China's State Firms Cling to Their Cash

By ANDREW BATSON
BEIJING -- Getting China to spend rather than save turns out to be harder than it sounds.
The nation collectively socks away over half its income, an extraordinarily high rate. By comparison, the average for developed countries is about 21%.

Putting more of China's money to work would provide a big boost to the global economy, especially with U.S. consumer spending now constrained by high unemployment and debts.

China's high savings show up all over the place: They're piling up not just in household bank accounts, but also in company vaults.

Those corporate savings -- basically, profits that haven't been invested or returned to shareholders -- have boomed. On central bank estimates, they rose to 23% of national income in 2007 from 12% a decade earlier. Household savings have stayed at around 20% of income during the same period.
The financial strains that push Chinese households to save can be addressed by expanded health care and lower education costs. But high corporate savings are a trickier problem. Much of that money comes from China's resurgent state enterprises, now hugely profitable and dominant in key industries.
Taking money away from those powerful state firms and shifting it to consumers would be good economics, many observers think -- and seemingly in line with the socialist principles of China's government.

But such changes are politically difficult: They threaten the interests of enormous corporations and perhaps even the ideas driving China's hybrid command-market economy.
"On the surface, it's a technical question. But in reality, it's a very political question," said Liu Jipeng, a professor at the China University of Political Science and Law.

China's large state sector helped it bounce back more quickly from the financial crisis than Western countries, he argues, so the government should be strengthening state firms, not sucking them dry.
After a wave of closures in the late 1990s, the government has enthroned a smaller number of strong state firms at the commanding heights of China's economy.

There are now three oil companies, three phone companies, two electricity distributors -- all majority owned by the state.

The profits of state firms were rising more than 30% a year before the crisis, and their strength is increasingly visible. They've been building lavish new headquarters in Beijing, and on average pay their employees 82% more than private firms.
Chinese officials flubbed their first attempt to extract some savings from these cash-rich state enterprises.

A requirement for state firms to pay a new dividend to the government has had little impact since its launch in 2008, bringing in revenue of just 0.2% of gross domestic product. And most of the money was used to aid state companies themselves, not support consumers.
"State-owned enterprise managers are a very powerful group in the policy debate. So the State Council [or cabinet] has moved very cautiously in implementing this reform," said Zhang Chunlin, private-sector development specialist in the World Bank's Beijing office.
Scholars and government officials are debating changing this dividend policy.

Many argue that the current payout of 5% to 10% of profits should be increased. And there's also a push for putting the money into the general government budget, where it could support social programs rather than fill a slush fund for state enterprises.
Many outside the country also see a shift in this dividend policy as key to making China a more consumption-driven economy.

The U.S. Treasury and the International Monetary Fund have both urged China to take more money out of the pockets of state firms and use it to support household incomes.
Even supporters are not optimistic that these changes will come quickly.

An overhaul to the dividend policy could threaten the agency that now administers it -- the State-owned Assets Supervision and Administration Commission, or SASAC -- and cause resistance in the bureaucracy.
"Scholars have put forward a lot of suggestions, but I think there is zero possibility of changing the dividend policy this year. And next year also," said Wen Zongyu, a researcher at the Ministry of Finance's think tank.

A gradual approach is more likely to win support, he said, with changes phased in at the end of the dividend policy's initial three-year trial period.
Perhaps not by coincidence, 2011 would also be close to the end of the current administration's term -- so the tough calls could be pushed off even further.

China's economy reaps a golden age of weddings

An engaged Chinese couple strike a pose for their wedding photographs at a studio in central Beijing November 27, 2009.

An engaged Chinese couple dressed in traditional Chinese wedding costumes pose for their wedding photographs at a studio in central Beijing November 27, 2009.

A photographic assistant makes final adjustments to an engaged Chinese couple posing for their wedding photographs dressed in 'royal' costumes at a studio in central Beijing November 27, 2009.

By Simon Rabinovitch and Aileen Wang

BEIJING -- Meng Ni and Fan Zhiqing said "I do" to each other in the same month that they said "we do" to their real estate agent.
China is in the midst of a golden age of weddings, a boon for businesses from photo studios to global platinum miners. Yet nowhere is the economic impact so potentially profound as in the housing market.
A flood of newlyweds such as Meng and Fan buying their first homes could help power China's property sales for years, even as some investors fear that prices are already in dangerous bubble territory.
"My husband and I preferred to have our own home rather than rent one as before, because marriage stands for a new start and we are building a family now," Meng said, sitting in their tidy, studio apartment.
Their story may seem perfectly normal, even universal, at first glance. What makes it more powerful is that Meng and Fan are part of a demographic bulge of people in their twenties who will be of prime marrying age between now and 2015.
As these newlyweds shell out for their first homes, the property market will enjoy a fount of solid demand.

Analysts estimate such couples could mop up as much as 450 million square meters of housing every year, or roughly 16 percent of all that is under construction at present.

BABY-BOOMERS' BABIES
Looking west from Meng and Fan's window, clusters of new apartment buildings fill the skyline. To the east lies a flat, gray landscape of single-storey dwellings that is slowly being swallowed by high-rises.
"The apartments here are fairly small. They're a perfect fit for young couples," Meng said, estimating that three-quarters of her neighbors were around the age of 30.
These are the children of China's baby-boomers, a demographic ripple effect of the country's population surge in the 1950s and 1960s.
They would have been even more numerous had Beijing not launched its one-child policy in the late 1970s to cap family size, but they are still a bigger group than those immediately younger and older than them.
As it turns out, the controversial population controls have shaped their consumption habits. Showered with attention and gifts all their lives, this generation of only children keep their purse strings loose, unlike their parents.
"They have all grown up since 1980, during 30 years of fast-paced growth, so they don't feel the same need for precautionary savings as their parents," Xing Ziqiang, an economist with China International Capital Corp, said.
Nuptials give them a ready outlet for spending.
Not only are more people getting married, more of those getting married are choosing to have weddings -- and lavish ones at that.

The wedding industry is worth about 400 billion yuan a year, roughly a 2.5 percent contribution to gross domestic product, according to official estimates.

BIG BUSINESS
The Xidan Wedding Mall in the heart of Beijing offers three floors of dress makers, jeweler merchants and photo studios.
"A bride usually buys two gowns: a white one in the Western style, used for the procession and vows, and a traditional Chinese one in red for the banquet," said Ying Zi, a saleswoman at Modern Bazaar, a dress shop in the mall.
A few years ago, brides often rented their clothes. Ying said almost all of her customers were now buying the dresses, which cost at least 2,000 yuan ($293) each.
Diamonds are also hot.

Chen Yin's family began crafting diamond rings at home for a niche market a decade ago. Now they run a shop, Bling Jewelry, selling hundreds a month.
"There are some people who originally bought small diamond rings, but are now looking to upgrade to bigger ones," she said.
And brides have taken to platinum jewelry, because the white metal matches their white gowns. Its place in Chinese weddings has helped double global demand for platinum this year despite a sharp fall in use by the hobbled auto industry, according to precious metals refiner Johnson Matthey.
The choice of white is, in itself, an indication of the social change sweeping over China, where white was traditionally the color of funerals.
Then there are the wedding photos, shot against elaborate, if fake, backgrounds: a couple in 1920s attire on a French boulevard or in cowboy gear with a rugged Wild West landscape behind them.
The wedding boom has not escaped the government's notice. The state-run China Association of Social Workers established the Wedding Industry Committee in 2003 to gather data and set standards.
The number of weddings, about 10 million in 2008, is increasing by 10 percent a year, while spending is rising 20 percent, according to Shi Kanning, the committee chief.

NO CRISIS
"The global financial crisis hit a lot of industries: exporters, banks, insurance. But not only was the wedding industry not affected, it has had even stronger growth over the past year," Shi said.
This resilience, he said, spilled over to the property market, with newlyweds buying homes when other business dried up.

He pointed to surveys by the China Index Research Institute, which show that three-quarters of first-time home buyers are below the age of 35.
But a surge in housing sales -- up 79 percent by value in the year to October -- is clearly about more than just newlyweds.
The economy is awash in cash after banks issued an unprecedented flood of loans to help combat the financial crisis. With few investment channels in China, property is alluring.
"Property prices are largely dictated by investors," Zou Linhua, an economist at the Chinese Academy of Social Sciences. "Wedding-related home buying is only a part of the demand."
Yet it is an essential part, Xing of CICC argues, so much so that the demographic implications need closer analysis.
In smaller towns, for example, where men outnumber women by a wide margin, families try to help make their sons more attractive by promising larger homes to potential brides.
The government needs to give serious thought to how to cushion a potential fall-off in housing demand at the end of the wedding boom, sometime around 2015, Xing said.

FUELED BY PARENTS
In the meantime, it is frugal parents, not the young couple and not banks, who often foot much of the bill for new homes.

Armed with a lifetime of savings and with just one child because of the government's population controls, parents are only too willing to lend a hand -- and sometimes twice.
Wang Dajian and Niu Xiaoxia said they recently purchased a second Beijing apartment for their 29-year-old son and his wife after the first one they had bought failed to entice the young couple out of the parents' home.
The newlyweds found the first apartment "inconvenient" for their jobs, their parents said, because it required a 30-minute commute from their offices.
"They should be independent. They should be responsible for their own lives," lamented Niu, who noted that when she and Wang married they had to wait more than two years after marrying before their work unit arranged for a tiny one-room apartment.
"I want to push them out, to make them suffer a little like we had to," Wang said with a wave of determination that quickly melted.
"But the problem is, when we see him suffer, we feel bad. I don't blame them, because all this resulted from us. We are responsible because we spoiled them."

Workers of the World vs. China Inc.

Market forces: Chinese workers for the Ramu nickel refinery being built at Papua New Guinea's Basamuk Bay shop for snacks from local villagers

By Hannah Beech / Ramu

Lunch at the site of the future Ramu nickel and cobalt mine in the remote hills of Papua New Guinea is a hurried affair, food shoveled into eager mouths.

But the menu is as divided as the two distinct groups of workers squatting in the heat, swatting away flies and filling their bellies before their nine-hour, seven-day-a-week shifts begin again.

In one huddle are local laborers chewing chunks of sweet potato and the canned fish known in pidgin dialect as tinpis.

In another clump are imported workers from China who dig into rice topped with pork belly and chili – black bean sauce.

The Chinese, who were shipped in by the state-owned China Metallurgical Group Corp. that has invested $1.4 billion into this faraway outpost, can understand neither English nor pidgin, two of the national languages.

The Papua New Guineans speak no Mandarin.

Even at mealtime, an event during which both cultures would normally encourage community and hospitality, the air is weighted by mutual incomprehension.

"How can we eat together if everything about us is different?" asks Shen Jilei, whose first overseas experience transferred him directly from China's Sichuan province to a South Pacific nation he hadn't even known existed.
Notes of culture clash ring everywhere I wander in the vast construction zones that by the end of this year will turn a pristine stretch of virgin forest and grassland into one of the world's largest nickel-extraction sites.

On the palm-fringed coast of Basamuk Bay, where the Ramu refinery will be situated, a chatty Beijing-born building engineer tells me that before the Chinese arrived, "the natives were completely uncivilized and running around almost naked."

I voice my doubts, telling him that I've just talked to a nearby villager who described a PowerPoint presentation she recently made detailing environmental concerns about the mine. The engineer, like many other Chinese I meet, remains unimpressed.

"All they do is chew betel nut and act lazy," he says. "They don't know how to work hard like we Chinese do."
The impression the Chinese have left on many P.N.G. nationals isn't much better.

A local landowner whose ancestral territory lies in the middle of the mine site alleges, improbably, that the nickel will be used to feed a secret Chinese weapons program.

In the capital Port Moresby, my driver announces that if a gang to evict Chinese from P.N.G. is formed, he will be the first to join.

"I will sharpen my bush knife and chop 10 or 20 heads," he says.

The unease about Chinese influence extends to government circles, even if the Ramu mine promises to add 8 percentage points to the country's GDP.

"I know the Chinese are going out everywhere in the world and investing successfully," says Rona Nadile, an assistant secretary of labor and industrial relations.

"But what I don't understand is why are they are so stubborn to not respect our local culture. We are a democracy. They have to play by our rules or we will rise up."

Mixed Blessings
When China began its global investment push in the early part of this century, the flood of new money was welcomed, particularly in those parts of Asia, Africa and Latin America that felt abandoned by the West.

China's promise not to politicize aid and investment by attaching pesky conditions like improved human rights pleased many governments.

Between 2003 and 2008, Chinese direct investment overseas skyrocketed — rising from $75 million to $5.5 billion in Africa, 1 billion to $3.7 billion in Latin America and jumping from $1.5 billion to $43.5 billion in Asia.

The People's Republic now ranks as the No. 1 foreign investor in countries as diverse as Sudan and Cambodia.

In exchange for the natural resources needed to feed China's economic engine, Beijing began an assiduous campaign to win foreign hearts and minds by financing stadiums, hospitals and lavish government offices.

The Foreign Ministry in East Timor was built courtesy of the Chinese, while Guinea-Bissau's marble-accented parliament building was a gift from Beijing.
Some countries, however, are no longer as willing to extend a red carpet toward the globetrotting Chinese.

Although political strings might not come with Beijing's cash, there are economic catches.

The roads, mines and other infrastructure on offer are most often built by armies of imported Chinese labor, cutting down on the net financial benefit to recipient nations.

Chinese companies investing abroad also tend to ship in nearly everything used on building sites, from packs of dehydrated noodles to the telltale pink-hued Chinese toilet paper.

It's not only the contracted Chinese workers who show up, either.

Within a few years, their relatives invariably seem to materialize to set up shops selling cheap Chinese goods that threaten the livelihood of indigenous entrepreneurs.

Locals who do get work on Chinese-funded projects complain that their bosses don't heed national labor laws ensuring minimum wage or trade-union protection.

Over the past three years, anti-Chinese riots have erupted everywhere from the Solomon Islands and Zambia to Tonga and Lesotho.

Tensions are also simmering in India, where the Chinese are involved in several major infrastructure projects. Even high-level officials are speaking up.

In Vietnam, plans for a $140 million Chinese-operated open-pit bauxite mine were publicly excoriated by none other than revolutionary hero General Vo Nguyen Giap because, he said, of "the serious risk to the natural and social environment."

An Island Apart
Nestled in one of the most backward parts of one of the world's least developed nations, the Ramu mine has emerged as an acute example of resentment against China Inc.

In 2004 P.N.G. Prime Minister Michael Somare returned home from Beijing, triumphant at having snared the country's largest foreign-investment project to date.

The euphoria was short-lived.

Landowners brandished slingshots and announced they wouldn't sign off on their tribal territory being used for mineral extraction, no matter what document was signed in China's Great Hall of the People.

Environmentalists cried foul over plans to deposit mine waste in the sparkling Basamuk Bay, while local workers protested conditions that even P.N.G.'s Minister for Labor and Industrial Relations David Tibu described as slavelike and "not fit for pigs or dogs."

Skirmishes repeatedly broke out between villagers and the 1,500-plus imported Chinese laborers, some of whom were working illegally in P.N.G.

At the same time, anger has boiled over because of an influx of thousands of Chinese who over the past couple of years have monopolized businesses that by law should be reserved for P.N.G. nationals.

In May, anti-Chinese riots convulsed cities nationwide, and several people were killed amid the looting of Chinese-owned shops.

"Our timber, our minerals, everything, goes to China," says Damien Ase, founder of the nonprofit Centre for Environmental Law and Community Rights in Port Moresby. "But we get so little in return."
For many Papua New Guineans, it's not surprising that their nation stands on the front lines of China's global campaign.
Located on the eastern half of the world's second largest island, P.N.G. is the most linguistically diverse region of the world, with at least 800 distinct local languages spoken by just 6.5 million people.
Yet despite the tribal diversity, the nation is unified in at least one aspect: suspicion of foreign exploitation of its plentiful resources, ranging from natural gas and timber to fisheries and gold. Tensions exploded in the 1990s on the P.N.G. island of Bougainville, where concerns over the environmental and economic effects of an Anglo-Australian-run copper mine sparked a secessionist struggle that claimed 15,000 lives over the course of a decade. (The mine, one of the world's largest open-pit sites, is now closed as a result of the civil war, which officially ended in 2000.)
Separately, the national government was forced to declare a state of emergency in Southern Highlands province three years ago when protests over a multinational consortium's proposed gas pipeline reached a crescendo. (The project has since stalled.)
The Ramu site had lain dormant for four decades, as a series of Australian firms calculated that the low-grade nickel wasn't worth extracting in such a remote area rife with shifting clan allegiances.
But Ramu NiCo, the subsidiary of China Metallurgical Group that has developed the mine, thought it could succeed where others were afraid to try.
In 2007, Ramu NiCo dispatched battalions of Chinese workers, who macheted their way through dense foliage and built a mirage-like Chinatown where elephant grass and kwila trees used to be. Today, in what was a malarial stretch of hills and valley, huge dormitories, offices and processing plants dot the landscape, along with a 135-km slurry pipeline that snakes its way from Ramu to the coast at Basamuk. (From Basamuk, ships laden with nickel and cobalt will sail to China.)
Last December, Ramu NiCo unveiled the first-ever bridge over the Ramu River, eliminating the need for a perilous canoe crossing.
The company also paved a ribbon of concrete through the forest, one of the few roads in a tropical country where asphalt is almost as rare as snow.
Although the project has displaced thousands of landowners, it has also provided badly needed infrastructure to the area.
What just a few years ago was a 10-hour bush walk from the mine site to the river has now been cut to a 30-minute drive.

A Growing Backlash
Roads and bridges aren't enough to placate locals, whose tenacious attachment to their ancestral land is mystifying to Chinese schooled in the communist principle of state ownership.
At Ganglau village, a collection of shacks fronting a bay teeming with dolphins and tuna, community elder Mou Bilang complains that most villagers haven't been compensated for the loss of land once used to plant cash crops, save a $125 "dust payment" issued as an apology for the dirt the project has kicked up.
"The Chinese promised us free electricity, free water supply, free job training for our boys," Bilang tells me. "But they have delivered nothing."
Tensions reached a crisis point five months ago, when a local youth was accidentally injured by a Chinese-driven tractor.
More than 100 villagers went on the rampage, targeting the Chinese with stones and bush knives.
The foreigners defended themselves with welding torches, but three were so gravely injured — one had his stomach sliced open — that they had to be airlifted to a hospital.
In July, relations reached a new nadir when P.N.G.'s chief mines inspector ordered all construction on the Ramu NiCo sites to be shut down because of significant health-and-safety concerns.
Work ceased for a month before "noticeable progress" by Ramu NiCo convinced the government to allow construction to continue.
The dispute echoed another flare-up that erupted last year when locals armed with slingshots critically injured another three Chinese workers over what the P.N.G. nationals considered to be workplace apartheid: everything, from their food and toilets to salaries and dormitories, they alleged, was far inferior to those of the Chinese workers.
"The Chinese think we are animals," says a welder named Nenge, who refuses to give me his full name lest he get fired from his job.
"No days off, sometimes tinned fish for overtime pay, dirty latrines with a bad smell. How can they respect themselves after treating us so poorly?"
Labor issues are compounded by environmental concerns voiced by international academics. The Australia-based Mineral Policy Institute believes that Ramu NiCo's assurances about mine-waste disposal in the Basamuk Bay not poisoning the fish-rich waters are based on "fatally flawed" data. (Other Chinese companies have been accused of importing vast amounts of illegal timber from P.N.G.'s dwindling forests, even as Beijing tries to protect its own natural bounty by cracking down on illicit logging at home.)

"With other countries, we try to make foreign companies accountable by lobbying shareholders or raising public awareness in that country," says Matilda Koma, who runs an ecological watchdog called the Centre for Environmental and Research Development in Port Moresby.

"But with China, the state and the company are the same and the public doesn't have much voice — so who can we complain to?"

The Trying Game
To its credit, Ramu Nico has done far more than the average Chinese state-owned enterprise to repair its image and court community approval.

Unlike most other Chinese firms, the company responds promptly to international press queries and has published a comprehensive project sustainability report.

Ramu NiCo has an English-language website that bandies about the proper catchphrases for a FORTUNE 500 subsidiary: sustainable development, competitive benefits, cross-cultural human resources.

The glass-sheathed Ramu NiCo headquarters in the town of Madang, where the fastest pace of life is set by swarms of flying foxes, boasts human-resources and health-and-safety departments. (At four stories, it is the tallest building in town.)

Ramu NiCo has expanded several schools and health centers in mine-affected areas and sent P.N.G. engineers on training courses to China.

Remarkably for a company owned by the officially atheist Chinese communist state, Ramu NiCo has even funded church activities.
Most notably, the company has agreed to a 2.5% ownership stake in the mine for a group of local landowners, although many others say they have been iced out of the deal.

"For Chinese and Papua New Guineans, who are from such different cultures, it will naturally take some time for us to truly understand each other, and sometimes it is not easy," says Wu Xuefeng, deputy general manager at Ramu NiCo.

"Our proposal to tackle all these challenges is to address them within our overall sustainability development framework, [and] we are glad that we have been improving along the way and that our linkage with the community has been strengthening."

Wu also correctly notes that the obstacles his company has faced are "largely the same sort that most of the international mining companies have faced in P.N.G."
But new classrooms and small ownership stakes don't fully solve the land-compensation issue or another major point of contention: the fact that so many Chinese have descended on P.N.G. — many illegally.

Last November, in a low point for Sino-P.N.G. diplomacy, the police raided the construction sites at Basamuk and Ramu and arrested 223 Chinese for immigration violations.

The foreign workers, it turned out, had entered on visas that prohibited employment.

Ramu NiCo, in turn, complained that government bureaucracy was so slow that getting the proper paperwork would have taken years so they were forced to circumvent the rules.

But there were other infractions.

Local regulations specify that foreigners can only work in jobs that locals cannot perform and that they must be able to speak either English or pidgin. Most of the Chinese workers couldn't speak a word of either language.
Still, the P.N.G. government didn't want to risk derailing such a major investment.

A compromise was reached, part of which required the Chinese working at the mine to attend English-language classes. Yet not a single Chinese I spoke to at Ramu or Basamuk said they had ever attended any of these language courses.

Furthermore, despite assurances that the Chinese working on-site were only engineers or other specialists, I saw Chinese sweeping up construction debris and doing other menial labor that locals could surely do.
Discrepancies between national immigration policy and local reality are acknowledged even by P.N.G.'s Department of Labor and Industrial Relations.

Assistant secretary Nadile bluntly tells me she suspects that most Chinese who entered the country have done so without the necessary visas and work permits.

Today, in major cities across P.N.G., the vast majority of so-called kai bars, or fast-food restaurants, are run by recent Chinese immigrants, as are nearly all the grocery stores.

But few Chinese have the correct papers to run such businesses.

I ask Nadile if she can tell me of a place nearby that she suspects is being run illegally.

She takes me to an office window overlooking Port Moresby and points at two low-slung kai bars located within a minute's walk from the government office: the Rickshaw and the Noodle Shop.
Later I visit the Rickshaw and meet its affable owner Liu Lianghua.

The tale he tells is like a caricature of the Chinese immigrant story.

His in-laws moved to P.N.G. over a decade ago because they had some family who had settled there previously.

Liu eventually followed with his family. Several other relatives joined them after that. More than a dozen members of Liu's family now live in P.N.G.

The downtown building in which the Rickshaw is located also has a clothing shop, a variety store, a gaming bar and another eatery, all run by Chinese.

When I ask about visas, he laughs and says immigration issues are not a problem in Papua New Guinea.

"The locals don't know how to do trade, and the government knows that," says Liu.

"If locals get money, they spend it immediately on liquor. The Chinese don't come here to enjoy life. We only come to make money."

Strange Bedfellows
In Papua New Guinea, at least, normal citizens can express their reservations about Chinese investment.

But in many of the countries where China has made its biggest business forays, such democratic dissent is squelched by repressive governments that are taking the lion's share of any investment profits.

Still, tensions can bubble up in surprising ways.

In July, an al-Qaeda wing in North Africa vowed to target Chinese immigrants living there as revenge for the recent ethnic strife in China's largely Muslim Xinjiang region.

The next month, riots against Chinese traders broke out in the Algerian capital Algiers, where residents accused the foreigners of failing to respect Islam.

Last year, nine Chinese oil workers living near the Darfur area of Sudan were kidnapped by an unknown group. Five were later killed.

An international trade embargo because of the unfolding genocide in Darfur may have kept most other foreign investors out of Sudan, but China consumes more than 60% of Sudanese oil.

For a government keen on keeping economics and politics separate, Beijing is finding that the two have a nasty habit of intertwining.

China is also learning that it can't keep a lid on political scandals overseas as easily as it can clamp down on information back home.

In P.N.G., for instance, the local press has widely covered a government investigation into claims that corrupt local officials allowed Chinese immigrants to buy passports.

In May Prime Minister Somare went so far as to implicate the immigration department, commenting, "We know some are saying, 'You give me a six-pack [of beer], and I'll give you a passport.'"
An even more sensitive case turned up in July.

Namibian prosecutors are charging representatives connected to a Chinese state-owned manufacturer of security scanners with bribing local officials to win a $55 million contract in 2008.

Until last year, the head of the company, Nuctech, was none other than Hu Haifeng, the son of China's President Hu Jintao.

Although the younger Hu has not been publicly implicated in the case, Chinese censors quickly squelched news stories on the bust within China. (Separately, E.U. officials are also investigating whether Nuctech engaged in illegal activity in Europe.)
Still, for all the controversy surrounding the influx of Chinese money in Africa, Latin America and Asia, the truth is that the vast majority of Chinese working abroad aren't going to go home rich.

Driving up to the Ramu mine site, I stopped the car at an incongruous sight: against a backdrop of rain forest, a lone Chinese man perched on a piece of cardboard overseeing a crew of local workers struggling in the sun to sheath a pipeline with insulation tape.

There was a feudal tinge to the scene, but the life of Chen Ming, the Sichuan-born supervisor, is hardly idyllic.

He has been in P.N.G. for 18 months, working seven days a week, though he sees little point in holidays "because there's nothing to do here."

By the time he finishes paying hefty deductions for his room and board, he makes less than he would at an equivalent job back home.

But unemployment is rising in China, and Chen struggled for months to find alternative work back home.

"It's not a good job, but what else can I do?" he asks, fanning himself with the strip of cardboard. "I have to eat and send money home."

For Chen and the other workers — Chinese as well as Papua New Guinean — toiling deep in the bush, all they can ask for is survival.

But the big Chinese firms, and the local governments they support — they expect nothing less than the kind of fortunes that will reshape the world.

Dangers of an Overheated China

By TYLER COWEN
PRESIDENT OBAMA’S recent trip to China reflects a symbiotic relationship at the heart of the global economy: China uses American spending power to enlarge its private sector, while America uses Chinese lending power to expand its public sector.

Yet this arrangement may unravel in a dangerous way, and if it does, the most likely culprit will be Chinese economic overcapacity.
Several hundred million Chinese peasants have moved from the countryside to the cities over the last 30 years, in one of the largest, most rapid migrations in history.
To help make this work, the Chinese government has subsidized its exporters by pegging the renminbi at an unnaturally low rate to the dollar.

This has supported relatively high-paying export jobs; additional subsidies have included direct credit allocation and preferential treatment for coastal enterprises.
These aren’t the recommended policies you would find in a basic economics text, but it’s hard to argue with success. Most important, it has given many more Chinese a stake in the future of their society.
Those same subsidies, however, have spurred excess capacity and created a dangerous political dynamic in which these investments have to be propped up at all cost.
China has been building factories and production capacity in virtually every sector of its economy, but it’s not clear that the latest round of investments will be profitable anytime soon. Automobiles, steel, semiconductors, cement, aluminum and real estate all show signs of too much capacity. In Shanghai, the central business district appears to have high vacancy rates, yet building continues.
Chinese planners now talk of the need to restrict investment in sectors that are overflowing with unsold products. The global market is no longer strong, and domestic demand was never enough in the first place.
Regional officials have an incentive to prop up local enterprises and production statistics, even if that means supporting projects or accounting practices that are not sustainable.

For an individual business, the standard way to get more capital resources is to put forward a plan for growth. Because few sectors are mature, and growth has been so widespread, everyone can promise to be profitable in the future.
Over all, there is a lack of transparency.

China’s statistics on its gross domestic product are based more on recorded production activity than on what is actually sold. Chinese fiscal and credit policies are geared toward jobs and political stability, and thus the authorities shy away from revealing which projects are most troubled or should be canceled.
Put all of this together and there is a very real possibility of trouble.
China has had a 30-year run of stellar economic growth. But it’s only human nature for such expansion to breed too much optimism, overextending an entire economy. Americans have found this out the hard way in their own financial crisis.
History has shown that no major economy has grown into maturity without bubbles, crises and possibly even civil strife or civil wars along the way.

Is China exempt from this broader pattern?
The notions of excess capacity and malinvestment were common in business-cycle theory of the 19th and early 20th centuries, when growing Western economies had frequent crashes of this kind.

Numerous writers, from the Rev. Thomas Malthus to the Austrian economist Friedrich A. von Hayek, warned about the overextension of unprofitable capital deployments and the pain from the inevitable crashes. These writers may well end up being a guide for understanding China today.
What will the consequences be for the United States if and when the Chinese economic miracle encounters a major stumble?

A lot of Chinese business ventures will stop being profitable, and layoffs and unrest will most likely rise.

The Chinese government may crack down further on dissent. The Chinese public may wonder whether its future lies with capitalism after all, and foreign investors in China will become more nervous.
In economic terms, the prices of Chinese exports will probably fall, as overextended businesses compete to justify their capital investments and recoup their losses.

American businesses will find it harder to compete with Chinese companies, and there will be deflationary pressures in both countries.

And even if the Chinese are selling more at lower prices, they may be taking in less money over all, so they may have less to lend to the United States government.
In any case, China may end up using more of its reserve funds to address domestic problems or placate domestic interest groups. The United States will face higher borrowing costs, and its fiscal position may very quickly become unsustainable.
That’s not so much a prediction as a very possible contingency, and we should be prepared for it. For now, we should avoid two big mistakes.

The first would be to assume that just because borrowing costs are now low, we can postpone fiscal responsibility and keep running up the tab — with the aid of Chinese lending, of course.

The history of financial crises shows that turning points can come swiftly and without much warning.

The second mistake would be to demand too many concessions from the Chinese.

What we see in the numbers today are a growing China and a somewhat ailing America. Yet there’s a real chance that, soon enough, Chinese economic weakness will be a bigger problem than was Chinese economic strength.

Will China Embrace Multiculturalism?

By Melinda Liu
In all the recent controversy over racism in China—focused on 20-year-old Shanghai pop singer Lou Jing, whose mother is Chinese and father is African-American—people forgot to mention how the Chinese bureaucracy itself encourages citizens to classify themselves by race.
China’s national identity cards contain a box requiring citizens to designate their ethnicity. Citizens are required to carry these cards at all times, and many analysts feel the practice inadvertently enhances ethnic divisions.

“It’s a very bad system [which] strengthens the differences between ethnic groups,” says international-affairs expert Prof. Yan Xuetong of Tsinghua University, ”We need to develop a common national identity, which we haven’t done very well yet.”
Many Chinese derive their sense of nationhood simply from being ethnic Chinese.

Although authorities stress that China embraces 56 different ethnic groups, more than 91 percent of the country’s 1.3 billion people belong to the dominant Chinese, or “Han,” race.

This makes it easy for the 1.2 billion members of the Han race to develop an “us” versus “them” mindset.

Aspects of the language itself also reinforce this ethnocentrism. “China” is Zhongguo, or “Middle Kingdom,” and in centuries past emperors and peasants alike considered themselves to be at the center of the universe.
Thirty years ago, China was only just beginning to stir from its international isolation.

During the 1960s, Beijing supported liberation movements in Southeast Asia and Africa, and helped built the Tanzania-Zambia railway, but ordinary citizens had little concrete interaction with foreigners.

Now, however, the recent racism debate—which coincided with President Barack Obama’s state visit—has revealed China to be a vast but for the most part ethnically homogenous nation whose economic Great Leap Outward seems to have outstripped its social awareness toward other races and cultures.
Today, the Middle Kingdom truly is a magnet for tourists and traders from all over the world. The southern city of Guangzhou alone has a 100,000-member African community, a reflection of China’s growing economic ties with African nations.

Bilateral trade hit $107 billion last year, and recently Premier Wen Jiabao pledged $10 billion in new low-interest loans to Africa.
Yet when Lou Jing became a finalist in the Go! Oriental Angel! TV talent show in late August, Chinese Netizens erupted with debate—some of it couched in crude or viciously racist terms—over her mixed-race origins.

The startling intensity of the comments upset Lou, who had never experienced such vitriol before.

Such public debates about race are rare; censors bar Chinese media from exploring this explosive topic in the context of domestic race relations, especially regarding the ethnic violence between Tibetans and Han in April 2008 and more recently between Muslim Uighurs and Han in the Central Asian region of Xinjiang.
Before Obama's visit, even when Chinese tried to sound positive or neutral about his race, they sometimes wound up being politically incorrect.

During the U.S. presidential campaign, for example, one leading Chinese Web site touted “Black Kid Obama.”

And on the eve of Obama’s landing in China, Foreign Ministry Spokesman Qin Gang said that the president, “as a black person,” should well understand Beijing’s position on the exiled Tibetan religious leader the Dalai Lama.

The Chinese government considers the Dalai Lama to be a scheming separatist who presided over a feudal serf system before he fled from Tibet into exile.

“China abolished serfdom in 1959,” Qin said, “this is the same as Lincoln’s abolition of the black slavery system in the U.S… President Obama should be more able to understand the stance of the Chinese government against Tibetan independence.”
But here’s another thing that many commentators missed: Obama is having a transformational effect on some Chinese who never thought they’d see a black man as president of the United States.

Beijing has long characterized America as riven with racial prejudice.

Last year’s Chinese government report on the U.S. human-rights record declared, “Black people and other minorities live at the bottom of American society.”

So pervasive is Beijing’s perception of racism in the U.S. that many Chinese foreign-policy analysts ruled out the possibility that Obama could become president.
He obviously proved those skeptics wrong.

Now some experts believe China could take a lesson from America’s multiculturalism.

“We need to dilute our ethnic differences, like the U.S. did,” says Tsinghua’s Prof. Yan.

It seems that Obama, just by being who he is, represents a potent riposte to some of the divisive and racist undercurrents in Chinese society.

Even Lou Jing—who calls him her “idol” and learned to say “Yes we can” in English—has been heartened.

Stars gather in Taiwan for Chinese-language 'Oscars'

Ang Lee

TAIPEI (AFP) — The cream of Asian cinema is set to gather in Taipei on Saturday for the Golden Horse Film Awards, considered the Chinese-language "Oscars".

Famed Taiwan directors Ang Lee and Hou Hsiao-hsien will join Hong Kong peers Johnnie To and Stanley Kwan to present the best director award at tonight's gala ceremony.
However, another top Hong Hong film-maker, John Woo, reportedly will shun the event after his blockbuster war epic "Red Cliff II" was snubbed by the Golden Horse nomination committee.
"It's disappointing and regrettable. The actors and the crew did very well and worked really hard... I didn't understand what standard the judges used," he told reporters in Taipei earlier this week.
Chinese actor Zhang Hanyu and last year's best actor winner also voiced bewilderment at the judges' decisions.
"I was hoping for a best actor nomination for 'The Message'. I didn't know what happened," said Zhang, who is instead up for the best supporting actor for the lesser known "The Equation of Love and Death".
Hit espionage thriller "The Message" received five nods, including a surprise double nomination in the best leading actress category for Zhou Xun and Li Bingbing of China.
Other nominees including Li, director Clara Law and heart-throb actor Daniel Wu of Hong Kong, as well as Taiwanese director Leon Dai, are expected to walk down the red carpet in a suburban Taipei auditorium.
Law, whose romantic drama "Like a Dream" led this year's race with nine nominations, is pitted against Dai ("No Puedo Vivir Sin Ti") for top honours at the 46th edition of the awards.
Critics favour Dai's social drama for best picture for its emotionally charged depiction of a diver's desperate fight for custody of his daughter, a plot based on a true story.
Law is in a tight race with Malaysian art-house director Tsai Ming-liang ("Face") for the best director gong, although her film could dominate the acting categories for Wu and Chinese actress Yolanda Yuan.
However, Chinese director Guan Hu could snatch the awards from his more acclaimed rivals with "Cow", a black comedy about a Chinese farmer protecting a cow during the war against Japan in the 1940s, critics say.
The Golden Horse Awards, broadcast by Chinese-language channels as far away as Canada, are styled on the US Academy Awards but are decided by a jury along the lines of the Cannes film festival.

China sees huge rise in garlic prices

Speculators accused of cashing in on people's swine flu fears
By Robert Cookson and Patti Waldmeir
HONG KONG -- Garlic prices are hitting record highs in China, the world's biggest producer of the pungent bulbs, amid reports of a speculative bubble in the market even as people rush to buy it as a putative cure for swine flu.
The China Daily reported last week that a high school in the eastern city of Hangzhou bought more than 400 pounds of garlic and made students eat it at lunch to stay healthy.
Wholesale garlic prices in Beijing are now 15 times as high as in March, and still rising.
Jerry Lou, a Morgan Stanley China strategist who has researched the opaque market here, said speculators -- fueled by the abundant liquidity sloshing around China -- have moved into the small market and strategically driven up prices.
"You need a warehouse, a lot of cash and a few trucks. That's how it works," Lou said, describing garlic speculators' tools of the trade.

"Basically, what you do is try to arrest as much supply as possible, then you bid up the price. Moving garlic from one warehouse to the other, you make millions of dollars."
Lou said garlic wholesalers told him that gangs that had amassed cash and credit from dealing property and stocks in other parts of the country had chosen the garlic market as their latest ruse.
In the basement of Shanghai's Dagu Road meat and vegetable market, vendor Zhang Weidong said foreigners are importing Chinese garlic for their own swine flu wars, exacerbating a shortage on the mainland. He said customers are paying a $1 per pound for his garlic for protection against swine flu.
China's Commerce Ministry -- which tracks commodity prices across the country -- recently posted an article on its Web site quoting Chinese traditional-medicine experts debunking the notion that garlic is as good as a flu shot.
China usually produces three-quarters of the global garlic supply, but farmers slashed their planting areas by as much as 50 percent last year after prices collapsed during the financial crisis.
But some experts say that neither a smaller crop nor rising flu fears are sufficient to explain why prices have jumped so high so fast, making garlic the country's best-performing asset.
Whatever the real story behind the price increases, growers in California, America's garlic heartland, will be pleased.

For years, despite tariffs, the U.S. market has found it difficult to compete with cheap garlic from China.

China’s Impolitic Artist, Still Waiting to Be Silenced

Artist Ai Weiwei in his studio in Beijing.

By MICHAEL WINES
BEIJING -- AI WEIWEI is perhaps China’s most famous living artist and its most vociferous domestic critic, titles of a sort this committed iconoclast disdains.

Which is not a bad thing, considering that recently, he very nearly lost them both.
Mr. Ai was in Chengdu, the capital of Sichuan Province, preparing to testify at the trial of a fellow political activist.

“By 3 a.m., we heard a very strong noise in the hallway, very brutal, much like a Hollywood movie — knocking on every door: ‘Open it up — we are the police!’ ” he said.
“They kicked open the door. I said, ‘How do I know you are the police?’

They said, ‘I’ll show you,’ and punched me here.” Mr. Ai pointed to the right side of his forehead. “It was a very solid punch.”
A month later, at an art exhibition in Munich, Mr. Ai went to a doctor with a pounding headache and was rushed into surgery to drain a pool of blood from his brain.
Mr. Ai nearly died.

Three months later, he says, his memory still fails him. On the other hand, “I don’t have so many good memories anyway.”
That seems an exaggeration.

At 52, Mr. Ai, a beefy, bearded man with an air of almost monastic composure, is an international figure in the art world, successful beyond what anyone might have predicted even a decade ago.

He is a celebrated architect, a co-designer of Beijing’s landmark Bird’s Nest Olympic stadium, an installation artist and a documentary filmmaker with a 100-member staff.
Artistically, he can do almost anything he wishes, like personally shipping 16 40-foot containers, including 9,000 custom-made children’s backpacks, from Beijing for his recent exhibition in Munich.
Yet clearly, all is not rosy in Mr. Ai’s world.

In one of his early acclaimed works, a series of three photographs called “Dropping a Han Dynasty Urn,” he dispassionately shatters a priceless ancient Chinese vase, striking a theme — destruction and recreation — that runs through much of his art.
Other works employ Ming and Qin period urns, furniture and architecture, assembled into haunting new creations, or painted over, Warhol-style, with the Coca-Cola logo, or speared by wooden beams.

A series of photographs depicts global icons — the Forbidden City, the White House, the Eiffel Tower — interrupted by Mr. Ai’s hand, middle finger raised.
Then there are his politics, an in-your-face criticism of China’s leaders that, given Beijing’s limited tolerance for dissent, seems almost suicidal.

Long before the Olympics, Mr. Ai disavowed his role in designing the Bird’s Nest, saying the government had transformed the Olympics into a patriotic celebration instead of using them to create a more open society.
In a 90-minute interview in his minimalist studio in north Beijing, Mr. Ai called the government unimaginative, prevaricating, suspicious of its own people and utterly focused on self-preservation.
“They don’t believe in liberty. They don’t believe in China before the Communists,” he said. “There is only one simple, clear task: to protect their control, to maintain their governing. Which is such a pity.”
All of this he has said many times before.

China’s nationalists often accuse him of shilling for the West, and in fact, Mr. Ai ended his chat with a plea to President Obama to call for greater freedom in China, saying “we still need the moral support of the Western leaders” to press for more uncontrolled space in a still-closed society.
With or without help, Mr. Ai is pressing hard.

His most provocative art, as well as his latest cause, concerns the question of why the May 2008 Sichuan earthquake killed thousands of children in their classrooms — and why the government has refused to give the public an official explanation.
After the quake, Mr. Ai used the Internet to assemble scores of volunteers who combed the disaster area, compiling a list of more than 5,000 dead children, organized by age and school, that now covers one wall of his studio.

“The picture became clear. All of them belonged to about 20 schools, and those schools, the buildings collapsed to dust,” he said. “Why did those buildings collapse, and the ones next to it are standing?”
THE citizens’ inquiry has produced a detailed list of questions, sent to government agencies, which were supposed to be answered by this past Tuesday under law, but have yet to be addressed.

In December it will yield a documentary film on the disaster.
In Munich, the inquiry produced Mr. Ai’s most arresting work of art to date: those 9,000 children’s backpacks, covering one exterior wall of the Haus der Kunst.

Against a blue background, colored bags form the Chinese characters for the message, “She lived happily on this earth for seven years,” a quotation from a mother of one earthquake victim.
The Munich exhibit is titled “So Sorry,” a caustic comment on the government’s near-silence on the schools disaster.
Mr. Ai’s beating in August occurred as he was preparing to testify at the trial of Tan Zuoren, a Sichuan writer and activist who was trying to investigate the same issue.

Mr. Tan was accused of inciting the subversion of state power. Mr. Ai was blocked from testifying at his trial, which has yet to produce a verdict.

This week, though, another activist, Huang Qi, received a three-year sentence for encouraging parents to press their grievances.

A disquieting sense of foreboding accompanies these jousts with the all-powerful state.
Ai Weiwei’s father, Ai Qing, was both an artist and one of China’s most revered contemporary poets, who as a young man studied Baudelaire and Mayakovski in Paris.

When he returned to Shanghai in 1932, the ruling Kuomintang party jailed and tortured him, calling him a leftist. It was right: in 1941, Ai Qing joined the Communist Party.
BUT 17 years later, in the infancy of Mao’s new People’s Republic, he ran afoul of the Communist Party for subtly criticizing its suppression of free speech. The party exiled him, first to Manchuria, then to remotest northwest China; Siberia, essentially.
Mr. Ai and his family lived in a hut dug into the ground. His job for the next 16 years was to clean out the village’s public toilets.
“He was 60 years old. He had never done physical work in his life and he had to start doing it,” his son said.

“Every night, he comes home very, very dirty. But he says, ‘For 60 years, I don’t know who cleans my toilets. So now I do something for them.’
“That’s something I learned from him. He became very powerful in terms of his thinking. He made the toilet so clean, he would see it as a work of art — like a museum, like MoMA.”
The family returned to Beijing in 1976, with the end of the Cultural Revolution.

In 1985, the elder Mr. Ai, now rehabilitated, would receive a literary award from President François Mitterrand of France.

His son, on the other hand, could hardly wait to flee China.
Young Ai Weiwei studied at the Beijing Film Academy but in 1981 left for the United States. In New York, Mr. Ai said, he was in the city’s art scene, not of it.

He held temporary jobs and moved 10 times, throwing out his canvases each time for lack of storage room.
When his father fell ill in 1993, he agonized over returning to his homeland, which harbored such painful memories.

But after 1989, and the silencing of protesters at Tiananmen Square, he had decided that “the world became different.” And so he returned to China in 1993, reckoning that one day he might face something like his father’s fate.
Lately, there are indeed signs that the government is reaching its limit.

His blogs on Chinese Web sites, about issues political and otherwise, have been shut down. Someone has installed two video cameras outside his studio. The police are said to be scrutinizing his finances, an ominous development in a state where other political critics have been prosecuted for what appear to be concocted fiscal misdeeds.
“He has never done anything illegal,” said his lawyer and friend, Liu Xiaoyuan.

“But if he continues on his current path, getting involved in some very high-profile cases, I will get worried. Some government departments are already very annoyed about him.”
Mr. Ai says he is ready for whatever comes.

“I came to art because I wanted to escape the other regulations of the society. The whole society is so political,” he said.

“But the irony is that my art becomes more and more political.”

The E.U. and China

By JÜRGEN R. THUMANN
As the United States and China engage in a so-called G-2 economic dialogue, the European Union will find itself footing the bill.

The G-20’s Pittsburgh declaration outlined the need to address macro-economic imbalances to avoid a repeat of the financial crisis that has thrown the world economy into disarray.

Although the U.S. current account deficit and the Chinese surplus have declined somewhat since the start of the financial crisis, the weakness of the dollar combined with China’s fixed exchange rate policy risk shifting the burden of future adjustments on to the E.U.’s shoulders.
A continued appreciation of the euro against both the dollar and the Chinese renminbi would be not only a stumbling block for economic recovery in Europe but could lead to suboptimal monetary policy decisions across our different economic blocs and fuel renewed financial and asset price misalignments.

It is our strong belief that a precondition for a return to global growth and financial stability is to ensure that macro-economic and exchange rate policies do not perpetuate past mistakes.
The E.U.’s interests are clear — the major economies need to work together to reach sustainable macroeconomic outcomes in which exchange rate policies have an important role.

China must introduce more flexibility in its exchange rate policy to facilitate Beijing’s clearly stated objective of boosting domestic demand.

The United States must make real its commitment to a strong dollar and restore domestic savings.

The E.U. needs to deliver on a far-reaching structural reforms to restore the Union’s faltering growth potential.

More intense dialogue between European, Chinese and U.S. officials is needed to discuss ways of reducing global imbalances and ensure sustainable development.
In climate change negotiations, China has been reluctant to commit to emissions reductions commensurate with its emissions levels.

Clearly there is a need for China to commit to serious reductions while recognizing the development challenges facing the country.

The Copenhagen conference will require strong leadership from the E.U. and major emerging countries like China to build a consensus.

Closer cooperation on technological solutions is required.

China and the E.U. have the opportunity to boost business-to-business cooperation in green technologies.

But this requires a coherent legal framework to protect intellectual property rights, to foster open trade and investment and to support global rules for freer trade in green goods and services.
The dialogue must also forcefully address the main challenges facing the E.U.-China trade and investment relationship.

Beijing has not shown much leadership. Chinese exports have expanded under multilateral trade rules, yet China has shown only a limited engagement in the World Trade Organization’s Doha Round negotiations.

The E.U. should call for more commitments from its China in global talks, especially on sector-specific goods and services. In this way, the E.U. and China can help reengage the U.S. and move the Doha Round toward a conclusion.
At the bilateral level, government restrictions on trade, procurement, investment and raw materials are harming the E.U.-China relationship.

At the same time, weak enforcement of intellectual property rights is discouraging E.U. companies from cooperating with the Chinese.

European companies would prefer that the Union works to remove these impediments to business development during the E.U.-China summit next week.

The summit could, for instance, grant a special mandate to resolve these matters rapidly through the E.U.-China High Level Economic and Trade Dialogue.

Otherwise, these issues will have to be channeled through the much more cumbersome W.T.O. settlement process.
China and the E.U. have a lot to gain from cooperating to stabilize the global economy, to address shared environmental concerns and to stimulate trade as a driver of growth and open markets globally.

If the E.U. can step up its game in negotiations, it will find in China a strong partner for cooperation.

The Second Chinese Stimulus

A flood of money is on the way as Beijing struggles to control market forces on the upside.
By PAUL CAVEY
You heard it here first: China will soon have a second economic stimulus. There hasn't been an official announcement from Beijing and there probably won't be, because this stimulus will come via forces policy makers are only partly able to control.

But conditions are falling into place for a new monetary loosening to follow the enormous expansion of bank credit in the "first" stimulus of the past year.
To see how, it's important to understand some characteristics of the stimulus China has already experienced for the past year. Attention often focuses on the four-trillion-yuan ($586 billion) plan unveiled by Beijing in November 2008, but for this Beijing spent only about 1.2 trillion yuan of its own cash on public works and the like.
Most of the stimulative pop instead was provided by banks in the form of 9.5 trillion yuan of new lending, or 27% of GDP, in 2009 alone. This binge, supplied by China's state-owned banks, could one day effectively become a fiscal stimulus if a significant number of these loans go bad and Beijing needs to recapitalize the banks using tax receipts. But for now, China's stimulus has been mostly monetary.
To achieve this, Beijing had to overcome several factors that would otherwise have caused a monetary tightening. In July 2008, Beijing gave up the slow appreciation of the yuan, and instead once again pegged its currency to the U.S. dollar. When the greenback appreciated amid a global flight to safety at the depth of the crisis, the yuan also appreciated against a basket of nondollar currencies.
This squeezed exporters already hit by a fall-off in demand. The resulting deflationary pressures would ordinarily have made banks reluctant to lend and businesses reluctant to borrow. Meanwhile, the crisis-related collapse in inflation caused a big rise in real deposit rates, attracting money back to the banks and threatening to squeeze asset-market liquidity.

So the credit expansion of the past year mainly represents a successful effort by policy makers to use their authority over bank managers to counteract broader market forces.
Authorities didn't even use the traditional market-based monetary levers to do it. In the crisis the actual policy rate fell by only a moderate 2.16 percentage points, less than half the size of the Federal Reserve's cuts in the United States; the cut in real rates after a collapse in inflation was even less.

Similarly, the reserve requirement for banks was cut, but only back to the level of the opening months of 2008, and even then the additional liquidity this unleashed only compensated for the drop-off in capital inflows during the crisis.
Thwarting these market forces will be more difficult on the upside than it was on the downside. Which is where the second stimulus will come from: The market forces against which Beijing was fighting this year are changing direction and are likely to spark a wave of capital flows that Beijing will struggle to counteract.
Now that the crisis is over, the dollar is weakening, dragging the yuan back down to levels against other currencies not seen since August 2008.

This is prompting speculation that Beijing will start allowing the yuan to appreciate again, and this speculation is in turn reviving the hot-money inflows that dried up during the crisis.
A similar trend is visible with real deposit rates.

Deflation has eased from 1.8% in July to 0.5% in October, meaning real interest rates are falling. As if on cue, last year's flood of deposits into the banks is reversing.

Except for a blip in September, the stock of household deposits in the banks has been falling since July.

Policy makers have few appealing options in this environment.

Raising nominal interest rates to cool the property market by making bank deposits more attractive, for instance, risks putting yet more upward pressure on the yuan.
These changes will offset the impact of the slowdown in new loans that the government appears to be aiming to achieve, which is not much of a slowdown to begin with.

A likely target for credit expansion of between seven trillion and eight trillion yuan, while less than predicted for the full year of 2009, is still enough to ensure 18% growth in the credit stock. This would still be appreciably above GDP growth, which would satisfy one definition of credit being "loose."
Even if lending slows more, history suggests that this environment—tighter credit but looser exchange and deposit rates—is not particularly tight.

The last time this happened, between 2004 and 2007, Beijing faced serious asset-bubble and inflation worries despite the fact that the growth in bank credit more or less kept pace with GDP growth.

The example of that period also shows what a policy problem Beijing will face as the "second stimulus" gathers steam. Neither small appreciation of the yuan vis-à-vis the dollar nor limited hikes in bank deposit rates could control asset-price rises.

With the dollar weak then as it is now, mild yuan appreciation made little difference to China's overall effective exchange rate.
Beijing already appears to be considering an exit strategy from its first stimulus.

Officials are likely to rein in some of the sector-specific measures that were part of last year's plan. But now market forces are likely to provide their own monetary stimulus.

China Seen Facing Protectionist Backlash Next Year

By REUTERS
BEIJING — China faces a protectionist backlash next year because its manufacturers are saddled with overcapacity and are disposing of its excess output on world markets, the European Union Chamber of Commerce in China said Thursday.
Jörg Wuttke, the head of the business group, said it would take about 12 months to prepare a case alleging dumping, the practice of selling goods for less than it costs to produce them.
“This lead time would indicate to me that in the second half of 2010, there will be far more dumping cases against China, unfortunately,” Mr. Wuttke said.
He was speaking at the introduction of a study into industrial overcapacity in China, a longstanding situation that the chamber believes has grown more serious as a result of the global financial meltdown and Beijing’s aggressive response to it.
“The crisis has throttled demand for exports from China at a time when even more investment, in the form of the Chinese government’s massive stimulus package, is being pumped into building new plants and adding unnecessary capacity,” the report said.
“As a result, the problem is actually getting worse in many industries,” it said.
In a survey of the chamber’s members, 56 percent of respondents identified local government policies aimed at luring investment as the main macroeconomic reason for overcapacity; loose lending was the second most frequently cited cause.
Mr. Wuttke welcomed efforts by the central government to curb new capacity but said it was often powerless in the face of local governments that craved new factories for the tax revenue and jobs they could generate and that have done everything to keep existing plants from going under.
“Local protectionism kicks in,” Mr. Wuttke said. “So even if Beijing sees a problem and wants to tackle it, they are very often derailed by local politics.”
Apart from generating trade friction, rampant overcapacity would weigh on foreign direct investment into China.
“Why would you invest if that market is already oversupplied?” he asked.
By wasting resources and eroding profits, overcapacity deters research and development and encourages companies to cut corners on health and safety standards as well as environmental protection.
Further, the creation of unneeded capacity raises the risk of nonperforming loans for banks that finance the investment. It also generates trade tension as producers sell their surplus production overseas at cut-rate prices, the study said.
The State Council, China’s cabinet, recently singled out the iron and steel, cement, electrolytic aluminum, glass, coal, chemical, polysilicon and wind power equipment sectors as the worst offenders when it came to overcapacity and announced steps to rein in their expansion.
The chamber applauded the cabinet’s actions but said the fundamental answer was to shift from investment-led and export-led growth and to focus more on domestic consumption and services.
The report made a series of recommendations that amounted to a root-and-branch overhaul of China’s economic model.
The recommendations included the redistribution of national income from companies to households. It said state-owned enterprises should disgorge dividends for the government to spend on social security, health and education instead of plowing profits back into fresh investment.
It also recommended a sharp reduction in corporate capital expenditure in coming years.
In addition, the report said that China should remove subsidies for energy and other inputs, which are provided indirectly by households.

Claiming that the manufacturing sector has become addicted to these subsidies, it recommended increasing resource and environmental charges.

China activist who spoke out on quake gets 3 years

In this April 5, 2000 photo, Chinese computer engineer Huang Qi poses for photo in his office in Chengdu, in China's Sichuan province. A Chinese court handed down a three-year sentence in prison to the veteran dissident accused of spying, Monday, Nov. 23, 2009

By CHRISTOPHER BODEEN

BEIJING — A veteran dissident was sentenced to three years in prison after casting a spotlight on poorly built schools that collapsed and killed thousands of children during China's massive earthquake last year — an apparent government attempt to squelch such information.
Huang Qi, founder of a human rights Web site, had been charged with illegally possessing state secrets, his wife Zeng Li said Monday by telephone.

His detention in June 2008 came after several posts on his blog that criticized the government's response to the massive earthquake that struck Sichuan province a month earlier and killed about 90,000 people.
Huang, 46, had alleged that state-controlled media provided skewed reports on relief efforts and accused the government of obstructing the work of non-governmental organizations responding to the disaster, according to reports at the time by Paris-based monitoring group Reporters Without Borders.
"The government is using its propaganda to portray itself as a savior to little avail," the group quoted him as saying in one Web posting.
Huang had also spoken to foreign media outlets about parents' accusations that their children had been crushed in badly built schools.

The government has attempted to quash such complaints, fearing the contentious issue could undermine the admiration and goodwill it earned for the massive rescue effort it led, boosted by volunteers and international aid.
But activists and parents — many of whom lost their only children in the quake — have repeatedly demanded those responsible for the shoddy construction be punished and called for an inquiry.

Those seeking to press the issue have been detained, harassed and threatened by police and thugs believed to be in the employ of local officials.
Huang's sentencing Monday appeared to be one more attempt at silencing the discussion.
Officials contend the sheer force of the 7.9-magnitude quake alone caused school buildings to collapse, ignoring evidence showing that schools were often the only ones to crumble in many parts of the quake zone while nearby buildings survived.
In May, just days before the one-year anniversary of the quake, China gave the first official tally of students' deaths from the temblor, saying 5,335 were killed or remained missing.
Zeng, Huang's wife, said the Wuhou district court in the western city of Chengdu gave no details about the state secrets charge, an ill-defined accusation often used by Communist leaders to clamp down on dissent and imprison activists.

Because of the charge, authorities were able to bar Huang from seeing his lawyer and forbid the photocopying of court documents, rights group Amnesty International said.
Zeng said the court refused to issue a written account of the sentence, leaving her at least temporarily without the necessary documentation to file an appeal.
"And we definitely plan to appeal," said Zeng, who was unable to speak with Huang after the sentencing because he was led directly from the court.
Calls to the court and Huang's lawyers rang unanswered Monday.
The sentence could give grist to critics of President Barack Obama, who faulted him for not being more outspoken on human rights during his visit to China last week.

While Obama raised the topics of universal rights and Internet freedom, he largely avoided the appearance of lecturing his hosts over such issues, something Beijing has responded to in past with indignation.
In a statement, Amnesty International called for Huang's immediate release, saying he was being punished merely for helping illuminate the tribulations of families whose children died in the earthquake.
"He should never have been detained in the first place and should be released immediately," the group's Asia-Pacific director, Sam Zarifi, was quoted as saying in the statement.
Amnesty said several supporters who asked to attend the sentencing were turned away and beaten by police who ringed the courthouse. It gave no details, and their identities were not immediately known.
Huang has already served a five-year prison sentence on subversion charges linked to politically sensitive articles posted on his Web site.
Since his release in 2005, Huang has supported a wide range of causes, including aiding families of those killed in the 1989 military crackdown on pro-democracy protests in Beijing's Tiananmen Square and publicizing the complaints of farmers involved in land disputes with authorities.

China's Internet buzzing over woman in black

In this Nov. 16, 2009 photo, Wang Zifei, is seen at far right in the third row in the background while listening to President Barack Obama, left, answer questions during his town hall meeting at Shanghai Science and Technology Museum in Shanghai, China. Wang has become China's version of the "Obama Girl," as online forums gushed over her beauty and poise. Even a week after Obama left China, the buzz about Wang is still going strong.

In this Nov. 16, 2009 photo, Wang Zifei, is seen at lower center, while listening to President Barack Obama answer questions during his town hall meeting at Shanghai Science and Technology Museum

By TINI TRAN

BEIJING — While President Barack Obama talked about Internet rights during his visit to China, the Internet here talked about a mystery woman in black.
Clad in a black dress and red coat, college student Wang Zifei was snapped by photographers sitting behind Obama during his townhall forum last week in Shanghai and her photos have ricocheted online, turning her into a minor Internet sensation.
She has become China's version of the "Obama Girl," as online forums gushed over her beauty and poise. Photos of her taking off her coat in slow motion have been uploaded and spread widely.
Even a week after Obama left China, the buzz about Wang is still going strong.

The official newspaper China Daily reported Thursday that Google searches for "Obama girl in red coat" in China turned up nearly 7 million results.
Most of the comments posted online have been positive, but a number of Internet users have been less flattering, with some speculating that she had actively courted the attention.
In the United States, an aspiring model and actress rose to fame as "Obama Girl" after being featured in a music video ("I Got A Crush On Obama") supporting him when he was still a candidate.

The sexy video featuring Amber Lee Ettinger became a hit on YouTube.
But this Obama girl has been a reluctant celebrity. After Wang's identity was unearthed by persistent Internet admirers, she broke her silence this week on her personal blog, saying angrily that she did not welcome the public interest.
In a piece titled "What has President Obama brought to me?," Wang urged netizens to stop delving into her personal life.
"I don't want to be popular in this way," she said on her blog.

"After noticing some comments online, I thought it would soon be quiet if I kept mum about it. I even told my friends not tell anyone else my personal information. However, it turns out that my silence brings more suspicion."
Wang, a student at Shanghai Jiaotong University, said she is studying business management. Though she has performed violin, acted in plays, and even hosted shows, she has no interest in entertainment as a career, she said.

"I never wanted to go into the entertainment circle, therefore I rejected many TV stations' offers and contracts."
This brief bout of celebrity has "totally disturbed my study and life," she wrote. She did not respond to an AP request for an interview.
"I'm hoping to quickly restore it to normal," she said in her blog. "I hope that after all this I can continue to be my simple self."

China's backing on Iran followed dire predictions

Before Obama's visit, NSC warned leaders of Mideast turmoil
By John Pomfret and Joby Warrick
Two weeks before President Obama visited China, two senior White House officials traveled to Beijing on a "special mission" to try to persuade China to pressure Iran to give up its alleged nuclear weapons program.
If Beijing did not help the United States on this issue, the consequences could be severe, the visitors, Dennis Ross and Jeffrey Bader, both senior officials in the National Security Council, informed the Chinese.
The Chinese were told that Israel regards Iran's nuclear program as an "existential issue and that countries that have an existential issue don't listen to other countries," according to a senior administration official.

The implication was clear: Israel could bomb Iran, leading to a crisis in the Persian Gulf region and almost inevitably problems over the very oil China needs to fuel its economic juggernaut, said the official, who spoke on the condition of anonymity.
Earlier this week, the White House got its answer.

China informed the United States that it would support a toughly worded, U.S.-backed statement criticizing the Islamic republic for flouting U.N. resolutions by constructing a secret uranium-enrichment plant.

The statement, obtained by The Washington Post, is part of a draft resolution to be taken up as soon as Thursday by the 35 nations that make up the governing board of the International Atomic Energy Agency, the U.N. nuclear watchdog.
While largely symbolic, it is the first such declaration since 2006 to be backed by both China and Russia. And the statement marks a departure for China, which has long refrained from criticizing Iran's nuclear policies.

The issue of how China will handle the Iranian nuclear issue has emerged as an early test of what Obama has described as a relationship that "will shape the 21st century."
Given its backing even from Iran's erstwhile allies, European diplomats on Wednesday predicted easy passage of the resolution, which calls Tehran's construction of an underground enrichment plant near Qom a "breach of its obligations" under U.N. and IAEA guidelines.

If approved, the resolution will be referred to the U.N. Security Council, which could decide to enact harsher sanctions against the Islamic republic.
"Our patience is not going to last forever," German Foreign Minister Guido Westerwelle, whose government drafted the resolution, told reporters on the eve of the IAEA session.
But while diplomats and arms-control experts welcomed China's support of the IAEA resolution, some acknowledged that it is not clear whether Russia or China would go further and agree to new sanctions against Iran.

Attempts to reach officials at the Chinese Embassy for comment were unsuccessful.
"They're expressing displeasure with Iran, but whether that translates into a U.N. Security Council resolution is another matter," said David Albright, a former U.N. nuclear inspector and president of the Washington-based Institute for Science and International Security.
Iran, which insists that it wants to harness nuclear power only to make electricity, this week acknowledged feeling new pressure from Russia over its expanding nuclear network.

A top military commander, Brig. Gen. Mohammad Hassan Mansourian, told state-run Press TV that Russia had reneged on supplying promised military technology "due to pressure form the Zionist lobby and the Americans."
The visit to Beijing last month by the senior White House aides was described as part of a broader effort by the Obama administration to isolate Iran.

In making their case to China, administration officials warned that a nuclear Iran not only would raise the risk of a regional conflict, higher oil prices and even interrupted supplies, it could also trigger a surge in nuclear proliferation.
The Chinese were told that "this could shake the entire framework of the international nonproliferation regime," said the official who was familiar with the lengthy analysis Ross laid out.
Countries such as Saudi Arabia, Turkey and Egypt could start their own nuclear programs, the Chinese were told.

"And once Saudi Arabia, Egypt and Turkey go, what's left?" the official said.

The implication again was clear: Japan, China's biggest competitor for influence in the region, could go nuclear as well, the official said.
Obama reinforced those messages during his trip to China last week in meetings with President Hu Jintao, the official said.

"Both Dennis and the president talked about the consequences of Iran moving toward having highly-enriched-uranium capacity," the official said.
The United States wants China to back sanctions against Iran if Tehran refuses a proposal to send most of its current stockpile of low-enriched uranium abroad for processing into fuel rods for a research reactor in Iran.
China has said it opposes sanctions against Iran; China's state-run energy behemoths have committed to investing $120 billion in Iran's energy sector over the past five years, and few if any of those projects have broken ground.

Iran is also China's No. 2 supplier of oil.

Earlier this week, Sinopec, one of China's biggest oil companies, signed another memorandum of understanding with the National Iranian Oil Refining and Distribution Co. to invest an additional $6.5 billion to build oil refineries in Iran.
From the start of his administration, Obama has lobbied the Chinese over Iran.

The issue dominated his discussions with Hu during their meeting at the U.N. General Assembly in September.

Obama referred to the issue with Iran as "a core national interest" of the United States, a conscious use of a term China employs on sensitive issues such as Taiwan and Tibet.

"It's their terminology coming back at them, emphasizing how critical" the issue is to the United States, the U.S. official said.
U.S. officials have also attempted to explore ways to help to wean China off Iranian oil, State Department officials have said.

Officials from the United Arab Emirates have said they plan to increase oil exports to China. Saudi Arabia is also moving toward closer ties with Beijing that would clearly involve selling more oil to China, officials said.

China seen as key U.S. relationship, also an enemy: poll

WASHINGTON (Reuters) - A plurality of Americans see relations with China as the most important globally for the United States, a survey published on Tuesday showed, but more than half of those polled viewed China was an adversary.
The Thomson Reuters/Ipsos poll of 1,077 adults aged 18 and older across the United States highlights U.S. ambivalence about the key trade and diplomatic partner.
Asked to choose from a list of countries "the most important bilateral relationship the United States should have," 34 percent chose China. Next was Britain, selected by 23 percent; and Canada, the choice of 18 percent.
When asked to characterize China as either an "ally" or an "adversary," 56 percent characterized China as a foe, while only 33 put the country in the ally column, said Ipsos Public Affairs, which conducted the poll for Thomson Reuters.
Two percent of Americans said China was both an ally and adversary, the same percentage who said it was neither.

Seven percent responded "don't know," the nonpartisan polling firm said.
The poll, conducted between October 29 and November 2, had a margin of error of 3.1 percentage points, Ipsos said.
Obama made a key visit to China and other Asian countries last week at a time when Washington and Beijing are working closely on tackling the global financial crisis, climate change and how to handle diplomatic hot spots like North Korea.
But the two countries have skirmished over trade issues. U.S. manufacturing and labor groups frequently accuse the Chinese of mercantilist business practices that have put American firms out of business with a loss of millions of jobs.

China takes a new look at Marxism

By Francesco Sisci
BEIJING - The week before the visit of United States President Barack Obama, the Chinese media were full of hope and expectations: Obama's meeting with China's leaders would lead to new and higher-level bilateral relations, newspapers wrote.

But it was already clear that, contrary to the ideas of the foreign press, this would not mean that China was to become a second America.
In fact, on November 14, less than 48 hours before Obama's arrival in Beijing, the official news agency Xinhua released a long statement in Chinese only explaining that Xi Jinping, vice president of the state and president of the Central Party School, had held a conference about the necessity to "actively encourage the building of a ruling party study model of Marxism".
Xi, in his speech at the Party School, which was chaired by Li Jingtian, the executive vice president of the same school, recommended studying socialist theory with Chinese characteristics and applying the "core values of socialism".
The school is the highest institution in the country to train officials of the Chinese Communist Party.
It sounds like a trip back in time, light years away from the wave of freshness and optimism that seems to blow in the West and in the US around Obama, with his liberal, charismatic aura.
But it is not an isolated gesture.

The strong emphasis on Marxism has been echoed by headlines in recent months. The current economic crisis places in question the faith, previously almost blind in China, in the capitalist system.
On November 11, the Chinese edition of Global Times, China's best-selling national newspaper, led the front page with a report that a BBC survey in 21 countries had found that a majority of people no longer had confidence in capitalism. (More than 29,000 people in 27 countries were questioned. In only two countries, the United States and Pakistan, did more than one in five people feel that capitalism works well as it stands.)
In a sense, China is emerging from decades of reticence about its political system.

On November 13 and 14, immediately before Obama arrived in Beijing, Zheng Bijian, credited as a political adviser to President Hu Jintao, flew to Taiwan to take part for the first time in a seminar on political systems.

Zheng was executive vice president of the Party School in the 1990s when Hu was its president.
It was the first time that a very senior Beijing official had agreed to discuss the differences between the political systems in China and Taiwan, which have been a major stumbling block in any potential process of reunification of the island with the mainland.

Taiwan is a parliamentary democracy, and China isn't.
The message appears to be that with the current crisis -- which is economic, but to a certain extent systemic in the US -- China is having renewed doubts about the value of the US and Western system, and is growing cautious.
This does not mean that Beijing will turn back or stop, although it is willing to explore different directions.
In his speech, Xi coined a new term in China's ultra-coded political rhetoric: "The ruling party study model of Marxism."

The definition is cryptic for people in the West, but it is still clearly miles away from the days when the party called itself "Communist Marxist-Leninist".
The indications are that the Chinese are no longer inclined to define their party as "communist", although they acknowledge a real, not simply rhetorical, value in the study of Marxism and the "core values of socialism".

China is becoming more convinced and self-confident in its trial reforms of the political system.
This greater confidence was evidenced in Zheng Bijian's trip to Taiwan.

In essence, the message to the Taiwanese, who might still one day unite with the mainland, was, "We will certainly change our political system, but your parliamentary democracy also must reform; otherwise, it risks being derailed and overwhelmed by demagoguery and populism."
Zheng's position is not without support on the island, where many entrepreneurs and tycoons are beginning to admire the efficiency and economic success in mainland China.
China's leaders stress they do not want to export their political model, and they even ask others not to imitate them but to look for their own development paths.

Still, China's politicians are becoming unwilling to endure lectures on politics or ethics, given the fact that their system is working today, while others falter.
In the runup to Obama's visit, all this meant that the message to the visitor was to keep domestic politics out of big-policy discussions.

But it was also a statement: China is reforming its political system, although it might not be totally along the lines Washington or the West wants to see.