IMF Urges China To Raise Rates More

The International Monetary Fund has warned China about the dangers of over-investment in sectors such as construction and property and recommended further monetary tightening following the small rise in interest rates imposed by the central bank last week:

Wanda Tseng, deputy director of the IMF’s Asia and Pacific department, praised the Chinese authorities for reacting “relatively early” to the problem but described the rate increases – which included a rise of 27 basis points to 5.85 per cent for the one-year benchmark rate – as “very small” and “probably just symbolic”.


The IMF report forecasts Asia-Pacific economic growth of 7 per cent this year. That would be the same as in 2005 but higher than the 6 per cent predicted by the previous report in August last year, partly because of the recovery of Japan and a continuing surge in international demand for electronic products made in Asia.

However, the IMF warned of several risks to Asian economies, including the effect of high oil prices, which have so far had only a moderate impact on the region. The report also said Asian financial markets would probably be “tested” as global liquidity conditions tighten.

Other dangers included a possible avian influenza pandemic among humans and the chance of a sharp slowdown in US demand caused by a disorderly unwinding of global current account imbalances. Although Asian domestic demand has improved, Ms Tseng warned: “Asia is still very dependent on external demand in the advanced countries.”

Current account surpluses are already diminishing in most Asian countries, in part because of higher oil import bills and the transfer of the surpluses to oil exporters. In India and east Asia, excluding Japan and China, the aggregate surplus is expected to fall to less than 3 per cent of gross domestic product this year, about half the level of 2004.

But in China, the IMF said, the current account surplus was likely to remain at 7 per cent of GDP this year after more than doubling in 2005. While rejecting calls from US politicians for a dramatic 20-50 per cent one-off revaluation of the renminbi, IMF officials such as Ms Tseng are urging Beijing to use its new exchange rate system more “flexibly”. In current conditions, that would mean allowing a faster appreciation of the renminbi against the US dollar.

The report, which covers the Asia-Pacific from India to New Zealand, could fuel concerns about the competitiveness of some south-east Asian economies.

Although foreign direct investment there has been sustained by manufacturers’ desire to avoid over-dependence on China, investors are more concerned even than they were before the 1997 financial crisis about corporate governance, corruption and political stability.

China Raises Interest Rates

The Chinese leadership obviously feel that the continued growth of fixed capital spending needs reigning in more and has today raised interest rates by 0.27 per cent, from 5.58 per cent to 5.85 per cent.

The rate rise, the first by the People’s Bank of China since October 2004, surprised the markets, which had expected Beijing to use a combination of administrative measures and higher reserve requirements for banks to rein in credit growth.

“We believe the central bank is trying to send a strong signal that the authorities mean business when it comes to controlling overheating in the economy and over-investment,” said Stephen Green, of Standard Chartered Bank, in Shanghai.

The government did not lift deposit rates, a decision which is aimed at minimising incentives for Chinese to leave their money idle in the banks rather than spending it.

The decision to lift only the cost of borrowing money also gives local banks a higher interest rates spread, meaning they can preserve their profitability even if they are forced to rein in the quantity of lending.

“Chinese banks make most of their money through their net interest margin,” said Arthur Kroeber, of China Economic Quarterly in Beijing.

The High Price of Feeding the Hungry Dragon

Mark Thirlwell, who is director of the international economy programme at the Lowy Institute for International Policy has an interesting piece in the FT today on China's commoditity appetite and how this is changing the shape of the global economy. I posted something on this on Bonobo Land some weeks ago.

Resource-rich economies around the globe have been busy counting their swelling foreign exchange receipts as their leaders consider how best to blow their rocketing tax revenues. The Middle East is awash in petrodollars, government coffers in Latin America and the Caribbean have been swollen by bumper earnings from oil, coffee and copper exports and sub-Saharan African producers are experiencing a welcome boost. Australia, meanwhile, is enjoying a resource bonanza that has lifted its stock market to record levels.

Soaring world prices for oil, gas, base metals and agricultural products have prompted speculation about a commodity supercycle that could last two decades, and this latest resource boom is bringing with it all the usual benefits and pitfalls. But it is also presenting policymakers in commodity exporting countries with a new challenge, one that relates to a key driver of the current cycle. While factors such as low real interest rates and concerns about security of supply have helped drive up prices, demand from China has probably played the most important role.

Take the case of metals and minerals. Last year, China accounted for almost half of the world’s consumption of metallurgical coal, over 40 per cent of thermal coal and iron ore consumption, and more than 20 per cent of steel, aluminium, copper and zinc consumption. The demand triggered by its industrialisation and urbanisation projects turned China into a big influence on commodity prices.

It is now widely recognised that China’s expanding economic weight is exerting a gravitational pull on countries in its neighbourhood, reshaping regional trade flows and institutions. One consequence of its immense appetite for commodities is that China is also pulling economies from further afield into its economic and political orbit. Bilateral economic relations with resource exporters worldwide are blossoming: Chinese companies are investing in Sudan, Angola and Nigeria; and China is now a big export market for Chile, Peru, Argentina and Brazil.

While feeding the hungry dragon is an economically rewarding experience, it adds a new diplomatic and strategic element to the macroeconomic policy issues involved in managing a resource boom. Australia’s experience as a significant commodity exporter and a close ally of the US provides a particularly interesting example both of the benefits involved in a deepening bilateral economic relationship with Beijing and the challenges that come with it.

The positive side of the balance sheet is impressive. China is now Australia’s second largest trading partner, and the complementarity between the two economies means that China’s rise has represented a huge economic windfall for Australia. Export prices have surged on the back of resource demand, even as Chinese production has helped hold down the price of manufactured imports. The Reserve Bank of Australia’s nominal commodity price index is at its highest ever level, and Australians are enjoying the biggest cumulative rise in the terms of trade since the early 1970s. The income boost has helped underwrite a record 15-year long expansion, a stock market boom and an unemployment rate currently at a 30-year low. That same complementarity, however, means that national prosperity is increasingly dependent on the growing power to the north. True, this is not the first time the “lucky country” has surfed its way to prosperity on a regional development wave. Economic take-off in Japan and South Korea were earlier east Asian boosts to Australian growth. But the relationship with Beijing injects a strategic element that was much more muted in the relationships with Tokyo and Seoul. Japan and South Korea were, like Australia, US allies, and neither had realistic ambitions to superpower status. China is different in both respects and Beijing has not been shy in linking economic ties with broader strategic objectives.

One example came last month, when China started to play hardball in negotiations over the contract price of iron ore. At one stage China reportedly threatened to impose a price cap on imports, prompting Australian protests. While that threat has now receded, the recent visit by Premier Wen Jiabao provided China with another opportunity to remind Canberra politely of the broader point: while Australians might think resource contracts are a matter for businesses, that is not a view shared by Beijing.

China is seeking to leverage its growing weight as a consumer to secure a more favourable price and Beijing is applying the same principle – using its economic power to win a better deal – in bilateral relations more generally. Canberra has learnt to play the game. Australia granted China market economy status as a precursor to free trade agreement negotiations and has pleased Beijing by announcing a deal to sell China uranium. Australia’s foreign policy stance is being influenced. Canberra has indicated that it will no longer automatically take its US ally’s side on issues where Washington and Beijing differ, from exchange rate policy to Taiwan. Even public analysis of last month’s visit by Condoleezza Rice, US secretary of state, focused in part on whether the security dialogue it entailed might unduly offend Beijing.

China’s economic rise has been good news for the world’s commodity exporters. But as Australia’s experience demonstrates, they should not make the mistake of thinking that the resulting bilateral relationship will be confined to taking Beijing’s money and shipping product. China has great power aspirations and superpowers, even prospective ones, tend to view their relationships with suppliers in a much broader perspective than in purely commercial terms. Just ask Washington about its dealings with Middle East oil suppliers.

This weblog first went the way of all flesh, and has now been reborn. I have started to follow the evolution of the Chinese economy yet one more time. For those who wish to do go deeper I would recommend Andy Xie's column at the Morgan Stanley Global Economic Forum, Brad Setser's Weblog and the New Economist China section. I continue to link to China related matters, and update on my website China page.

More on China and Commodities


The inflation in commodity prices caused by China growth continues. Remember we in the OECD are also dependent on the terms of trade:

Xinhua state information agency reported that China has maintained a "basic balance" between supply and demand for major agricultural products since the late 1990s. Yet, national grain production is down for the fifth consecutive year, say experts. Inflation and decreasing grain reserves are worrisome.

The explosive demand for commodities in China has caused prices to rocket also at global level. Imports of grains and oil-seeds have doubled compared with last year. National grain production is down again for the fifth year consecutively. This year in particular, yields of all three major crops; wheat, rice and corn have dropped. Total national grain output is expected to fall below 450 million tons. If the trend does not change, it could result in a shortage by 2005, said the China daily on Thursday.

Inflationary trends have been recorded for grain, cooking oil, meat, eggs and fodder. The price hikes, which began in Beijing, Nanjing and Zhengzhou, quickly spread throughout the country. Purchase prices for wheat went up by 40 to 80 Yuan (US$ 4.80 - 9.70) per ton in major wheat production areas such as Henan Province. Prices for corn rose by 80 Yuan in northern China, while prices for rapeseed and rice increased by 20 and 10 per cent, respectively, in Anhui Province.

Farmers, who have been suffering sluggish income growth over the years, welcome higher prices. Still, that has its implications on the national agricultural market. The growing demand for grain stimulates imports from abroad that has other implications on the nation's trade balance.

Experts are expecting grain shortages. "China has been using its grain reserves to balance the market for the last four years," said Wan Baorui, vice-chairman of the Agriculture and Rural Affairs Committee of the National People's Congress. "The reserves can be used for, at most, another two years."

Since 2000, annual national grain demand has stood at 480-490 million tons, 25-35 million tons more than the annual output. Fundamental changes have caused that the national grain reserve have diminished. Not only natural disasters but also shrinking acreage slowed down the long years of oversupply. Moreover, rapid urbanization has been eating up grain fields.

In addition to the swift expansion of towns and cities, many regional governments have reserved large parcels of land for "economic development zones" meant to attract foreign investment, but many such zones simply lie empty due to a lack of infrastructure or adequate local investment, said the China Daily.

The low grain prices in the past have led to farmers' declining enthusiasm for planting it. Heavily burdened by various taxes and charges, most farmers would rather grow more profitable crops, such as peanuts and cotton, or migrate to the cities to look for better earnings. The latest government statistics indicate that 80.7 million rural labourers were working in cities at the end of September.

Professor Li noted that total global output of the three major crops this year would come to 2.03 billion tons, down 63.3 million tons from last year, marking the sixth consecutive year that the figure has dropped. The world grain market, meanwhile, experienced its biggest price fluctuations in seven years, said the China Daily.

Due to population growth, increasing consumerism and economic growth the grain demand is rising. Although, China must make every effort to guarantee that at least 90 per cent of demand is met by domestic supply, as grain is a product involving national security, that target is not reached so far.

To realize this target, Han Jun, an agriculture researcher with the State Council Development and Research Centre said, national grain acreage must be kept stable, at around 1.07 billion hectares. Han also suggested the central government abolish agricultural taxes in five years while taking strict measures to curb the occupation of farmland for industrial development and other purposes.
Source: China Biz
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The Quality of Soya is not Strained

Back to the fascinating story of Brazil's soyabeans for China. Today there is an interesting follow up: the Chinese are worried about quality:

Brazil's agriculture minister Roberto Rodrigues will meet his Chinese counterpart in Beijing later today to resolve quality problems that have slowed Brazil's soybean exports to China, the world's biggest buyer of the oilseed. Brazil, the world's second-largest soybean producer, plans to send inspectors to its main ports to ensure shipments of soybeans to China are free from fungal contamination and don't contain grass or other waste matter, Rodrigues said in an interview at the World Economic Forum's 22nd annual China Summit in Beijing. "Starting now we are sending inspectors to our main ports,'' Rodrigues said. ``Some exporters have wanted to make big profits in one shipment by mixing good quality soybeans with bad quality. We are doing our homework now to resolve the problem.''

In August, China's quality inspection bureau banned new orders for soybean shipments handled by Cargill Ltd., Louis Dreyfus & Cie., Bunge Ltd. and other international traders, citing concerns that shipments contained too much grass or fungus. The ban was the latest in a series of disruptions that started when China introduced regulations on genetically-modified crops last year. Rodrigues will meet Qi Jingfa, China's vice agriculture minister, and Li Changjiang, head of China's quality inspection bureau, later today. China has said it found fungus and other contaminants in shipments of soybeans from Brazil. The discovery has prompted a slowdown in issuance of soybean import permits for shipments from the South American country. Brazil will pledge at the meeting to identify shipments that contain genetically-modified soybeans, Rodrigues said. Of Brazil's total soybean harvest of 51 million tons this year about 7 million tons are gene-modified. That figure will rise to 10 million tons next year, he said. Brazil's soybean harvest may rise to as much as 58 million tons in 2004.
Source: Bloomberg
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China's Far West

As part of the 'fair and balanced' policy, after an article singing the praises of China's potential, here's a fascinating one one the downside problems. China's ethnic diversity. I have only produced a trucated excerpt here, the whole peice is well worth reading. And if I say that the US is demographically 'condemned to grow' just imagine China's problems, and the potential consequences fro the rest of us.

This is Beijing's nightmare: a people within China's border who speak their own language, keep their own time, and face Mecca when they pray. The Uighurs of Xinjiang province embody Mao's "super-chaos" - and Beijing doesn't like it. Roving Eye Pepe Escobar reports on the start of a trip along the ancient Silk Road.

KASHGAR and URUMQI, Xinjiang - At the Mother of All Bazaars, the atmosphere still evokes Marco Polo's Travels. A monumental traffic jam of donkey carts coils around the muddy borders of the Tuman River - trespassed by horses, Bactrian camels, acres of melancholic sheep and elders brandishing sickles and testing horseshoes, saddles and whips. Sandy alleys bear the conspicuous accumulation of carpets from Hotan, mountains of spices, laminated dowry boxes, bits and pieces of dead animals, very much alive chickens and ducks, the famous Yengisar knives, hats in all shapes and colors, pots and pans, fruits, vegetables, riding boots, prehistoric transistor radios, Pakistani silk stockings, any imaginable agricultural tool hand-made from wood or steel, and the usual paraphernalia of items available in any self-respecting Oriental souk. The food is delicious - from bread sprinkled with poppy or sesame seeds to lahgman - noodles topped with mutton and vegetables; from jiger (liver) kebab to girde nan - Uighur bagels.

One hundred thousand nomads and villagers converge every week on this anthropological delirium, the Kashgar Sunday market. Solemn barbers with long sharp knives perform in the street. Multitudes gather in front of karaoke-TVs. The cast of characters - with their long, pointed beards, decorated hats, dark cloaks and black boots - are all Uighurs: an ethnic subdivision of the Turks who dominated Mongolia in the 8th and 9th centuries. The language, of course, is Uighur. The music, still on audio cassettes, is gecekondu arabesk, Turkish pop. Most women wear multicolored scarves, but quite a few wear a chador or a thick brown cloth thrown over their heads.

Spiritually, the area points to Mecca. We are more than 4,000 kilometers from Beijing, and two hours behind Beijing time which is supposed to apply to the whole of China. But here, everybody is guided by Xinjiang local time. There's not a single Han Chinese face in this bazaar.................

To top it all, Beijing has radically cut off aid to the so-called "ethnic minorities": there are 12 in Xinjiang alone, and apart from Uighurs (42 percent of the population) they include Hui (Chinese Muslims), Manchu, Mongolian, Kazakh, Kyrgyz, Tajik, Uzbek and Tatar. Only Han Chinese could come up with a concept like "minority food street". Beijing is only interested in promoting "mysterious" Xinjiang for tourism purposes: but it has to be a Xinjiang reduced to theme-park status. If you are a Uighur and you happen, by a miracle, to work for a Chinese company, you cannot go to the mosque. Signs on many mosques, in Arabic, say they are forbidden to teenagers - which is a frankly absurd ruling that has nothing to do with Islamic law. All public demonstrations by Uighurs are forbidden. And if you are an Uighur in Urumqi and you talk about independence, you are arrested on the spot, assures a trader in Yengisar knives. In March 2000 Beijing formally adopted an ambitious plan for "the large-scale development of the West". The key point of this massive "Go West" campaign is to resettle millions more Han Chinese in Xinjiang. Beijing would not be too displeased if in the long run this official policy exports many of the 7.5 million Uighur and 1.3 million Kazakh "minorities" toward the more unstable pastures of the former Soviet Central Asian republics.

Mao Zedong used to talk about the possibility of a "super-chaos" in China. Arguably the mindset remains the same in Beijing, as the Politburo knows very well that Uighurs and other "ethnic minorities" are less than 6 percent of the total population of 1.3 billion, but they occupy more than half of Chinese territory. Xinjiang is almost as big as Western Europe. Beijing's greatest fear is the - at least for the moment - remote possibility of new alliances between regional chiefs and business elites capable of redrawing China's map, as happened many times in the past. Since the implosion of the Soviet Union and the birth of the new Central Asian republics, Xinjiang has had a constant influx of people from Kazakhstan, Uzbekistan and Kyrgyzstan: both parts of Turkestan started in a way to unify. That's exactly what Beijing does not want. Beijing wants very well defined - and patrolled - borders (more in Part 2 of this series).

But the fact is that here, amid mighty Central Asian mountain ranges, it's impossible to talk about defined borders. Xinjiang anyway remains the laboratory of the future of this China riding a tiger at full speed and at the same time trying to control all the "super-chaos" it is capable of creating. With more than 25 percent of the world's population and the most coercive of birth-control policies, China still has not managed to contain its population explosion. Ten percent of Chinese territory, inhabited by two-thirds of the overall population, and producing 70 percent of the national wealth, is prone to inundation by major rivers. China's economy needs to grow at least 10 percent every year just to absorb new contingents of job seekers.

According to Minister of Labor and Social Security Zheng Silin, in his latest report to the National People's Congress, a staggering 150 million Chinese rural workers are unemployed of a total of 485 million; and of 94 million farmers who have recently migrated to big cities, the majority are still unemployed.

Growth at a median 8 percent annually - something the West can only dream about - is still not good enough for China. While some sectors of "market socialism" have degenerated into gangsterism, and human rights, from Beijing's point of view, means only economic development, hundreds of millions of people are involved in the largest internal mass migration movement in history. Dozens of millions of unemployed threaten social cohesion. In the event the Dragon starts to disintegrate, the implosion will begin on the periphery, at the last frontier, in the wilderness that shot from the 14th century straight into the 21st: Xinjiang.
Source: Asia Times
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