Wednesday, March 7, 2012

162 Ambrose wrong on Japan Fiscal Doomsday; China looking to buy LAND in Africa

Ambrose wrong on Japan Fiscal Doomsday; China looking to buy LAND in Africa

This is bulletin 1562. I only began numbering them in early 2006; before that, they were un-numbered. Even now, some are not numbered.

(1) Krugman Says China Is Devaluing Its Currency, ‘Stealing’ Jobs
(2) Something must be done about China’s currency - Paul Krugman
(3) Ambrose Evans-Pritchard says Japan near Bankruptcy, because of Internal Debt
(4) Ambrose wrong on Japan's internal debt - Peter M.
(5) Ambrose wrong on Japan Fiscal Doomsday - R. Taggart Murphy
(6) China continues to buy Africa’s resources - now LAND for cattle ranches & plantations

(1) Krugman Says China Is Devaluing Its Currency, ‘Stealing’ Jobs

By Jacob Greber

Oct. 23 (Bloomberg) -- Nobel laureate Paul Krugman said China is devaluing its currency and undermining the global economic recovery by “stealing” jobs that otherwise would have gone to nations that aren’t growing as quickly.

By pursuing a weak-currency policy, China is siphoning demand away from other nations including poor countries, Krugman wrote in an article titled “The Chinese Disconnect” in the New York Times.

“In normal times, I’d be among the first to reject claims that China is stealing other peoples’ jobs, but right now it’s the simple truth,” the Princeton University professor said.

U.S. officials have been “extremely cautious” about confronting China on the issue, an approach that “makes little sense,” he said.

While the dollar has fallen 14 percent against the euro and 7 percent versus the yen since mid-March, China’s authorities have kept their currency little changed.

The U.S. economy would benefit if China began selling its “dollar hoard,” which Krugman says is currently worth about $2.1 trillion, because it would make American exports more competitive.

“With the world economy still in a precarious state, beggar-thy-neighbor policies by major players can’t be tolerated,” Krugman said. “Something must be done about China’s currency.”

To contact the reporter for this story: Jacob Greber in Sydney at Last Updated: October 23, 2009 00:33 EDT

(2) Something must be done about China’s currency - Paul Krugman

The Chinese Disconnect


Published: October 22, 2009

Senior monetary officials usually talk in code. So when Ben Bernanke, the Federal Reserve chairman, spoke recently about Asia, international imbalances and the financial crisis, he didn’t specifically criticize China’s outrageous currency policy.

But he didn’t have to: everyone got the subtext. China’s bad behavior is posing a growing threat to the rest of the world economy. The only question now is what the world — and, in particular, the United States — will do about it.

Some background: The value of China’s currency, unlike, say, the value of the British pound, isn’t determined by supply and demand. Instead, Chinese authorities enforced that target by buying or selling their currency in the foreign exchange market — a policy made possible by restrictions on the ability of private investors to move their money either into or out of the country.

There’s nothing necessarily wrong with such a policy, especially in a still poor country whose financial system might all too easily be destabilized by volatile flows of hot money. In fact, the system served China well during the Asian financial crisis of the late 1990s. The crucial question, however, is whether the target value of the yuan is reasonable.

Until around 2001, you could argue that it was: China’s overall trade position wasn’t too far out of balance. From then onward, however, the policy of keeping the yuan-dollar rate fixed came to look increasingly bizarre. First of all, the dollar slid in value, especially against the euro, so that by keeping the yuan/dollar rate fixed, Chinese officials were, in effect, devaluing their currency against everyone else’s. Meanwhile, productivity in China’s export industries soared; combined with the de facto devaluation, this made Chinese goods extremely cheap on world markets.

The result was a huge Chinese trade surplus. If supply and demand had been allowed to prevail, the value of China’s currency would have risen sharply. But Chinese authorities didn’t let it rise. They kept it down by selling vast quantities of the currency, acquiring in return an enormous hoard of foreign assets, mostly in dollars, currently worth about $2.1 trillion.

Many economists, myself included, believe that China’s asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis. But China’s insistence on keeping the yuan/dollar rate fixed, even when the dollar declines, may be doing even more harm now.

Although there has been a lot of doomsaying about the falling dollar, that decline is actually both natural and desirable. America needs a weaker dollar to help reduce its trade deficit, and it’s getting that weaker dollar as nervous investors, who flocked into the presumed safety of U.S. debt at the peak of the crisis, have started putting their money to work elsewhere.

But China has been keeping its currency pegged to the dollar — which means that a country with a huge trade surplus and a rapidly recovering economy, a country whose currency should be rising in value, is in effect engineering a large devaluation instead.

And that’s a particularly bad thing to do at a time when the world economy remains deeply depressed due to inadequate overall demand. By pursuing a weak-currency policy, China is siphoning some of that inadequate demand away from other nations, which is hurting growth almost everywhere. The biggest victims, by the way, are probably workers in other poor countries. In normal times, I’d be among the first to reject claims that China is stealing other peoples’ jobs, but right now it’s the simple truth.

So what are we going to do?

U.S. officials have been extremely cautious about confronting the China problem, to such an extent that last week the Treasury Department, while expressing “concerns,” certified in a required report to Congress that China is not — repeat not — manipulating its currency. They’re kidding, right?

The thing is, right now this caution makes little sense. Suppose the Chinese were to do what Wall Street and Washington seem to fear and start selling some of their dollar hoard. Under current conditions, this would actually help the U.S. economy by making our exports more competitive.

In fact, some countries, most notably Switzerland, have been trying to support their economies by selling their own currencies on the foreign exchange market. The United States, mainly for diplomatic reasons, can’t do this; but if the Chinese decide to do it on our behalf, we should send them a thank-you note.

The point is that with the world economy still in a precarious state, beggar-thy-neighbor policies by major players can’t be tolerated. Something must be done about China’s currency.

(3) Ambrose Evans-Pritchard says Japan near Bankruptcy, because of Internal Debt

From: chris lenczner <> Date: 14.11.2009 02:48 PM

Comment {CL} To Ambrose: Everything is bad, very bad around you except yourself in Great Britain. After looking down the Euro, Germany and East European financial crisis says Ambrose {End}

It is Japan we should be worrying about, not America

Japan is drifting helplessly towards a dramatic fiscal crisis. For 20 years the world's second-largest economy has been able to borrow cheaply from a captive bond market, feeding its addiction to Keynesian deficit spending – and allowing it to push public debt beyond the point of no return.

By Ambrose Evans-Pritchard

Published: 5:33PM GMT 01 Nov 2009

The rocketing cost of insuring against the bankruptcy of the Japanese state is telling us that the model has smashed into the buffers. Credit default swaps (CDS) on five-year Japanese debt have risen from 35 to 63 basis points since early September. Japan has suddenly decoupled from Germany (21), France (22), the US (22), and even Britain (47).

Regime-change in Tokyo and the arrival of Yukio Hatoyama's neophyte Democrats – raising $550bn (£333bn) to help fund their blitz on welfare and the "new social policy" – have concentrated the minds of investors at long last. "Markets are worried that Japan is going to hit a brick wall: the sums are gargantuan," said Albert Edwards, a Japan-veteran at Société Générale.

Simon Johnson, former chief economist of the International Monetary Fund (IMF), told the US Congress last week that the debt path was out of control and raised "a real risk that Japan could end up in a major default".

The IMF expects Japan's gross public debt to reach 218pc of gross domestic product (GDP) this year, 227pc next year, and 246pc by 2014. This has been manageable so far only because Japanese savers have been willing – or coerced – into lending for almost nothing. The yield on 10-year government bonds has been around 1.30pc this year, though they jumped to 1.42pc last week.

"Can these benign conditions be expected to continue in the face of even-larger increases in public debt? Going forward, the markets capacity to absorb debt is likely to diminish as population ageing reduces saving," said the IMF.

The savings rate has crashed from 15pc in 1990 to near 2pc today, half America's rate. Japan's $1.5 trillion state pension fund (the world's biggest) has become a net seller of government bonds this year, as it must to meet pay-out obligations. The demographic crunch has hit. The workforce been contracting since 2005.

Japan Post Bank is balking at further additions to its $1.7 trillion holdings of state debt. The pillars of the government debt market are crumbling. Little wonder that the Ministry of Finance has begun advertising bonds in Tokyo taxis, featuring Koyuki from The Last Samurai. If Japan's bond rates rise to global levels of 3pc to 4pc, interest costs will shatter state finances.

No one knows exactly when a country tips into a debt compound trap. But Japan must be close, even allowing for the fact that liabilities of the state Loan Programme (FILP) have fallen by 40pc of GDP since 2000.

"The debt situation is irrecoverable," said Carl Weinberg from High Frequency Economics. "I don't see any orderly way out of this. They will not be able to fund their deficit. There will be a fiscal shutdown, a pension haircut, and bank failures that will rock the world. It is criminally negligent that rating agencies are not blowing the whistle on this."

Mr Hatoyama inherited a country that was already hurtling into sovereign "Chapter 11". The Great Recession has eaten up 27pc in tax revenues. Industrial output is down 19pc, even after the summer rebound; exports are down 31pc; the economy is 10pc smaller today in "nominal" terms than a year ago – and nominal is what matters for debt.

Tokyo's price index fell 2.4pc in October, the deepest deflation in modern Japanese history. Real interest rates have risen 300 basis points in a year. It reads like a page from Irving Fisher's 1933 paper, Debt Deflation Causes of Great Depressions.

The Bank of Japan seems oddly insouciant. It will end its (feeble) quantitative easing in December by suspending purchases of corporate debt, much to the fury of the Finance Ministry.

"This is incredibly dangerous," said Russell Jones from the RBC Capital Markets. "The rate of deflation is shocking. The debt dynamics are horrible and there is the risk of a downward spiral."

Tokyo has let the yen appreciate violently – 90 to the dollar, 13 to the Chinese yuan – giving another twist to the deflation knife. Top exporters are below break-even cost, says RBS. The government could stop this, as it did in a wave of manic dollar purchases from 2003-2004. It could print money à l'outrance to stave off deflation. Yet it sits frozen, like a rabbit in the headlamps.

Japan's terrible errors are by now well known. It failed to jettison its mercantilist export model in time. It resisted the feminist revolution, leading to a baby strike by young women. It acquiesced in a mad investment bubble (like China now) in the 1980s, stealing growth from the future.

It wasted its immense fiscal firepower, scattering money for 20 years on half-baked spending projects to keep the economy afloat. QE was too little, too late, and this is the lesson for the West. We must cut borrowing drastically over the next decade, and offset this with ultra-easy monetary policy. Does Downing Street understand this? Does the White House? Does the European Central Bank? Clearly not.

(4) Ambrose wrong on Japan's internal debt - Peter M. {from bulletin 1458, date August 28 2009}

Geoffrey Gardiner, former director of Barclays Bank's international division, wrote:

you cannot transfer money from one country to another, only swap it.  A movement of money in one direction has to be exactly matched by a transfer in the other direction. All real transfers of value have to be in the form of "real" things.

The Japanese car maker is receiving Australian dollars for his product. To bank it in Japan he has to change the dollars for yen.

That means he has to find someone willing to take his dollars in return for yen. So a deposit in dollars still remains, but owned by someone else. If the Japanese economy is in surplus with Australia, the holder of the deposit is likely to be Japanese.

It is all a result of the inexorable law of double-entry book-keeping that for every debit there must be a credit.

Of course the deposit may be used to buy other Australian assets, and Japan gradually comes to own all Australia's capital assets.

Japan's Exporters bring Yen home (by swapping their Dollars for Yen) to pay their workers, reinvest in further production, disburse as dividends etc.

Given Japan's sustained Current Account Surplus over many decades, the demand for Yen, as Exporters brought their proceeds home, would push up the Yen and the $ down.

To counter this, Japan's Central Bank (BOJ) has often intervened to buy those Dollars, paying for them with Yen it created ex nihilo.

This, however, increases the money supply in Japan, and can be inflationary. And so the BOJ has often Sterilized the excess Yen.

Robert Skidelsky explains that Sterilization is performed by BOJ issuing Yen Bonds to soak up the excess Yen created when it buys $s from Exporters to keep the Current Account Surplus from pushing the $ down.

These Yen Bonds put the Japanese Government in debt - internally, to wealthy Japanese, and at close to 0% interest - but at the same time the same the Japanese Government (BOJ) acquires (with the $s it bought from the Exporters) US Dollar Bonds paying higher interest.

Yet it may never get the principal back from the US - it's unrepayable. It does this to keep the Yen down, so that exports keep flowing and Japanese industry stays at the top of the heap. Meantime, the US becomes de-Industrialized (or PostIndustrial, if you want to put a gloss on it).

The situation is not obvious, because Japanese products have often been re-badged as American products; or present as hi-tech components in imported products; or components in nominally American products, such as Boeing aircraft. Or they are machine-tools with which China builds factories.

Apple's iPhone is assembled in China using mainly Taiwanese hardware. Chinese clones are selling over the internet - cutting Apple out. China Mobile is teaming up with Taiwan's HTC to develop Ophone to compete with the iPhone:

The Yen Carry trade, by which foreigners took out (on a large scale) Yen loans at close to 0% interest, to speculate elsewhere (say in $ denominated assets) at higher interest returns, also helped keep the Yen down.

In the process, the BOJ created more Yen, sold them to these foreign borrowers, who sold them for Dollars, and the BOJ must have soaked up these extra Yen by issuing Yen Bonds (internally) to wealthy Japanese.

Via these Yen Bonds, Japan has the biggest internal debt in the world. But it's at very low interest; and balanced by Japan's holding large assets abroard.

Additional Comment Nov 17, 2009: Ambrose implies that instead of Sterilizing Yen by issuing Yen Bonds, the Bank of Japan should be letting the extra Yen (it creates when it buys Dollars to keep the Yen down) remain in the Japanese economy to counter Deflation.

(5) Ambrose wrong on Japan Fiscal Doomsday - R. Taggart Murphy

Is Japan Headed for a Fiscal Doomsday?

R. Taggart Murphy

Many people in the financial world – not all of them kooks – have managed to convince themselves that Japan is hurtling towards some kind of fiscal doomsday. And that no matter what the Hatoyama government does or doesn't do, it's already too late. That Japan will be defaulting on its pension obligations. Or defaulting on its debt. Or will find itself unable to halt a string of bank failures that will bring the financial system to its knees. Or some combination thereof.

Robert Samuleson picked up on this scuttlebutt in a November 1 article in the Washington Post. He warned Americans that they are at risk of following Japan into an abyss of debt that will increasingly “constrict governments' economic maneuvering room.” He refers to a JP Morgan Chase study of Japan's fiscal situation and seems to have relied on it for much of what he had to say about Japan. Jim O'Neill, head of global economic research at Goldman Sachs, has for months been predicting that Japan's fiscal woes would translate into a weaker yen. I myself was talking recently to a hedge fund manager who was speaking of Japan's hitting a “debt wall.”

Topping off the hysteria about Japan was a piece in Britain's Daily Telegraph on November 1 by Ambrose Evans-Pritchard.

Sprinkling his piece with quotes from people such as the former IMF Chief Economist Simon Johnson (“a real risk that Japan could end up in major default”) and various finance gurus (“the sums are gargantuan,” “ the situation is irrecoverable,” “incredibly dangerous,” “shocking,” “horrible,” “the risk of a downward spiral”), Evans-Pritchard works himself up into a fever pitch of indignation, accusing the Japanese government of “sitting frozen like a rabbit in the headlamps” and concludes with the obligatory warning for the rest of us about our profligate, debt-addicted ways.

Now when Evans-Pritchard begins writing that the Japan Post Bank is “balking” at taking on additional Japanese government debt, one begins to doubt his grasp of Japanese political reality. The notion that the Post Office has an investment policy independent of that of the government is pretty hard to swallow – particularly when it is headed today by Saito Jiro, former MOF jimu jikan (administrative vice minister – the pinnacle of the traditional bureaucratic hierarchy). And many of us can remember that much of the financial world worked itself up into a comparable state of of frenzy about Japan back in the mid 1990s. Back then, the idea was that it was Japan's banks that were going to collapse and take the world down with them rather than its bond market. But it was the same general fear that Evans-Pritchard expresses in his piece -- that Japan's leaders simply don't understand how bad things are; that they are risking not only their own well-being but everyone else's unless they can be waked up and set on the right course.

Now just because the little boy cried of a wolf once before when the creature in question turned out to be more of a miserably wet dog than a genuine menace doesn't mean that a real wolf might not be moving in for the kill today. To be sure, even back in 1997, all the hysteria – particularly the pressure from the Clinton White House – provided the government of the late Hashimoto Ryutaro with the political cover to get the bank bail-out package through the Diet. So perhaps another bout of hysteria could have its uses again. And while Evans-Pritchard may need some tutoring on the way Japanese institutions work, many of the facts that so frighten him are not in dispute.

The debt numbers are indeed growing and Japan's debt as a percentage of GDP is among the highest in the developed world – more than twice as high as the US.

Rising Debt projections. OECD

Deflation is worsening. Thus the Japanese economy is burdened with relatively high real interest rates that monetary policy cannot fix since it is not, in practical terms, possible to cut interest rates below zero. The population is aging. For a generation now, the Japanese government has squandered the country's savings on white elephants: seawalls, dams, bridges and roads to nowhere, airports in sight of each other – monstrosities that not only produce no revenue but actually eat into it since many have to be subsidized to continue to operate. Savings rates have dropped like proverbial stones and are now actually lower than those in the United States.

So why am I not yet ready to join the doomsayers? To start with, using impeccable neo-liberal logic, if the “market” believed things were really that bad, investors would be fleeing the yen while the prices of Japanese government bonds (“JGB's”) would be tumbling (i.e., yields would be rising). I am no adherent of efficient markets reasoning (in a nutshell, according to that reasoning, prices can't be wrong – they tell us everything we can possibly know at any particular moment about the future), but given that most of the doomsayers generally subscribe to orthodox free market economics, they have some explaining to do. An investor who genuinely believes the Japanese government is going to default on its debt or that Japan will find itself in some intractable economic squeeze is not going to wait until these things actually happen to sell holdings of JGBs or short the yen. Indeed, an investor who is completely convinced these events are inevitable can make out like a bandit by placing large bets against the yen and JGBs. That's the whole point behind the efficient markets hypothesis – that if enough investors believe the yen and the JGBs are headed for steep falls, then they will by their very actions bring these on. And if they haven't, well then, there is somebody somewhere who has convinced himself of a very different scenario. Who is right? We don't know, but the efficient markets hypothesis will tell you that for the moment, more investors believe the yen and the JGB are sound than otherwise.

Yen to US$ exchange rate

The obvious rejoinder is that maybe some investors indeed plan to dump their yen and JGB holdings, but in the meantime, believe they can make money from the idiots out there who don't see how bad things are – and that they can get out in time. Buy the yen today at 90 to the dollar, wait until it crashes to 140, and pocket the 50 yen difference. In efficient markets land, this isn't supposed to happen, but any one who looks at the real world history of financial crises – the “Manias, Panics, and Crashes” of the late Charles Kindleberger's legendary book – knows that this kind of thing goes on everywhere; that everyone thinks he is smarter than the next guy and can get out in time – until he can't. This explanation would make sense if we were in the midst of euphoria about Japan; real killings in the financial markets are, after all made by people who bet against the herd and are then proved right. But the herd today – if articles like Evans-Pritchard's are any indication – believes Japan is headed over the proverbial cliff. It's pretty hard these days to find any bullish writing on the prospects for the Japanese economy.

Well, then, maybe the markets are being manipulated. Putting aside the efficient markets theologians who maintain that is impossible, who might be doing it? There is only one candidate: the Japanese government itself. Unfortunately for this theory, the new government in Tokyo has been quite explicit that it does not intend for the time being to intervene in order to suppress the value of the yen. In other words, market forces are making the yen stronger, not weaker. Meanwhile, the JGB market has indeed long been “manipulated” if you want to call it that – most JGBs end up in the portfolios of deposit taking institutions in Japan that tend to march to the orders (more precisely, the hints and nods) of the bureaucrats in the Finance Ministry, the Bank of Japan, and the Financial Services Agency. There is a school of thought – I count myself among its members – that the day may come when the authorities will indeed lose control of the JGB market and when they do, JGB prices will fall (in finance-speak, yields will rise). But we're not there yet – if we were, to say it one more time, JGB prices would already be falling.

More broadly, there are several things to keep in mind about all the doomsaying.

 1. Japan continues to enjoy the luxury of financing its government debt from its own savings in its own currency – and, at least for the moment, pays practically no interest on it. This means that comparisons with countries such as the US that must borrow from foreigners (not to mention developing world countries that have to borrow from foreigners in a foreign currency at substantial interest rates) are not terribly relevant.

 2. A stronger yen is, to be sure, hard on exporters. But it also changes the terms of trade in Japan's favor. Of course this is a tautology, but it is worth pointing out that other things being equal, standards of living rise in Japan when Japanese people can buy foreign commodities (foodstuffs/ petroleum) for fewer yen.

 3. A rise in interest rates is not necessarily a bad thing. One reason the demographic crunch in Japan understandably frightens people is that it is essentially impossible today to purchase future yen cash flows with today's yen – interest rates are far too low. A rise in interest rates would finally permit savers to do that, as they used to before next-to-nothing interest rates were introduced some 15 years ago. Since then, Japanese savers have been unable to find any kind of investment that promises to return reliable streams of cash flow in the future – one reason now that so many of them are finding that their savings are inadequate to finance retirement. A “normal” interest rate environment of 4-6% annual coupons on JGBs would, to be sure, be a frightening prospect for many Japanese corporations. But it would be a relief to any wage earner who hung on to his or her job and needed to save for retirement.

 4. The DPJ government wants to restructure the Japanese economy. While success is by no means assured, a super-strong yen accompanied by rising interest rates may actually help them do it by, among other things, making it politically possible to shut down inefficient producers and reduce white-elephant spending. Yes, many will lose their jobs when inefficient producers go bankrupt or the government stops building useless roads and dams. But a cushion of a strong yen makes it much easier for the government to introduce welfare spending sufficient to prevent economic devastation for people who are temporarily out of work. One reason, for example, that the Scandinavian economies are so relatively strong is that they combine very strong social welfare spending with flexible labor markets, meaning that job loss does not have to spell economic devastation. And it bears remembering that the restructuring of the American economy that led to US dominance in emerging IT sectors in the 1990s had its roots in the high-interest rate, high-dollar environment of the pre-Plaza Accord 1980s. Furthermore, as a glance at places like Shanghai or the eastern seaboard of Thailand can affirm, Japanese business is now irrevocably committed to waves of foreign direct investment – a strategy for which a super strong yen is a very powerful tool.

Of course Japan faces formidable problems, but the world has been underestimating the place for 150 years now and really shows no sign of learning from this history. Yes, many of Japan's savings have been wasted, yes, the birth strike by Japanese women is both understandable and worrisome, yes, we're in for some rough years particularly for an economy that has long relied on exports as its primary engine of growth. Those exports are unlikely to recover any time soon. But the levels of human capital here and the immense creativity of the population are still enviable. To be sure, the country has been poorly served by its leaders, but perhaps even that is changing. Everett Dirksen's quip at the 1968 Republican Convention about the United States could perhaps serve equally well for Japan -- “We're not sick, we're just mismanaged!”

R. Taggart Murphy is Professor and Vice Chair, MBA Program in International Business, Tsukuba University (Tokyo Campus) and a coordinator of The Asia-Pacific Journal. He is the author of The Weight of the Yen and, with Akio Mikuni, of Japan's Policy Trap. He wrote this article for The Asia-Pacific Journal.

Recommended citation: R. Taggart Murphy, "Is Japan Headed for a Fiscal Doomsday?" The Asia-Pacific Journal, 46-4-09, November 16, 2009.

(6) China continues to buy Africa’s resources - now LAND for cattle ranches & plantations

China continues its aggressive pursuit of Africa’s resources

By Brian Smith and Ann Talbot

16 November 2009

The ministerial Forum on China-Africa Cooperation met in Sharm el-Sheik, Egypt, last week, attended by Chinese Premier Wen Jiabao and representatives of more than 300 Chinese companies. Wen took the opportunity to chide the US for its large budget deficit.

He made it clear that China intended to press ahead with its programme of investment in Africa despite American opposition. He pledged $10 billion (£6bn) in concessional loans—loans with lower interest rates and longer repayment periods than standard loans—to Africa over the next three years. His offer was warmly welcomed by African ministers.

Within days of the conference closing, the US responded. The International Monetary Fund threatened to cut off lines of credit to the Democratic Republic of Congo if it did not scale back a Chinese investment plan. The IMF, a body dominated by the US, showed that it is quite prepared to plunge this war-torn and impoverished African country into financial isolation, a fate that has already befallen Zimbabwe, with disastrous consequences for the mass of the population.

The conflict over Chinese investment in Congo may only be a foretaste of what is to come. Stephen Roach, the Asia managing director of Morgan Stanley, has warned in no uncertain terms that a US-China trade war is a “big risk”. He told the Hong Kong-based DNA Money, “I am worried about US-China trade friction next year. It’s one of the biggest risks to the global economic climate”.

China has increased its economic involvement in Africa every year for the last decade. Its trade with Africa has grown from $18.5 billion in 2003 to $107 billion in 2008. China is now South Africa’s largest trading partner.

A new feature of the Chinese investment drive in Africa, which is up 77 percent in the first three quarters of 2009 over the same period last year, is the move to public-private partnerships. China now wins more than 50 percent of all new public works contracts in Africa, and Chinese companies dominate road construction in the continent. In shifting to public-private partnerships or concessions, China is following a pattern already established in the West, where construction projects are routinely financed in this way, with great profits for the financial institutions and private companies involved.

Whilst China’s banks escaped the worst of the turmoil that affected Western banks last year, its export-driven economy was hit hard. Approximately 25 million workers have lost their jobs and exports have plunged, down 21 percent on average compared with the same period last year.

Huge contractors backed by China’s large development banks now see the global downturn as an opportunity to get cheaper resources globally, particularly from Africa. According to the Ministry of Commerce, Chinese firms took on $8 billion of overseas contracts in the first two months of 2009, up almost 25 percent.

China has over $2 trillion in currency reserves and US Treasury bills, which are increasingly seen as a liability as the US dollar weakens. The Chinese government has begun to buy up tangible assets such as natural resources as a way of diversifying its currency reserves. In this context, low mineral prices are seen as a good investment opportunity.

Oil in Angola and Nigeria

In the last few years Chinese companies have attempted to sign exploration contracts in nearly every African country with potential oil resources. Earlier this year Sinopec bought the Canadian/Swiss company Addax, giving it access to vital offshore technology.

Angola is China’s largest African trading partner, and it provides 16 percent of China’s oil imports. Trade volumes between the countries reached $25.3 billion in 2008, or more than 23 percent of total China-Africa trade. Angola’s imports from China were up by 96 percent to 2.5 million tonnes, according to China Customs.

With Angola’s presidential elections due this year, Chinese construction projects are essential to President Dos Santos’s campaign. However Angolan companies in some sectors have complained that the Chinese presence is stifling development since supplies that could be obtained in Angola are often imported from China. China’s move to establish public-private partnerships is an attempt to overcome that kind of criticism.

In Nigeria, which has Africa’s largest gas reserves and its second-largest oil reserves, Chinese oil companies are interested in taking over $50 billion worth of oil reserves currently licensed to Western oil majors. The China National Offshore Oil Corporation (CNOOC)—China’s third-largest oil company—is trying to secure stakes of up to 49 percent in 23 oil licences, ten of which are operated by Chevron, eight by Royal Dutch Shell, four by ExxonMobil and one by Total, covering more than 10 billion barrels of proven oil reserves and substantial gas reserves.

According to Tanimu Yakubu, chief economic adviser to the Nigerian President, “Even at this early stage, where nothing has been agreed, it is clear that the Chinese are ready to pay very, very much more for some of these licences than the existing operators”.

If it is successful CNOOC would become the largest foreign partner in Nigeria.
Dams, ports and pipelines

In Ethiopia, Chinese construction companies are to build a number of large dams to harness the country’s hydropower potential and allow Ethiopia to expand domestic power coverage and export power to its neighbours.

In Kenya, the government recently approached China about a $3.5bn construction project involving a port in the tourist area of Lamu, and road and rail links to Kenya’s borders with Ethiopia and southern Sudan. Nairobi had been in discussions with Qatar about the project, which also included a lease on 40,000 hectares of land on which to grow crops. The transport corridor could provide an export route for Chinese oil from southern Sudan, which provides 6 percent of China’s oil imports.

Separately, the China National Offshore Oil Corporation is to begin prospecting for oil in northern Kenya, according to Kenya’s energy ministry, and it also has exploration rights for a second block in the Lamu basin.

In Uganda, CNOOC is negotiating to buy part of Irish company Tullow’s interests in oil reserves found under Lake Albert, which could amount to more than one billion barrels. Around $4 billion needs to be invested for a pipeline to the port and a refinery.

China is conscious of the need to protect its interests in Africa. It has sent a flotilla of destroyers to the Gulf of Aden using the pretext of combating piracy in the geo-politically sensitive waterway. Around 40 percent of China’s goods and raw materials trade pass through these waters. This marks the Chinese navy’s first major foreign engagement, outside of a UN mandate.

In Niger, China is now rivalling France as a buyer of uranium, and last year China National Petroleum Corporation signed a $5 billion contract for the Agadem oil bloc near Zinder. In Liberia, China Union is to spend $2.6 billion to develop iron ore mines in Bong County.

In Zambia, China’s Non-Ferrous Company-Africa recently bought out Luanshya Copper Mine, a $230 million mine which had $200 million in debts, and China Exim Bank is putting up 85 percent of $400 million for a power project at Kariba North.

China has also been in discussions regarding building a rail-link between the east and west coasts of Southern Africa, connecting Mozambique, Angola, Congo-Kinshasa and Congo-Brazzaville, Malawi and Zambia.
Agriculture and bio-fuels

In Mozambique, China Exim Bank is to loan $2.3 billion for the Mphanda Nkuwa dam on the Zambezi River. China also awarded $800 million in agricultural support to Mozambique aimed at boosting national rice production, and has discussed how to link Lake Malawi, in neighbouring Malawi, to Mozambique’s rivers and dams to improve its existing agricultural infrastructure.

Chinese companies have also been looking for land for cattle ranches and plantations in the Zambezi Valley and hope to settle 3,000 Chinese agricultural workers on other land leased in Mozambique, though this has met stiff resistance from locals. China has just 9 percent of the world’s arable land, but 16 percent of the world’s population, and is dependent on food imports.

In Uganda, China has leased 10,000 acres, and in Zambia, China has requested two million hectares of land for bio-fuel production. The Hong Kong-based tycoon Stanley Ho is rapidly building a bio-fuel empire worth some $40 billion, more than 10 percent of world output.

Under pressure to complete construction projects as quickly and cheaply as possible, Chinese companies have been criticised by trade unions across Africa for breaking regulations on minimum wages and on working conditions. A report by the trade union-financed African Labour Research Network (ALRN) released in late May described “tense labour relations, hostile attitudes by Chinese employers towards trade unions, violations of workers’ rights, poor working conditions and unfair labour practices”. The South African textile workers’ union believes some 60,000 jobs have been lost in the textile sector since 2001 due to local products being undercut by imports.

At Ghana’s Bui Dam controlled by Sinohydro, all workers are treated as casual labourers and are billeted twelve to a room, with little ventilation and poor sanitation. When the Sinohydro workers tried to form a union, they were intimidated and forced to abandon the plan.

Chinese financial institutions are becoming more aggressive in search of high returns on their investments following the recent economic downturn. World Bank President Robert Zoellick recently held talks with the China Investment Corporation, which manages nearly $300 billion of Beijing’s foreign reserves, about cooperation on investment in African manufacturing through special industrial zones.

The weakening of the US dollar is encouraging China to develop its own global financial strategies. A consortium of Chinese banks recently injected $1 billion through Standard Bank of South Africa to fund Standard Bank’s expansion in Africa and to bankroll more Chinese deals.

Beijing officials have also recently been discussing the possibility of using part of China’s foreign reserves to finance the world’s largest development aid programme, termed a “Harmonious World Plan”, the main recipients of which would be Africa, Latin America and Asia.

The fund would be capitalised at around $500 billion, with $100 billion of foreign exchange reserves and the rest in Chinese Renminbi (about RMB2.7 trillion). It would make loans through existing institutions, such as the Forum on China-Africa Cooperation, to developing states in a mixture of US dollars and Renminbi, which would be repaid in national credit or from the profits generated.

The plan presented by economist Xu Shanda to the Chinese People’s Political Consultative Conference in July is said to draw on ideas from the United States’ post-war Marshall Plan. It is an attempt to offset the impact of the global recession on Chinese industry by creating new export markets and establishing the Renminbi as a currency of international trade.

The ambitious nature of Chinese plans in Africa is driven by the global recession and the increasing trend of US policy towards protectionism. Inevitably, it will lead to great tension between China and the USA, as China intrudes on an area vital to US interests.

No comments:

Post a Comment