuel costs or merely poor management and poor "quality control". Perhaps this is merely a result of cutting one corner to many.

The old adage "dead men don't talk" is only partially true in this case.

China cremator dumps half-burnt bodies to save fuel [Reuters]

HONG KONG, Dec 7 (Reuters) - China's worst fuel crunch in years has led a crematorium to dump half-burnt corpses to try to save on diesel costs, a Hong Kong newspaper said on Friday.

Villagers in Hengyang county, in the southern province of Hunan, discovered the practice when an "unbearable stench" started coming from the site, and tried to block a road on Wednesday to stop funeral vehicles from delivering more bodies.

The village 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.

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.

An increase of nearly 10 percent in the prices of domestic diesel and gasoline from Nov. 1, the first in almost a year and a half, failed to lift refining margins back into the black. (Reporting by John Ruwitch; Editing by Sanjeev Miglani)

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Record Trade Surplus (again)

Not a month goes by without China recording yet another record trade surplus. The last month was no exception although the record prices for many commodities meant that the actual value fell below some analysts predictions.

The crucial issue is whether this marks the beginning of a trend reversal or a mere blip. The oil price should begin to fall but the price of other commodities may struggle to come down much as long as supply is restricted.

Goldmans makes a correct observation - if China attempts to curtail domestic inflation, any domestic slowdown is likely to lead to a fall in imports (although commodities for use in teh manufacture of exports should remain unaffected).

China posts record trade surplus [FT]

China’s trade surplus rose to a record in October, but fell short of many analysts’ predictions thanks to a jump in the value of imported raw materials.

Data on Monday showed the trade surplus rose to $27.1bn. Imports in October grew 25.5 per cent from the same month a year earlier to $80.7bn, accelerating from a 16.1 per cent rise in September. That exceeded the growth in exports, which rose 22.3 per cent from a year earlier to $107.7bn in October.

For more than three years export growth has outstripped that of imports as global manufacturers shifted their production to the workshop of the world. However, soaring prices of crude oil and other raw materials appear to have reversed that trend for now.

China’s accumulated trade surplus for the first 10 months of the year reached $212.4bn, an increase of 59 per cent from the same period a year earlier.

China’s trade surplus with the European Union, its top export destination, rose to $13.9bn from September’s $12.5bn while the politically sensitive surplus with the US, its second-largest export market, was $15.40bn, slightly higher than September’s $15.35bn.

China’s trade numbers have provoked fierce debate in Washington over how to deal with perceived trade imbalances and led to calls for Beijing to move faster to liberalise its currency regime.

Trade partners led by the US say the surplus is a direct result of Beijing keeping its tightly managed exchange rate undervalued to give domestic exporters a price advantage.

The surplus is also partly to blame for a rising flood of liquidity in the Chinese financial system that is stoking inflation already at a 10-year high of more than 6 per cent.

The central bank buys the foreign currency earned by Chinese exporters using renminbi which then enters the economy and feeds into price inflation.

In an attempt to drain liquidity and slow bank lending the central bank said at the weekend that it will raise the proportion of deposits banks must hold in reserve for the ninth time this year, to 13.5 per cent, a record high.

”Rising domestic inflation will lead to further tightening of monetary policy in the near term,” Goldman Sachs said in a research report on Monday. ”Without a meaningful adjustment in the [renminbi exchange rate], such tightening will likely lead to a slowdown in domestic demand, and therefore import demand.”

Rising Fuel Prices in China

A round-up of fuel price related articles. This is an important issue - China is investing heavily in Africa to secure oil stocks in the future. This is a problem that may persist for some time.

This statistic shows how quickly things can turn around with this trade switch indicating how much China has grown since 1993.

China is the second-largest crude oil consumer after the US and although it was a net exporter as recently as 1993 it now relies on imports for nearly 50 per cent of its crude supply.

This quote shows clearly the problems that can occur when strict government controls are in place. Something that Taiwan and many other East Asian countries are also experiencing.

The current shortages, particularly of diesel, result from a combination of high global oil prices and strict government controls, causing huge losses for Chinese refiners that must pay more for oil but cannot raise prices at the pump.

With the Olympic games around the corner there is sure to be a lot more column and blogger inches devoted to this subject.

Beijing raises pump prices as shortages bite [FT]

Faced with worsening fuel shortages across the country Beijing raised petrol, diesel and jet fuel prices at the pump by almost 10 per cent on Wednesday, in an effort to boost domestic supplies and exorcise the spectre of social unrest.

The policy reversal came as shortages spread to the capital, which is usually immune from the country’s periodic supply crunches.

But the government is unwilling to allow prices to rise too much because of a morbid fear of spiralling inflation, which has a history of toppling governments in China and is currently running at a 10-year high, above 6 per cent.

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Analysts say the increasingly independent state oil giants are playing a high-stakes bluffing game with the government in which they chase profits by exporting refined products instead of supplying the domestic market.

This has created shortages that force the government to choose between doing nothing and risking incidents like the one in Henan, or raising prices at the risk of triggering a backlash among ordinary citizens that could escalate like the recent protests in Burma, which started as a reaction against a fuel price increase.

“The government will be under enormous pressure to keep fuel prices low at least until after the Olympics next year,” says Gordon Kwan, head of China energy research at CLSA in Hong Kong. “They can’t have sad faces, let alone street riots or fuel shortages, in Beijing with Bush and Putin here to watch the games.”

China hikes fuel prices as long lines form at gas pumps and shortages disrupt trucking [China Post]

BEIJING, China -- China raised gasoline and diesel prices Thursday by about 10 percent to curb demand amid shortages that have caused long lines at filling staions and disrupted trucking in key export areas.

and finally, a China bloggers view of events from 30th and 31st October a good 2 or 3 days before the FT got hold of this story.

Fuel shortage spreads [China Financial Markets]

Hidden inflation? [China Financial Markets]

Certain regions in China are experiencing shortages in diesel fuel. I heard first from my students and then in the press that in parts of coastal China gas stations are rationing the amount of diesel they sell. This often happens when price controls clash with underlying inflation – instead of showing up in higher prices, inflation shows up as shortages.

I believe that the last time gasoline prices were set by the authorities, oil was trading around $60 a barrel. Unless oil prices drop substantially in the near term I would expect that there might be pressure on the government to let gasoline prices rise, thereby showing up in the non-food component of CPI inflation. Perhaps more worrying, to see inflation spread from food to transportation may lead to a rise in inflationary expectations. All eyes will be on October inflation numbers, which I believe should be released in less than two weeks.

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China - a development perspective

Links from Chinadialogue on the development crisis in China and an essay by John Warburton and Leo Horn who I would describe as "policy economists".

Worth a read although it will be a "long" one.

China’s crisis: a development perspective (part one)

China’s graduation to middle-income country status and its emergence as an aid donor and world power is arguably the most outstanding developmental achievement of the past five decades. This remarkable transition has been neither smooth nor linear, but punctuated by societal convulsions and underpinned by widespread environmental degradation. China’s environmental crisis is now one factor threatening to jeopardise future domestic growth prospects; it is also increasingly impacting other developing countries. The sheer pace of change is taking us into unchartered territory.

China’s crisis: a development perspective (part two)

From a resource consumption perspective, China’s role as a major importer of primary commodities, manufacturer and subsequent exporter not only provides the world with affordable goods, but provides huge opportunities for commodity exporters, primarily in the developing world.

China is now one of the most important global buyers of oil, minerals and timber, and agricultural commodities such as soybean and palm oil. China has huge cash reserves, and Chinese companies often outbid western competitors for oil and mineral concessions, sometimes paying very high premiums, which should benefit the producing countries.

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