Google Web Searches Are Partly Blocked in China

By SCOTT MORRISON
SAN FRANCISCO—Google Inc. said that its Web search service in mainland China was partially blocked Wednesday, less than two days after the company announced changes aimed at keeping its Internet operating license in the country.
The company said the blockage appeared to affect only search queries generated by mainland China users of the company's Google Suggest function, which automatically recommends search queries based on the first few letters a user types into the search box.
"It appears that search queries produced by Google Suggest are being blocked for mainland users in China. Normal searches that do not use query suggestions are unaffected," the company said in a statement.
Google declined to speculate why only Google Suggest searches were being blocked.

The blockage affected only searches conducted from within mainland China, not those from Hong Kong.
The blockage was first noted on a Google Web page, google.com/prc/report.html, which reports on the availability of the company's services in mainland China.

The page listed the Web search service as "partially blocked" as of Wednesday.

Google's Web search had previously been listed as "fully or mostly accessible." The search service has been partially blocked several times in recent months, according to the page.
Other key services such as Gmail, News and Images remained "fully or mostly accessible."
Google said late Monday it would no longer automatically redirect Chinese users to an uncensored search site in Hong Kong but would instead add a link on its main Chinese Web page to direct users to its Hong Kong search engine.
Google made the switch after the Chinese government objected to the automatic redirect and threatened to take away Google's Internet operating license.
But it isn't clear whether China's government will find the change sufficient and extend the company's license.
The standoff between Google and China appears to be reaching a pivotal moment three months after the company said it would reroute search traffic to Hong Kong, a move that enabled the Internet search giant to evade mainland China's censorship laws.
The Chinese government told Google that the rerouting was "unacceptable," according to a company blog post on Monday.

Google said it was told its Internet license wouldn't be renewed if it continued the practice.
The escalating dispute with China was sparked in January when Google complained that it had been the victim of a major cyberattack in which hackers stole some of the company's proprietary computer code and spied on Google email accounts of Chinese human-rights activists.

US blocks China fibre optics deal over national security

By Stephanie Kirchgaessner in Washington
The Obama administration has forced a US maker of fibre optics to abandon a planned joint venture with China’s Tangshan Caofeidian Investment Corporation because it believes the tie-up would threaten national security.
The decision by the White House to scupper the move represents the second time in less than a year that the administration has sought to block a transaction involving a Chinese company because of security concerns.
It also offers a rare glimpse into the administration’s handling of sensitive acquisitions following a drought in cross-border deals during the financial crisis.
Emcore, which is based in New Mexico and makes components for fibre optics and solar panels, said in a statement it had withdrawn a voluntary filing with the Committee on Foreign Investment (Cfius) after the executive branch panel said it had “regulatory concerns” over the venture.
Cfius, which is chaired by the Treasury department, conducts classified investigations of deals on national security grounds.
Although it rarely blocks transactions formally – it has done so only once – the panel alerts companies about a problem to allow them to drop merger plans voluntarily.
Under the terms of the deal, Emcore was set to sell 60 per cent of its fibre optics business to TCIC for $27.8m in cash.

“While addressing any regulatory requirements, Emcore remains committed to seeking other means of co-operation,” the company said.
The Treasury department declined to comment.
Though the proposed deal was small, it will be studied in security circles.
Late last year, Washington forced another Chinese company to abandon a bid to buy a 51 per cent stake in FirstGold, a Nevada mining group.
The government told lawyers working on that deal it was concerned about the group’s proximity to a naval airbase.

But one person familiar with the transaction said it was also worried about the Chinese company’s potential access to tungsten, a metal used in missiles.
The latest decision will also be watched by Huawei, the Chinese telecommunications equipment maker that was blocked from acquiring 3Com, a US technology group, by Cfius in 2008 and is seeking to make inroads in the US.

US wary of upsetting its new friend

By Geoff Dyer in Beijing and Daniel Dombey in Washington
The latest showdown between Google and the Chinese government could put President Barack Obama’s administration in a tricky situation just as US relations with Beijing appear to be improving.
Google said on Tuesday that Beijing wanted it to end its practice of automatically redirecting customers in China to its Hong Kong website, which it adopted this year when it announced it would stop self-censoring its Chinese search engine.
As Google’s operating licence for China expires this week – and has not yet been renewed – this latest confrontation could lead to the formal departure of Google’s website from the Chinese market.
If Google does end up closing its Chinese operations, the US administration will probably come under pressure to take a stronger stance than it has so far.
US administration officials have for months signalled that Google’s dispute with China is primarily an issue for the company, rather than one requiring high-profile intervention by the US government.
While Hillary Clinton, US secretary of state, announced in a speech in January that internet freedom was now an issue of foreign policy concern, US-China relations remain dominated by more traditional issues such as Beijing’s build-up of its military, China’s allegedly undervalued currency and the US’s drive for sanctions against Iran.
After a meeting with Hu Jintao, Chinese president, at the weekend, Mr Obama focused his remarks on China’s reluctance to date to invite Robert Gates, US defence secretary, to Beijing, and on Washington’s desire that China condemn North Korea for the sinking of a South Korean ship in March.
Mr Obama’s recent invitation to President Hu to pay a state visit – he will be only the third foreign leader to make such a ceremonial trip during the president’s time in office – is a further sign of the importance the White House gives to good US-Chinese relations.

President Hu has accepted the invitation.
The view from China, though, is rather different.
Google’s initial announcement in January that it would stop censoring web searches made on its Chinese search engine was widely assumed, within the country, to have been taken in collaboration with the new US administration.
The news also came at a time when US-China relations were going through a rough patch, buffeted by tensions over the Copenhagen climate change talks, the sale of arms to Taiwan by US companies and a meeting between President Obama and the Dalai Lama, the exiled Tibetan spiritual leader.
However, since then, ties between the two governments have improved sharply.
And, with the disputes earlier in the year behind it, the Obama administration may well feel reluctant to pick a new fight with China.

India Loses to China in Africa-to-Kazakhstan-to-Venezuela Oil

By Rakteem Katakey and John Duce
An offshore platform in the Lan Tay field in Vietnam, owned partly by BP Plc, ONGC Videsh Ltd. and Vietnamese government-owned Petro-Vietnam.

Indian Oil Minister Murli Deora traveled to Nigeria, Angola, Uganda, Sudan, Saudi Arabia and Venezuela this year, leading a record number of delegations to gain oil for the world’s third-fastest-growing major economy.
The flurry of visits is part of a new drive to find oil for India’s 1.2 billion people after losing out to China in at least $12.5 billion of contracts in the past year.

India proposed a sovereign wealth fund to bid for reserves, told state-controlled Oil & Natural Gas Corp. and Oil India Ltd. to make a major acquisition each this year, and raised the amount they can spend without government approval to 50 billion rupees ($1.1 billion).
“There is a new push,” said N.M. Borah, chairman of state-owned exploration company Oil India. “Going abroad is part of the government’s policy -- diplomatic support is very, very crucial as we search for assets overseas.”
India’s energy use may more than double by 2030 to the equivalent of 833 million metric tons of oil from 2007, while China’s demand may rise 87 percent to 2.4 billion tons, the Paris-based International Energy Agency said.
India faces an uneven contest to close the gap with China, which is dipping into $2.4 trillion of foreign currency reserves to buy stakes in oil and natural gas fields from Iraq to Uganda, compared with India’s $250 billion in foreign exchange reserves.

State-run Chinese companies spent a record $32 billion last year acquiring energy and resources assets overseas versus India’s single $2.1 billion investment by ONGC.

China’s June 19 decision to allow the yuan to appreciate will further strengthen the hand of Chinese companies buying overseas.
India’s oil import bill climbed six-fold in the past decade to $85.47 billion for the year ended March, equivalent to about 7 percent of gross domestic product.

‘Political Game’
“India’s search for energy has to become a more intense political game, rather than one based entirely on economics,” said Abheek Barua, an economist at the Mumbai-based HDFC Bank Ltd. “China has virtually already taken over Africa.”
China has promised billions of dollars in aid, investment and loans to Africa, producer of one-eighth of the world’s crude oil, in exchange for energy supplies.
“We buy assets based on commercial decisions even though there is a mandate for securing energy for the country,” R.S. Sharma, chairman and managing director of ONGC said in April. “The Chinese are different with their big cash. We can’t invest just for the sake of it.”

Stronger Yuan
China National Petroleum Corp. beat India by agreeing to pay $4.18 billion in August 2005 for PetroKazakhstan Inc., then China’s biggest overseas oil deal.

At that time, oil minister Mani Shankar Aiyar said India’s bid for PetroKazakhstan was thwarted as the “goalposts were changed after the game began.”

A month later China National Petroleum again outbid ONGC in buying assets of EnCana Corp. in Ecuador for $1.42 billion.
A stronger yuan would also make purchases cheaper for the Chinese.

The People’s Bank of China said on June 19 it may allow the yuan to move higher, abandoning the 6.83 yuan peg to the dollar adopted during the global financial crisis to shield exporters.

The yuan climbed 0.4 percent to 6.7976 per dollar in the first trading day after the announcement.
India has had some success.

ONGC agreed in 2005 to spend as much as $6 billion on roads, ports, railway lines and power plants in Nigeria in exchange for 600,000 barrels a day of oil for 25 years.

In April, Reliance Industries Ltd., operator of the country’s largest gas field, agreed to buy a $1.7 billion stake in natural-gas properties from Atlas Energy Inc.

On June 24 it announced a $1.3 billion acquisition of shale gas assets in the U.S. from Pioneer Natural Resources Co.

More Freedom
ONGC, Indian Oil and Oil India were part of a group in March that agreed to develop reserves in Venezuela’s Carabobo blocks during a visit by Deora.

In February, the minister persuaded Saudi Arabia, the world’s biggest oil exporter, to almost double crude shipments to India, to about 800,000 barrels a day, according to the ministry. State-run Saudi Aramco ships about 1 million barrels a day to China, more than to the U.S., Chief Executive Officer Khalid al-Falih said Jan 28.
India increased the amount ONGC and some other state-run companies can spend to acquire assets and set up joint ventures, allowing them greater freedom to expand and become globally competitive, the government said in December.
“One of the advantages the big Chinese oil companies have is government support, it’s an open secret,” said Gideon Lo, an energy analyst at DBS Vickers Hong Kong Ltd.

“The government establishes high-level contacts with oil-producing countries. Once this is done, the oil companies can come in and negotiate.”

Oil Opportunities
PetroChina Co., which vies with Exxon Mobil Corp. as the world’s biggest company by market value, wants half its oil to come from overseas by 2020, Chairman Jiang Jiemin said in March. Less than a tenth comes from abroad now.
“We will take advantage of opportunities in developing oil, gas and energy sources in all areas of the world,” Jiang said in an interview in March.
Cnooc Ltd., the listed arm of China’s biggest offshore oil producer, is in discussions to buy a one-third stake in three blocks in Uganda’s Lake Albert region from Tullow Oil Plc.

ONGC had jointly bid with Indian Oil Corp. and Oil India for the stake and lost out to the higher Chinese bid, a person familiar with the negotiations said, declining to be identified because the talks were private.
China has spent at least $21 billion on overseas resources in the past year, including state-controlled China Petrochemical Corp.’s $4.65 billion purchase in April of a stake in an oil- sands project in Canada.

ONGC was interested in the asset and didn’t bid, a person familiar with ONGC’s plans said, declining to be identified since the plans were not public.

‘Financial Firepower’
ONGC plans to borrow $10 billion over the next decade for purchasing assets overseas.

In September, China National Petroleum Corp., PetroChina’s state-owned parent, received a $30 billion loan from China Development Bank at a discounted interest rate to buy energy resources, according to a Sept. 9 statement from parent China National Petroleum Corp.
“The financial firepower that the Chinese companies have is a factor,” Tom Deegan, Hong Kong-based head of energy and infrastructure at lawyers Simmons & Simmons, said.

“They have access to capital and finance through Chinese banks which have the liquidity, which perhaps Indian companies don’t.”

Deegan has been advising on M&A deals in Asia for 13 years.
Adding India to the competition may push prices higher for hydrocarbon assets, boosting drilling costs that are already facing an increase in the U.S. after an explosion in April at a BP Plc-leased drilling rig in the Gulf of Mexico released oil that polluted about 140 miles (225 kilometers) of coastline.

Chinese Premium
“Chinese companies always have to pay a slight premium to win oil and gas deals overseas to fend off the competition,” said Gordon Kwan, analyst at Mirae Asset Securities in Hong Kong. “This is just the tip of the iceberg. With talk of the yuan appreciating this will increase China’s purchasing power.”
China Petrochemical, known as Sinopec Group, agreed to buy a 9 percent stake in Syncrude Canada Ltd. for $4.65 billion, or $650 million more than the high end of an estimate by Macquarie Securities.
“There’s a market consensus that perhaps Sinopec overpaid for its stake in oil sands project in Canada, but this is made on the assumption that oil prices” were around $80 a barrel at the time, DBS Vickers’s Lo said.

“The company may be assuming that oil prices will rise to over $100 a barrel and this purchase may turn out to be a bargain.”

Replace Reserves
Oil in New York has risen 0.3 percent in the past year to $75.62 a barrel.

Prices may average $84.50 a barrel in the fourth quarter of this year, according to the median estimate of 30 analysts surveyed by Bloomberg.

Oil has tripled in the past 10 years.
Sinopec bought Addax Petroleum Corp. last year for C$8.3 billion ($7.9 billion), gaining licenses in Nigeria, Gabon and Cameroon.

Chinese oil companies also have African assets in Kenya, Niger, Algeria, Equatorial Guinea, Mauritania, Libya, Tunisia, Sudan and Chad.
Oil companies aim to at least replace used reserves each year by finding new fields.

Royal Dutch Shell Plc’s shares fell 1.3 percent after the company announced last year that its reserve replacement ration dropped to 95 percent from 124 percent a year earlier.
“Chinese and Indian companies are getting into a competitive field and that is driving up asset prices,” Neil Beveridge, an analyst at Sanford C. Bernstein Ltd. in Hong Kong, who rates PetroChina and Cnooc Ltd. “outperform” and ONGC and Reliance “market perform”.

“That is why a lot of the companies try and do government-to-government deals. We saw that in the Indian companies getting a deal in Venezuela this year.”

Foreigners doing business in China feel boxed out

Foreign firms doing business in China say laws discriminate against them, an EU Chamber of Commerce Report said Tuesday, echoing complaints from other international competitors.
By Peter Ford
Beijing — Foreign firms are being cut out of business opportunities by official discrimination in favor of Chinese companies, and there is no sign of the playing field being leveled in the near future, a major European business group complained on Tuesday.
The report on business confidence by the European Union Chamber of Commerce adds weight to a growing chorus of complaints by foreign businesspeople in recent months that the Chinese authorities are increasingly setting rules and standards designed to favor local manufacturers over international competitors.
Though the Chamber’s members almost all expect strong growth in the Chinese economy, only one-third of them expect their profits to be good.
That pessimism stems largely from the fact that “nearly 40 percent of our members say the situation in two years will be even less fair than today,” said Chamber President Jacques de Boisséson.
“Optimism in the overall economic climate has been dampened dramatically by concerns about regulatory interference and unpredictability in the market,” the report said.
“China should not take the presence of European companies and their commitment to China for granted,” Mr. de Boisseson said, voicing members’ frustration.

“They tell us that if things turn sour, China is not necessarily a must for them.”

Unwelcoming signs
In March, the American Chamber of Commerce in China also reported growing unease about doing business here, with 38 percent of US firms saying they felt unwelcome, up from 26 percent in 2009.
An international uproar last December forced the government back to the drawing board with its Indigenous Innovation Product Accreditation Program, seen as a bid to cut foreign companies out of the official procurement market.

But the plan is still in the works “and we will have to see in practice how it works,” says one European diplomat warily.
Recent experience in such promising sectors as renewable energy is not encouraging.

Foreign wind-turbine manufacturers in China have not won a single tender to build a wind farm here since 2005.

They are handicapped, EU Chamber officials say, by requirements such as one demanding that bidders on projects have a minimum production capacity 30 percent higher than the largest currently operating foreign-owned maker of turbines.

That condition makes a winning bid virtually impossible.
“There is nothing official to keep foreigners out of the market, but you just have to look at the results of the tenders to know what the policy is,” says the diplomat.

Promoting home-grown technology
China’s ambition to replace key foreign technology with home-grown or home-adapted versions within a decade has led it to place a host of restrictions on foreign firms, executives complain, ranging from mandatory technology transfers to local content requirements.

And government efforts to boost local entrepreneurs over foreign competitors include uneven application of the law, they say.
EU firms surveyed complained, for example, that they have to comply with environmental regulations that their Chinese counterparts ignore with impunity.

Forty-seven percent said they experience “strong” enforcement of such regulations; only 7 percent felt that Chinese firms were subjected to that level of implementation.
De Boisséson said he took heart from recent reassurances by Prime Minister Wen Jiabao, at a meeting with top European businessmen, that their investments were welcome and would be treated the same as Chinese companies.
“We look forward to the premier’s words being translated into deeds,” he said.

European business wary of China regulation

By Geoff Dyer in Beijing
Many European companies expect the regulatory environment in China to get worse over the next two years even though they are optimistic about growth prospects, according to a new survey.
The European Chamber of Commerce said on Tuesday that businesses from Europe are looking to increase investments in China, but could yet decide to scale back their presence significantly if the operating environment became more difficult.
“The Chinese authorities should not take the presence and commitment of European companies for granted,” said Jacques de Boisseson, president of the European Chamber in China.

“This massive commitment to the Chinese market is not unconditional. If perceived risks materialise to a great extent, the presence and commitment of our members may disappear.” Mr de Boisseson was speaking at the launch of the chamber’s annual survey of European businesses in China, which mixes buoyant views about the prospects for the market with growing pessimism about the political climate facing foreign companies.
The survey is the latest warning from the foreign business community in China that the operating conditions and political limits they face have become more difficult since the global crisis.

The showdown between Beijing and Google has been one of the most high-profile examples of tensions.
Such fears have been echoed in recent statements by the American Chamber of Commerce in Beijing.
The Chinese government has taken some steps to address these concerns, including changes in public procurement rules.

Indeed, Wen Jiabao, premier, met a delegation of European companies in April and said they would not be discriminated against.
“We do not want to have to vote with our feet to be heard by the Chinese government,” said Mr de Boisseson.

“But the perception today is one of concern, and we look forward to the premier’s words being translated into deeds.”
According to the survey, 64 per cent of companies said China was one of their top three destinations for investment.

Yet 39 per cent of European companies said they thought the regulatory environment would worsen over the next two years, with only 10 per cent expecting it to improve.
While 78 per cent of companies said they were optimistic about growth, only 34 per cent said the same about the prospects for profitability this year.

China pact proving hard to sell in Taiwan

By Peter Harmsen

An anti-trade deal protester holds a model toilet complete with a picture of Taiwan's President Ma Ying-jeou

Protesters hold placards with the Taiwan and Chinese flags combined and reading: "pro-Beijing policy selling out Taiwan"

CHONGQING, China — After reaching a sweeping trade agreement, Taiwan and China face the challenge of persuading the island's 23 million people that Beijing has no ulterior political motives, analysts said.

The Economic Cooperation Framework Agreement (ECFA) signed Tuesday in China is ostensibly about commerce but many on Taiwan -- which has ruled itself for six decades -- fear it could undermine their hard-won de facto independence.
"It's very difficult for the public not to harbour political concerns over ECFA," said Tung Chen-yuan, a Taipei-based author of several books on Taiwan's economic ties with China.
"Who would be naive enough to believe that Beijing has no political motivation behind the move? What would make it sign an agreement benefiting Taipei at time when Taiwan already enjoys a huge trade surplus each year?"
Taiwan's trade surplus with China, according to the island's own statistics, was 37.6 billion dollars in 2009, and ECFA is not likely to narrow it.
The agreement will lead to lower tariffs for more than 500 categories of Taiwanese products sold in China, but for only half as many Chinese-made goods sold in Taiwan.
Even a Chinese negotiator has called the deal skewed in Taiwan's favour, and many on the island view the agreement as a bid to lock it into China's political orbit.
Taiwan's main opposition Democratic Progressive Party warned Tuesday that ECFA would relegate Taiwan to the status of a local government such as semi-autonomous Hong Kong and Macau in any talks with Beijing.
Those anxieties were reflected in Taiwanese newspaper commentary Wednesday.
"China is most happy from the signing as its goal of annexing Taiwan is moving smoothly ahead," the Liberty Times said.
The Apple Daily said: "ECFA is a vitamin for Taiwan but we can't take vitamins instead of regular meals. Taiwan has to rely on its own efforts to compete."
The Economic Daily News, however, said the trade pact was a "critical first step for Taiwan's participation in regional economic integration", as the rest of Asia draws ever-closer to China.
China often buys political gains with economic concessions, but may have misunderstood the mood in Taiwan, said Zhang Baohui, an expert on China-Taiwan ties at Hong Kong's Lingnan University.
"They underestimate the identity issue. In the past 10 years, the people on the island have shifted towards a Taiwan identity. Fewer and fewer think of themselves as Chinese. No economic benefit will reverse that trend," he said.
Voters in the small, vibrant democracy could voice their anger over pressure from Beijing in presidential elections in 2012, analysts argued.
China should therefore mute talk about political ties, said Liou To-hai, a political scientist at Taipei's National Chengchi University.
"What China should avoid doing is press Taiwan to talk about political or security matters for two or three years or at least not before Taiwan's next presidential election," he said.
For Taiwan's China-friendly government under President Ma Ying-jeou, ECFA is a potential victory but only if the promised gains -- including hundreds of thousands of new jobs -- materialise, analysts said.
Ma's administration also could ease fears by encouraging more open discussion of the pact, a debate hampered so far by the absence of concrete details.
"Since so many people are still worried about the ECFA, and no consensus has been reached on it, a referendum would be the socially least expensive way to arrive at a consensus from within," said Tung, the Taipei-based writer.
But no matter what Beijing and Taipei may say, China is so huge and so close that it is hard for Taiwan not to feel intimidated.
"Because of the overwhelming difference in size, there is a concern that integration of the economies could make them lose economic autonomy and in the long run also political autonomy," said Zhang of Lingnan University.

Rights group urges support for Google in China standoff

WASHINGTON (AFP) — A prominent human rights group urged governments and technology companies Tuesday to support Google as it seeks the renewal of its business license in China.
"Governments that are very concerned about the freedom of the Internet should absolutely step up now in terms of sending a message to the Chinese government," said Sharon Hom, executive director of Human Rights in China.
"Governments and the industry should send a very clear message to China that it must provide a business environment for foreign companies that doesn't force them to violate human rights," she told AFP.
"Google is standing there alone," she said. Others "must step up to the plate and address this as a collective industry Internet challenge. They can't just say it's a Google problem."
Google on Tuesday said it would stop automatically redirecting mainland Chinese users to an unfiltered search site in Hong Kong, a process it began in March in response to censorship and cyberattacks it claims came from China.
Instead, mainland users who visit Google.cn would have to manually click a link to access the Hong Kong site.
"It's clear from conversations we have had with Chinese government officials that they find the redirect unacceptable -- and that if we continue redirecting users, our Internet Content Provider (ICP) licence will not be renewed," Google's chief legal officer David Drummond said on the company's blog.
"This new approach is consistent with our commitment not to self-censor and, we believe, with local law," Drummond wrote.
Google's ICP licence comes up for renewal on Wednesday, and it re-submitted its application based on what it called its "new approach," he added.
Human Rights in China's Hom said "what Google appears to be trying to do is this technology maneuver that preserves and gives them a shot at getting their license renewed."
"They're not changing the picture of what people can get, they're changing a little bit how they get to it," she said.
"Whether that's going to go down with the Chinese authorities is another question," Hom said. "It's hard to predict."
Google's decision met with a mixed reaction in technology circles.
Writing on popular US technology blog TechCrunch, M.G. Siegler said Google is "sort of backing down" and described it as a "little disappointing."
"Google's position is clearly that they're not ready to fully give up on China just yet," he said.
"While they're still refusing to censor (which Chinese law requires), they are willing to stop the redirect which China finds 'unacceptable,'" he said.
"The power of Google's initial message was anchored by the fact that they said they were ready to leave China and shut down google.cn if it came to that," Siegler said.

"Now that it has come to that, and it's clear they're not going to do that anytime soon, it's just a little disappointing."
Jacqui Cheng at another technology blog, Ars Technica, expressed doubt the Chinese authorities would accept the new arrangement.
"Google thinks this might be enough to appease the government and get them to renew Google's ICP license," Cheng wrote.

"We'll see. Google is trying to have its cake and eat it, too; the Chinese government, while sometimes deluded, is not so stupid."

Advertising lead put in jeopardy

By Richard Waters in San Francisco and Kathrin Hille in Beijing
The Chinese threat not to continue Google's licence to operate in the country has put it on the brink of being barred completely from the world's most populous internet market and could eventually jeopardise its position as the world's leading online advertising company, according to internet executives and other observers yesterday.
Without a licence Google would be forced to shut down its operations in the country, which include music, maps and translation services, according to officials at the internet company. Google has about 350 engineers in China and 500 employees in total, said a person familiar with the company's operations there.

Should it lose its licence, many of its most talented people would be likely to move quickly to jobs elsewhere, this person said.
"In the first half of this year, there was no more than psychological fallout from Google's stand-off with the government, but this time, the impact will be real, and it will be big," said Edward Yu, chief executive of Analysys, a Beijing-based internet research firm.
"If the licence expires and users can no longer visit Google.cn, it will definitely affect user traffic, and that will have a direct impact on ad revenues," he said.
In the first quarter of this year, which included Google's initial pledge to stop censoring search results in China as well as its later move to redirect Chinese users to its Hong Kong site, the company's share of Chinese online search revenues slid from 35 to 30 per cent, according to Analysys.
Statistics for the second quarter are not out yet, but Mr Yu said Google's online search revenues in China in the June quarter rose.
In the short term, even if it loses its licence the company might hope to keep at least some of its advertising revenues from Chinese customers.

Google does not publish China revenues, but analysts estimate that between 30 and 40 per cent are generated from ads Chinese customers buy on Google.com rather than on the local site.

In theory, these revenues would remain unaffected by a closure of the Chinese site.
Li Zhi, an online search expert at Analysys, believes that if Google is forced out, some Chinese customers might switch ads from Google.cn to Google.com, reducing the loss from closure.
But this would only work if Google.com.hk and Google.com remained accessible -- a questionable prospect if the company continues to anger Beijing.
China could retaliate by taking aggressive steps to block access inside China to the Chinese-language version of Google.com, according to one person close to Google.

Even without that action, search traffic from inside China would fall off sharply since many Chinese users do not know the URLs of its foreign sites.
Views were also divided inside Google yesterday over whether the company would be able to maintain a presence inside China selling advertising for its .com service if it loses its licence.
Analysts have said that smaller Chinese search engines are most likely to benefit from an exit of Google.

Microsoft has also been positioning itself to benefit from Google's troubles, with recent comments from Steve Ballmer, chief executive officer, making clear that the company believed in maintaining full engagement with its business there.

Microsoft's Bing search service is available in China, but is not yet widely known.
The prospect of losing its access to the Chinese market is likely to dent Google's long-term prospects and may already be weighing on its stock price, according to observers.

Sandeep Aggarwal, an analyst at Caris in San Francisco, estimated Google was on track to generate $300m-350m in revenues this year from China.

Given the growth there, that could already account for up to 5 per cent of its stock market value, with the prospect of that proportion rising three or fourfold in the next five years, he added. Another Silicon Valley financier estimated that the risk of losing access to China had knocked 10-15 per cent from Google's stock market value.
"If Google wants to be the number one advertising company globally, China is a country they must be in," Mr Aggarwal said.

Baidu plans to recruit from California's Silicon Valley
Baidu, China's largest online search company, is planning to hire software engineers directly from Silicon Valley early next month, a move reflecting its growing ambitions to match the technological prowess of rival Google and expand overseas.
The company yesterday said it would attend a job fair in the US on July 10 and that it had 30 positions to fill.
"These could be Chinese, people from Taiwan or Hong Kong, or citizens of any other country," Baidu said.

The initiative marks the beginning of changes in Baidu's personnel policy. So far, less than 10 of the company's more than 8,000 employees hold passports from countries other than China.
"As we develop more and more advanced search technologies, our need for world-class talent will only continue to increase," said Zheng Bin, director of Human Resources.
Baidu has been the main beneficiary of Google's decision to move its Chinese web search from the mainland to Hong Kong in January.
It stands to gain more market share if Google fails to renew its Chinese licence today. Baidu claims more than 60 per cent of China's online search market revenues.

Google's China presence in limbo as license set to expire

The license for Google's China website expires at midnight, but as the workday ended it had not been renewed. The US firm antagonized Beijing this year by refusing to censor its search results.
A person walks past Google's company logo outside the firm's China head office in Beijing's Zhongguancun district, where high-tech companies are located June 30. Google Inc will end the automatic redirection of users from its China to its Hong Kong website within the next 24 to 48 hours, a Google spokeswoman said on Wednesday.
By Peter Ford
Beijing — Google closed its Beijing offices for the day Wednesday still uncertain whether its Chinese website would be legal in the morning.
As a midnight deadline for an annual license renewal loomed, Google was still awaiting a decision by the Chinese authorities on its application for a new permit to act as an Internet Content Provider.
The fate of the American search engine giant – which in January announced that it would no longer submit searches by mainland Chinese users to official censorship as required – has been watched as a test of Internet freedom in the country.
“We are still waiting to hear from the government,” said Marsha Wang, Google spokeswoman in Beijing, on Wednesday afternoon.

“We do not know.”
Google said it decided to stop censoring its search results after it had detected cyberattacks coming from China against human rights activists’ Gmail accounts.
It has circumvented Chinese censorship since March by automatically redirecting any user who visited google.cn to the company’s uncensored website in Hong Kong, at google.com.hk.
The Chinese authorities objected, however.

“It is clear from conversations we have had with Chinese government officials that they find the redirect unacceptable – and that if we continue redirecting users, our Internet Content Provider license will not be renewed,” Google’s chief legal officer, David Drummond, said on Google’s official blog.
“Without an ICP license, we can’t operate a commercial website like Google.cn – so Google would effectively go dark in China,” Mr. Drummond wrote.

Compromise solution?
Google responded this week to government concerns by adding a step that users on the Chinese mainland must take themselves to find their way to the Hong Kong site.

It was still unclear Wednesday evening whether Beijing would accept this technical gesture.
The uncertainty over Google’s website, which channels about one third of Chinese web searches, has also raised doubts over the company’s other business activities in China, such as its research and development center and its bid to persuade Chinese mobile phone makers to install its Android software.
On Tuesday, Sina.com published screenshots from the Beijing Municipal Administration of Industry and Commerce website, apparently showing that the four companies through which Google operates in China have all had their business licenses renewed.

Those pages could no longer be accessed on Wednesday, and Ms. Wang said she could not comment on the status of Google’s business license applications.
In any case, Google’s website requires a separate license from the Beijing Communications Administration.

The agency’s spokesman was not available for comment Wednesday evening.

China Returns U.S. Criticism Over Sinking of Korean Ship

By ANDREW JACOBS and DAVID E. SANGER

The stern of the South Korean warship Cheonan on a barge in April. It was sunk on March 26, killing 46 crew members.

BEIJING — Three days after President Obama emerged from a tense meeting with President Hu Jintao of China, and accused Beijing of “willful blindness” toward North Korea’s military provocations, the Chinese government on Tuesday continued the argument about how to handle its testy neighbor.
In a regularly scheduled news conference, a spokesman for the Chinese Foreign Ministry dismissed American calls for a tough line against North Korea, most recently for the sinking of a South Korean naval ship.
The spokesman, Qin Gang, suggested that Mr. Obama had overreached when he accused Beijing of “turning a blind eye” to what an international investigation concluded was a North Korean torpedo attack in March on the ship.
The sinking of the Cheonan, which killed 46 South Korean sailors, has intensified already strained relations between the North and the South and thrown into stark relief China’s long-standing role as a patron of Kim Jong-il, the North Korean leader.
Mr. Qin contended that China had even more reason than the United States to view the sinking with gravity.

“China is a neighbor of the Korean Peninsula, and on this issue our feelings differ from a country that lies 8,000 kilometers distant,” he said.

“We feel even more direct and serious concerns.”
United States officials indicated that Mr. Obama was likely to continue trying to step up pressure on China and North Korea, including authorizing new military exercises with South Korea that would take place not far from Chinese waters.
Mr. Obama’s strategy appears intended to demonstrate to China that it would pay a price for failing to rein in the North Koreans, who depend on China for food and fuel.

On Saturday, Mr. Obama announced that the United States would extend by three years, until 2015, an agreement under which American commanders would take control of South Korean forces in the event of a military clash with the North.
When United States officials first briefed reporters on the meeting between Mr. Obama and Mr. Hu on Saturday during the Group of 20 summit meeting in Toronto, they described a largely friendly session that covered economic and security issues.

But in recent days, American officials have acknowledged that the conversation took a decidedly tougher turn when it came to North Korea, and that Mr. Obama emerged from the meeting frustrated at Mr. Hu’s unwillingness to acknowledge the North’s actions, much less put additional pressure on the country.
The dispute is playing out now in the United Nations.

A watered-down “president’s statement” is under debate in the Security Council that would acknowledge the findings of a South Korean-led investigation, which included experts from four other countries, that concluded that a North Korean submarine sank the ship.
China has led the opposition to the statement and to the idea that the North would have to pay any price for the act of aggression, which some American officials say was essentially an act of war.
An American official familiar with the conversation between Mr. Obama and Mr. Hu said that the discussion of the sinking was “the toughest part of a generally positive” talk.
Mr. Hu spoke only in generalities to Mr. Obama about the need for “peace and stability” on the Korean Peninsula, the official said.

Those are traditional code words for doing nothing that could result in the collapse of the North Korean government, which could result in a flood of refugees into China and might eliminate China’s buffer with American forces in the South.
Mr. Obama responded that the North Koreans should not be “indulged” for acts of aggression, the official said, and he said that if China were truly interested in preventing the outbreak of hostilities in its region, it would take a much tougher line.

It was at a news conference a short time later that Mr. Obama said “willful blindness” would not solve the problem.
North Korea has denied the accusations that it sank the Cheonan and has warned that any attempt to punish it would lead to armed conflict.
The director of the Central Intelligence Agency, Leon E. Panetta, said Sunday that he believed that the sinking of the Cheonan was part of a succession struggle in North Korea, as President Kim’s youngest son, Kim Jong-un, 27, is being positioned as his successor.

Beijing Rebuffs U.S. on North Korea

By BRIAN SPEGELE
BEIJING—China brushed aside criticism by U.S. President Barack Obama over its refusal to blame its close ally North Korea for the sinking of a South Korean warship, as tensions between China and the U.S. over the incident escalated.
Mr. Obama said on Sunday that he raised the issue with Chinese President Hu Jintao at a meeting of world leaders in Toronto over the weekend.

"I think there's a difference between restraint and willful blindness to consistent problems," Mr. Obama said.
South Korean warship Cheonan, which sank in March, is inspected this month.

Asked about those comments, Chinese foreign-ministry spokesman Qin Gang told a news briefing on Tuesday: "China borders on the Korean peninsula, and we have our own feeling on the issue, different from that of the countries tens of thousands miles away... We have more direct and intense concerns."
In response to the sinking of the Cheonan in March, in which 46 sailors died, the U.S. is planning joint naval exercises with South Korea designed to signal strong support for its ally.

China, North Korea's chief international supporter, has condemned the exercises as destabilizing to the region.
A U.S. military spokesman said on Tuesday that the drills could take place next month.

U.S. Navy spokesman Cmdr. Jeff A. Davis said the drills weren't meant to intimidate China or destabilize the region, but "are designed to ensure we have the ability to maintain peace and defeat aggression on the Korean peninsula."
China has announced it will conduct its own drills in the East China Sea beginning Wednesday. Chinese state media have suggested those exercises are a direct response to the planned U.S. operations.

Mr. Qin denied this, saying the Chinese drills have "nothing to do with the situation on the Korean peninsula."
South Korea, the U.S. and Japan are pushing for the United Nations Security Council to recognize North Korea's culpability in the ship sinking.

Such a move would need the support of China, a permanent council member.
Some defense experts suggest the U.S.-South Korea exercises are partly intended to reassert the U.S. military's presence in the Pacific even as its forces appear heavily committed in Afghanistan and Iraq.
"Given recent economic problems and U.S. disarray in Afghanistan, it is necessary to show the world in general, and China in particular, that the U.S. is an active and committed Pacific power," said Nancy Bernkopf Tucker, a professor at Georgetown University and a former State Department official in Beijing.
China froze military relations with the U.S. earlier this year following President Obama's decision to go ahead with $6.4 billion in weapons sales to Taiwan.
Tensions flared openly at a conference of senior defense officials in Singapore last month after Secretary of Defense Robert Gates pointedly criticized China for its continued objection to Taiwan arms sales.
"Only in the military-to-military arena has progress on critical mutual security issues been held hostage over something that is, quite frankly, old news," Mr. Gates said in a speech.
Many analysts say military friction between the U.S. and China will be contained.

They note that relations in other areas have improved markedly, particularly since a high-level dialogue in Beijing last monthin which both sides tempered their rhetoric.
"Let's face it, the balance of power remains where it is," said Brad Glosserman, executive director of the Pacific Forum Center for Strategic and International Studies.

"China needs the United States on so many levels, just as the United States needs China."
Another source of tension—China's currency policy—has eased somewhat since China announced earlier this month that it would ease the yuan's peg to the dollar and allow greater exchange-rate flexibility.

The yuan has since edged higher against the dollar.
Some scholars in China see the planned U.S.-South Korean naval exercises as an act of disrespect toward a rising power.

Shi Yinhong, an expert on international relations at Renmin University in Beijing, said the drills are a "slap in the face" for the Chinese government.

"The United States has not treated China as a great power," he said.
Cmdr. Davis, the U.S. Navy spokesman, noted that joint naval exercises between the U.S. and South Korea aren't out of the ordinary and U.S. Navy ships routinely patrol the Yellow Sea.
Chinese state media have reported the presence of a U.S. aircraft carrier near China's shores.

An article Tuesday on the English-language website of the People's Daily, a Communist Party organ, said China is under the ship's "combat scope."
Cmdr. Davis declined to discuss the potential location or size of the fleet involved in the naval drills, saying details for the exercise hadn't been finalized.
Some foreign analysts say hawks within the People's Liberation Army are putting pressure on politicians to respond to what are viewed as aggressive acts by the U.S., and their leverage is growing as policymakers seek the military's support ahead of a leadership transition in 2012.
"This is one of the moments the PLA are in more power," Mr. Glosserman said.

"No political leader can afford to be seen as weak."

Google to defy China's censors a little less

By Rob Pegoraro

Google is backing down, but only a little, in its standoff with the government of the People's Republic of China.

Three months after it began redirecting traffic from its censored, China-based google.cn site to a less-regulated site based in Hong Kong, google.hk, Google said Monday night that it would stop sending Chinese users to the Hong Kong page automatically.
Instead, Google Senior Vice President David Drummond wrote in a blog post that the company will limit google.cn to "services like music and text translate, which we can provide locally without filtering," while adding a prominent link to google.hk on that home page (as seen in the screenshot below).

Drummond explained the move as Google's only way to preserve a commercial Web presence in China after seeing the Communist government's intense dislike of its redirecting strategy -- itself a response to a series of hacking attempts on Google's computers and increasing interference with its operations inside the country:
...it's clear from conversations we have had with Chinese government officials that they find the redirect unacceptable -- and that if we continue redirecting users our Internet Content Provider license will not be renewed (it's up for renewal on June 30). Without an ICP license, we can't operate a commercial website like Google.cn -- so Google would effectively go dark in China.
That's a prospect dreaded by many of our Chinese users, who have been vocal about their desire to keep Google.cn alive.
Drummond expressed optimism about the odds of Beijing renewing its license after this change, but my colleague Keith Richburg's story suggests that's no sure thing.

We'll all see soon enough.
Now, from the perspective of those of us living in countries with constitutional guarantees of free speech, the Mountain View, Calif., firm's conduct in the PRC doesn't directly affect us either way. But it can and should play into how we view Google, a company that invites its users to trust it with an enormous amount of private information.

Do Google's actions in this case show a willingness to sacrifice its business to defend its ideals and its users?

Do they suggest a commitment to ethical conduct worthy of that trust?
You tell me.

West worries China may undermine Iran sanctions efforts

Officials fear that China, which has questioned the value of sanctions and is hungry for energy, will step up its trade with Iran as other countries scale back.
By Paul Richter
U.S. and European officials in charge of efforts to tighten sanctions against Iran have expressed new concerns that China is quietly positioning itself to undermine the latest measures.
In the last two weeks, the United States and the European Union imposed new sanctions to pressure Tehran to curtail its nuclear program.

The measures, which augment United Nations sanctions adopted this month, aim to discourage international investment in Iran, particularly its energy sector.
But U.S. officials fear that China, which is skeptical of sanctions and hungry for energy, will step up its trade and investment with Iran as other countries scale back to comply with trade restrictions.
The concerns point to the possibility that new unilateral sanctions approved by the Obama administration and its European allies could, in effect, backfire by putting Western firms at a disadvantage while benefiting China and failing to affect Iran's nuclear program.
"This is a significant challenge that we face," Stuart Levey, the Treasury Department's top sanctions official, told a Senate committee last week.
Levey added that the Obama administration will "push and urge" China to scale back an economic relationship that has flourished over the last decade.
Sanctions have been widely questioned as an effective means of persuading a defiant Iran to give in to demands for opening its nuclear program to international inspectors and scaling back its ambitions.
CIA Director Leon E. Panetta said Sunday in an ABC interview that the sanctions would have "some impact" on Iran, but by themselves would "probably not" deter Tehran's nuclear ambitions.
China, despite its misgivings, supported a fourth round of U.N. sanctions this month after Iran refused to scale back its expanding uranium enrichment program.

U.S. officials and allies charge that Iran's effort is aimed at developing nuclear weapons, which Tehran denies.
The U.N. measures were diluted during negotiations among the 15 members of the U.N. Security Council, and passed on a split vote.

China's support depended on the inclusion of language that permits continued foreign investment in Iran's oil and gas sector.
Within days, U.S. and European officials quickly added their own tougher measures in hopes of discouraging petroleum sales, energy investment and foreign financing.
But U.S. officials fear that China could secretly sell gasoline and other refined petroleum products to Iran through intermediaries in the Persian Gulf. And they worry that China could expand its growing investments in the oil and gas sector.
Rep. Howard L. Berman (D-Valley Village), chairman of the House Foreign Affairs Committee and a leading advocate for U.S. sanctions legislation approved last week, said in an interview that Chinese "backfilling" — taking the place of businesses with Western roots — is "a huge concern."
U.S. officials have received complaints from allied countries that have trimmed their ties with Iran, only to see the Chinese fill any void.
Japanese officials have complained regularly to the Americans in private, said Fariborz Ghadar, a former Iranian official now at the Center for Strategic and International Studies.

A typical complaint, Ghadar said, is: "You asked us to cut back — we backed out — and now the Chinese are stepping in."
In North Korea, Chinese cooperation with U.N. sanctions against Pyongyang has been considered spotty.

Beijing has been unwilling to disclose information about Chinese business contacts with the North Koreans, experts said.
"There's a track record of China not cooperating with the mechanisms set up to implement the international sanctions," said Mark Hibbs of the Carnegie Endowment for International Peace. "In the case of unilateral sanctions by the United States, cooperation is likely to be even less."
In Iran, China "has given no commitment not to take up the slack," said a Western diplomat, who spoke on condition of anonymity in keeping with diplomatic protocol.

Iran's trade with China has been growing and reached an estimated $36.5 billion last year, surpassing trade with the European Union.
In some cases, the U.S. may find it difficult to pressure Chinese firms to limit business ties with Iran because many do no business in the United States and won't care about U.S. threats to cut off access to the American market, as allowed under the sanctions legislation.
For Chinese companies that could be punished under the U.S. sanctions measure, the U.S. would risk complicating its relationship with one of its largest trading partners.
Nevertheless, U.S. officials insist they intend to police the new sanctions vigorously.
One senior official assigned to the task is Robert Einhorn, a veteran State Department nuclear nonproliferation specialist whom the Chinese have called "the dentist" because of his willingness to come down hard on foreign officials.
Still, there are some positive signs for the Obama administration.
Although China wants to expand economic ties with Iran, it is moving slowly in areas as it assesses the potential effects of international pressure.

The Chinese government may not want to invest large sums in major gas and oil projects if there is a risk that Iran's isolation could make it difficult to complete the projects, analysts said.

Vietnam Opposes China’s Tourism Plan in Disputed Area

By Beth Thomas
Vietnam’s government opposes China’s plan to develop Hainan island for tourism in the decade to 2020, a proposal that incorporates the Spratly and Paracel islands.
Vietnam reaffirmed its “indisputable sovereignty” over the islands, Ministry of Foreign Affairs spokeswoman Nguyen Phuong Nga said, according to a statement on the government’s website. Vietnam’s Ministry of Foreign Affairs met Chinese embassy officials on June 22 on the matter, according to the statement.
China plans to promote air and sea routes to take tourists to the Paracel islands and encourage citizens to register for the right to use uninhabited islands, the statement said.
China’s actions violate Vietnam’s sovereign right and go against the spirit of the Declaration on the Conduct of Parties in the South China Sea, which China and the Association of Southeast Asian Nations signed in 2002, Nga said in the statement.
The Paracel and Spratly islands, groups of rocky outcrops in the South China Sea with unproven oil and gas deposits, are claimed in whole or part by Vietnam, Taiwan, Brunei, the Philippines and Malaysia.

The Renminbi Runaround

By PAUL KRUGMAN
Last weekend China announced a change in its currency policy, a move clearly intended to head off pressure from the United States and other countries at this weekend’s G-20 summit meeting.

Unfortunately, the new policy doesn’t address the real issue, which is that China has been promoting its exports at the rest of the world’s expense.
In fact, far from representing a step in the right direction, the Chinese announcement was an exercise in bad faith — an attempt to exploit U.S. restraint.

To keep the rhetorical temperature down, the Obama administration has used diplomatic language in its efforts to persuade the Chinese government to end its bad behavior.

Now the Chinese have responded by seizing on the form of American language to avoid dealing with the substance of American complaints.

In short, they’re playing games.
To understand what’s going on, we need to get back to the basics of the situation.
China’s exchange-rate policy is neither complicated nor unprecedented, except for its sheer scale.

It’s a classic example of a government keeping the foreign-currency value of its money artificially low by selling its own currency and buying foreign currency.

This policy is especially effective in China’s case because there are legal restrictions on the movement of funds both into and out of the country, allowing government intervention to dominate the currency market.
And the proof that China is, in fact, keeping the value of its currency, the renminbi, artificially low is precisely the fact that the central bank is accumulating so many dollars, euros and other foreign assets — more than $2 trillion worth so far.

There have been all sorts of calculations purporting to show that the renminbi isn’t really undervalued, or at least not by much.

But if the renminbi isn’t deeply undervalued, why has China had to buy around $1 billion a day of foreign currency to keep it from rising?
The effect of this currency undervaluation is twofold: it makes Chinese goods artificially cheap to foreigners, while making foreign goods artificially expensive to the Chinese.

That is, it’s as if China were simultaneously subsidizing its exports and placing a protective tariff on its imports.
This policy is very damaging at a time when much of the world economy remains deeply depressed.

In normal times, you could argue that Chinese purchases of U.S. bonds, while distorting trade, were at least supplying us with cheap credit — and you could argue that it wasn’t China’s fault that we used that credit to inflate a vast, destructive housing bubble.

But right now we’re awash in cheap credit; what’s lacking is sufficient demand for goods and services to generate the jobs we need. And China, by running an artificial trade surplus, is aggravating that problem.
This does not, by the way, mean that China gains from its currency policy.

The undervalued renminbi is good for politically influential export companies. But these companies hoard cash rather than passing on the benefits to their workers, hence the recent wave of strikes.

Meanwhile, the weak renminbi creates inflationary pressures and diverts a huge fraction of China’s national income into the purchase of foreign assets with a very low rate of return.
So where does last week’s policy announcement fit into all this?

Well, China has allowed the renminbi to rise — but barely.

As of Thursday, the currency was only about half a percent higher than its typical level before the announcement.

And all indications are that watching the future movement of the renminbi will be like watching paint dry: Chinese officials are still making statements denying that a rise in their currency will do anything to reduce trade imbalances, and prices in the forward market, in which traders agree to exchange currencies at various points in the future, suggest a rise of only about 2 percent in the renminbi by the end of this year.

This is basically a joke.
What the Chinese have done, they claim, to increase the “flexibility” of their exchange rate: it’s moving around more from day to day than it did in the past, sometimes up, sometimes down.
Of course, Chinese policy makers know perfectly well that although U.S. officials have indeed called for more currency flexibility, that was just a diplomatic euphemism for what America, and the world, wants (and has the right to demand): a much stronger renminbi.

Having the currency bob up or down slightly makes no difference to the fundamentals.
So what comes next?

China’s government is clearly trying to string the rest of us along, putting off action until something — it’s hard to say what — comes up.
That’s not acceptable.

China needs to stop giving us the runaround and deliver real change. And if it refuses, it’s time to talk about trade sanctions.

China Shows ‘Bad Faith’ in Yuan Move Before G-20

By Russell Ward
Nobel laureate Paul Krugman said China’s pledge to make the yuan more flexible was an “exercise in bad faith” intended to fend off international pressure for a stronger currency at this week’s Group of 20 summit.
China is still undervaluing the yuan to make its exports “artificially cheap” and keep imports expensive, a policy that is “very damaging at a time when much of the world economy remains deeply depressed,” Krugman wrote in an opinion piece published on the New York Times’s website yesterday.
The yuan has gained 0.53 percent this week, the most since December 2008, following the central bank’s June 19 announcement on abandoning a fixed peg to the dollar.

The People’s Bank of China had held the yuan at 6.83 since July 2008 to shield exporters during the global financial crisis.
The country has “barely” allowed the currency to rise, and further movements will be “like watching paint dry,” Krugman wrote.

The undervalued Chinese currency fuels inflationary pressure and diverts national income to the purchase of foreign assets with a low return, he said.
G-20 leaders begin a two-day meeting in Toronto tomorrow to discuss how to sustain the recovery from the worst global recession in postwar history.

Following China’s announcement on the yuan, the talks are likely to focus on the pace of fiscal- deficit reductions rather than exchange rates.

Trade Sanctions
Policy makers outside of China should consider trade sanctions unless the country delivers “real change,” Krugman said.

President Barack Obama said yesterday that it’s “too early to tell” whether China’s decision to allow more yuan flexibility will be sufficient to rebalance the world economy.
The Obama administration is under pressure from some members of Congress to push harder on China over its currency policy.

Senator Charles Schumer, a Democrat from New York, has said he’ll seek a vote soon on legislation to let U.S. companies seek tariffs on Chinese imports to help offset the weak yuan.
U.S. economic woes can’t be solved by a revaluation of the yuan and American leaders will “help no one” by politicizing the issue, Chinese Foreign Ministry Spokesman Qin Gang said yesterday.
Krugman said the Chinese government’s idea of “flexibility” is for the yuan to move slightly either up or down, while U.S. officials were using the word as a euphemism for seeking a “much stronger” currency.
Chinese officials are “seizing on the form of American language to avoid dealing with the substance of American complaints,” the Princeton University professor said.

“In short, they’re playing games.”
Krugman, who won the Nobel Prize in 2008 for his theories on global trade, said in an October article in the New York Times that China is taking jobs from other countries by maintaining a cheap yuan.

China’s currency plans remain unclear

By Geoff Dyer in Beijing
China announced a significant revision to its exchange rate policy last weekend but the modest appreciation in the level of the currency during the first week of trading under the new regime has raised questions about B.eijing’s real intentions.
The Chinese central bank announced it would abandon its two-year peg to the US dollar a week ahead of Saturday’s G20 summit in Canada where the value of the renminbi had threatened to become one of the major issues.
Since then, the Chinese currency has risen by 0.5 per cent against the US dollar, a large movement in the context of the usually tightly controlled currency regime, but still only equivalent to the daily 0.5 per cent trading limit that has been in place for five years.
As a result, the Chinese delegation could yet come under pressure at the G20 summit to be more specific about what will change with the new currency policy.
“The rest of the [G20] were not born yesterday, and there may be some suspicion that the move over the last week was just window-dressing to take the exchange rate issue off the top of the agenda,” said Brian Jackson, a strategist at Royal Bank of Canada in Hong Kong.

“To reduce the risk of trade tensions, we will need to see further renminbi gains in the days and weeks ahead.”
Washington has so far given a cautious welcome to the policy shift.

Barack Obama, the US president, said on Thursday that initial signs were positive and that it was unrealistic to expect swift increases in the value of the Chinese currency.
“We did not expect a complete 20 per cent appreciation overnight, for example, simply because that would be extremely disruptive to world currency markets and to the Chinese economy,” he said.
However, Mr Obama added that it was “too early to tell whether the appreciation... is sufficient to allow for the rebalancing that we think is appropriate”.
Sander Levin, chairman of the US House of Representatives ways and means committee, said that legislation designed to press China into more rapid appreciation would be kept “on the burner”.
“We’ll see if China’s action in this immediate period really reflects a very significant change in policy,” said Mr Levin.
Jiang Yaoping, a Chinese deputy minister of commerce, whose department fiercely opposed any shift in currency policy, said that any changes in the exchange rate would be “gradual”.
“Accusations that China is manipulating its currency are groundless. The facts have proved that it’s not true,” he said.
Mark Matthews at Macquarie Securities in Hong Kong said investors were wrong to dismiss this week’s modest market movements as “just a continuation of the same cat-and-mouse game [China has] been playing with the US since 2008”.
A more dramatic shift would have been criticised in China as capitulation to the US Congress and would have attracted a huge volume of speculative capital.
“The important thing with currencies is not the absolute level but the trend,” said Mr Matthews. “Longer-term, this move shows that China has decided it will let its currency appreciate.”

CSIS has a long preoccupation with Chinese spying

BY JONATHAN MANTHORPE
Beijing's efforts at espionage and recruiting agents of influence in Canada has been a preoccupation of the Canadian Security and Intelligence Service (CSIS) for many years.
There has been no clearer indication of how large the issue looms for CSIS than when the former director, Jim Judd, appeared before a Senate committee in April 2007, and said fully half of his organization's work involved monitoring Chinese government espionage efforts in Canada.
So there is a long heritage to the statement by the current CSIS director, Richard Fadden, that his organization has evidence that a few provincial and municipal politicians and officials have become "agents of influence" for foreign governments, with the clear inference that he meant primarily China.
Indeed, CSIS has always been quite open that it believes Canada is an inevitable target of the Beijing government's determination to activate susceptible Canadians to gather both useful secrets -- especially involving technological advances -- and to influence Canadian public policy in China's favour.
One of the first reports dealing with Chinese efforts to exert influence on other countries and governments was made public by CSIS in 1998.

It is an examination of how Beijing used what is called "The United Front" to try to affect public opinion in Hong Kong ahead of the handover to Chinese sovereignty in 1997 and minimize fears of repression.
The United Front, now a department of the Chinese government since it was resuscitated by former paramount leader Deng Xiaoping in 1978, has a long history starting with the war against Japan in the 1930s and '40s of seeking to play on and use the natural patriotism of non-communist Chinese towards the Communist party's objectives.
"Because they are international in scope and occasionally coercive, activities associated with this work can amount to interference in the internal affairs of other nations," says the 1998 CSIS paper.
"In this context, Canada cannot claim disassociation from the phenomenon, if only because of the sheer size of its Chinese community."
The report goes on to document the role played by the New China news agency, Xinhua, in United Front activities and it points out that the main targets for recruitment as agents of influence are not leftists sympathetic to communism.
The main targets are business people who can be suborned by the inducements of contracts in China, and people who may rise to political or other positions of influence within Canadian society.
The CSIS report is careful to say, however, that "ethnic Chinese who have settled abroad should not be viewed as a fifth column."
The number of people within the Chinese diaspora who are susceptible to Beijing's blandishments are relatively few, the report says.
The CSIS interest in Beijing's efforts to recruit agents of influence was refreshed in 2004 with the start of the Chinese government's worldwide program to place Confucius Institutes in academic and other institutions.
The official Beijing line was that these institutes, paid for by the Chinese government, are only an attempt to win friends and calm fears about China's rise by spreading knowledge about Chinese culture and language.
Institutions in scores of countries have taken Beijing up on the offer, including at least seven colleges and universities in Canada, among them the British Columbia Institute of Technology.
But some jurisdictions such as Sweden, and some states in Australia and the United States, have been wary of accepting the institutes, seeing them as another effort by Beijing to recruit agents of influence and acquire technical secrets from academic institutions.

Ottawa aware of Chinese influence: sources

CBC News
The highest levels of the Canadian government have known for years that China has been trying to win influence through Chinese-Canadian politicians and public servants.
Richard Fadden, director of the Canadian Security Intelligence Service, in an exclusive interview with the CBC

That information comes a day after CSIS director Richard Fadden said he had never warned officials close to Prime Minister Stephen Harper that some provincial cabinet ministers may be under the sway of China -- even though he told the CBC earlier this week the agency was discussing the issue with the Privy Council Office.

Sources tell the CBC the PCO was well aware of those concerns, even if it hadn't been told the details of who was involved.
Public Safety Minister Vic Toews, the minister responsible for the Canadian Security Intelligence Service, Canada's spy agency, refused to discuss Fadden's bombshell allegations.
"I'm afraid I can't comment on any operational issues involving CSIS," Toews said Thursday.
In an exclusive interview with CBC News earlier this week, Fadden said Canada's spy agency suspects that some municipal politicians and cabinet ministers in two provinces are being swayed by their connections to foreign governments.
China was one of the countries Fadden mentioned.
The remarkable comments sparked outrage from some provincial politicians and have led some observers to call for Fadden to resign.
But senior intelligence sources say the highest levels of the Canadian government were "absolutely" aware of the issue.
"These problems are very well-known," one source said. "This information did not blindside the government."

Fadden 'not wrong'
A source suggested the prime minister was personally aware of the issue of foreign agents trying to win influence over politicans and bureaucrats -- even if he didn't know the details.
"The prime minister is strongly of a view that this is a problem," a source said.
The source said Harper has an appetite for intelligence beyond that of his predecessors. Intelligence briefers now routinely provide the prime minister with detailed written reports, in addition to their regular verbal briefings.
On Wednesday, the Prime Minister's Office denied it was warned by CSIS of any specific agents of influence in provincial cabinets. Fadden himself later issued a retraction on that key point.
But sources tell the CBC the issue was very likely "verbally briefed " to intelligence staff who work for the prime minister.
Fadden "had to swallow hard," a source said, "but he's not wrong."

Is China controlling Canadian politicians?

Canada's chief spy has incensed Chinese-Canadians after he claimed that foreign powers control some of the country's politicians.
By Tom Leonard in New York

Canada's Prime Minister Harper walks with China's President Hu in the Hall of Honour on Parliament Hill in Ottawa

The comments by Richard Fadden, the director of the Canadian Security Intelligence Service, in a television interview have been widely interpreted as a thinly-veiled attack on Beijing on the eve of a visit to Canada by the Chinese president Hu Jintao for the G20 summit.
Mr Fadden told CBC that municipal officials and at least two cabinet ministers from two Canadian provinces were "agents of influence" who were secretly working on behalf of foreign interests.
"We're in fact a bit worried in a couple of provinces that we have an indication that there's some political figures who have developed quite an attachment to foreign countries," he said.
"The individual becomes in a position to make decisions that affect the country or the province or a municipality. All of a sudden, decisions aren't taken on the basis of the public good but on the basis of another country's preoccupations."
For many Canadians, Mr Fadden did not have to name names for them to work out which to which foreign country he was referring.
As elsewhere, China has been linked with economic espionage in Canada, most recently over reports that its technicians had tried to steal secrets from the aerospace company Bombadier.
Tung Chan, a former Vancouver city councillor and head of an immigrant services organisation, said Mr Fadden's remarks "cast shadows and cast doubts on the loyalty of a whole group of people, particularly those committed to serve the public".
He added: "It's not helpful to what we're trying to do in creating multicultural harmony."
He was echoed by several members of the Chinese-Canadian community, as well as provincial premiers and city mayors.

China rewrites history of Korean War

On the 60th anniversary of the Korean War, China has finally rewritten its history of how the conflict began to point the finger of responsibility at North Korea.
By Malcolm Moore in Shanghai

North Korean Army tank regiment during the Korean War 1950-1953

Until now, the Chinese have staunchly supported their North Korean allies, along whose side they fought in the war.
China previously insisted that the war was waged out of American aggression. The official title of the conflict on the mainland is "The War to Resist America and Aid Korea".
Chinese history textbooks state that the Korean War began when "the United States assembled a United Nations army of 15 countries and defiantly marched across the border and invaded North Korea, spreading the flames of war to our Yalu river."
The official Chinese media stated for the first time that it was North Korea that dealt the first blow.

In a special report, Xinhua's International Affairs journal said: "On June 25, 1950, the North Korean army marched over 38th Parallel and started the attack. Three days later, Seoul fell."
China and North Korea were "as close as lips and teeth," said Mao Tse-tung.
The Korean War, which has never formally ended, has been largely forgotten in the West, despite the deaths of between two and three million people in the fighting.
In Asia, however, the memory of the war is still felt strongly and has sustained a continuing alliance and emotional bond between Beijing and Pyongyang.
While many Chinese historians privately subscribe to the view that North Korea was the aggressor in the war, driven by Kim Il-sung's desire to unite the Korean peninsula under a Communist banner, the matter remains highly sensitive.
"It is not convenient for me to comment on the matter," said Zhang Liangui, a leading professor of Korean studies at the Communist Central Party School in Beijing.

"I was not aware of this timeline [in the Xinhua article]. As far as I am aware there has been no change to the official view on the war."
Meanwhile, the Global Times, a government-run newspaper, said it was "high time to renew and strengthen efforts by Chinese scholars to discover the truth about the Korean War."
In Seoul, South Korea held an official ceremony to remember the war and Lee Myung-bak, the president, paid tribute to the dead.

"Sixty years ago, North Korea's communists opened fire on a weekend's dawn when all people were sleeping peacefully," he said.
Meanwhile, across the border, North Korea put across its own view of the conflict.

Under the headline: "US, Provoker of Korean War," the country's state news agency accused Washington of starting the war with a surprise attack.
"All the historical facts show that it is the US imperialists who unleashed the war in Korea and that the United States can never escape from the responsibility," the Korean Central News Agency said.

China’s Export Economy Begins Turning Inward

Strikers outside a Denso auto parts plant in Guangzhou, China. The authorities appear to have tolerated recent strikes that led to higher wages.

A potential customer looked over a Lexus in January at an automobile showroom in Beijing. A tag indicated the monthly payments.

Workers were on strike earlier this month at the Honda Lock factory in Zhongshan, China.

By EDWARD WONG

BEIJING — For years, Chinese leaders looked to the millions of poor workers from the country’s interior as the engine of a roaring export economy.

They would move to coastal provinces, toil in factories and churn out the world’s household goods.
These days, the workers are crucial for China’s economy in another way: They must start buying the very products they manufacture, spending their paychecks on lipstick and lingerie, plastic lawn chairs and plasma television sets.

Officials see them as the linchpin of China’s move away from a lopsided economic model that relies too heavily on foreign consumption.
Some of China’s top leaders, including Prime Minister Wen Jiabao, have emphasized the need for that restructuring for years, especially since the global financial crisis pummeled the export industry.

But China’s move this week to make its currency, the renminbi, more flexible and the authorities’ apparent tolerance of recent factory strikes that have led to significant wage increases both signal that Chinese leaders could be serious about re-engineering the nation’s economic model.
The currency shift brings immediate political benefits, since China will now presumably come under less pressure at the Group of 20 summit meeting this weekend.

But there are important domestic considerations as well.

The breaking of the renminbi’s de facto peg to the dollar means the currency is likely to appreciate in value, making Chinese exports somewhat less competitive in the global marketplace but strengthening the purchasing power of Chinese consumers.

Likewise, government policies to encourage wage increases for poor laborers — there are an estimated 150 million migrant workers in cities — could also spur consumption, if the pay increases outpace inflation.
“The central government attitude toward raising wages is undoubtedly positive because it’s directly tied to boosting domestic consumption and restructuring the economy,” said Liu Cheng, a scholar of labor law at Shanghai Normal University.

“For a long time, wage growth has lagged behind economic growth, and that has forced China to continue to depend on exports.”
Chinese leaders have little choice but to overhaul the model.

For one thing, the pool of cheap labor is drying up. China’s population of 15- to 24-year-olds has already peaked and will continue to shrink over the next decade, even if China were to change its one-child policy, according to projections by the United Nations.

Just as important, young workers these days are no longer willing to toil under the same conditions tolerated by laborers a decade ago.
Some Chinese leaders have been vocal in recent months about the need to raise household consumption.

Li Keqiang, the vice prime minister who is viewed as a likely successor to Mr. Wen, stressed that as a priority in public addresses this year.

On June 1, Seeking Truth, an official journal of the Communist Party, published an article by Mr. Li in which he wrote that “increasing citizens’ consumption is the key to expanding domestic demand.”
Raising wages is only one of several actions the government must take if it wants to stimulate household consumption.

The savings rate in China is much higher than that in Western nations, at least partly because people rely on savings to finance much of their education and health care needs.

In January 2009, China announced that it intended to spend $123 billion by 2011 to set up universal health care for its 1.3 billion people, but that plan is vastly underfinanced, scholars say.
Keeping a lid on inflation is also crucial.

Low wages have helped hold down the inflation rate despite years of extraordinary double-digit growth and huge government investments in projects.

But in May, the consumer price index edged up to 3.1 percent from the previous May; the government wants the average in all of 2010 to be no higher than 3 percent.

That was most likely one factor that pushed the People’s Bank of China to announce last Saturday that the renminbi would become more flexible.
Analysts say that a currency revaluation by itself will not necessarily make China’s exports significantly less competitive or rein in China’s dependence on its export industry.

From mid-2005 to mid-2008, the renminbi appreciated 21 percent against the United States dollar, but China’s trade surplus with the United States continued to grow by an average of 21 percent during that period.

In recent months, China’s exports have shown a strong recovery, with nearly 50 percent growth year-on-year in May. Chinese officials obviously felt confident enough in the recovery to go forward with the currency shift.
Besides exports, China’s economic growth has depended on state-led investment, especially infrastructure building, and that too leads to big risks, some analysts say.

Stimulus spending and a surge in lending by state banks during the economic crisis helped China power through the slump.

But the lending spree has contributed to inflationary pressures and a soaring property market that the central government is trying to cool down.
Victor Shih, an associate professor at Northwestern University who studies the political economy of China, said a significant portion of $1.6 trillion that has been lent to companies run by local governments is likely to pile up as bad loans, posing a risk to state banks, and thus the entire economy.

“There will be a big cost,” he said. “China is trying to recapitalize its banks before a lot of these bad loans show up on the balance sheets.”
As with export dependence, some Chinese leaders are starting to see the danger and have moved to slow bank lending.
But effective infrastructure projects are literally the road to more widespread wage increases across China, and thus greater domestic consumption.

An explosion of highways and rail lines in the central interior provinces means companies are now operating more factories in those areas, where costs are lower.

Some workers in the interior are seeing wages increase at the same rates as those on the coast, or at even higher rates.
Anne Stevenson-Yang, head of the Beijing office of Wedge MKI, an equity analysis firm, said her research into at least 15 companies across China showed that some in the interior had raises of up to 30 percent this year, a higher rate than those on the coasts.

But absolute wages are still lower in the interior, so more and more low-margin manufacturing companies are setting up shop there, especially as provincial governments on the coast slowly push out some assembly-line factories in favor of higher-end businesses.
In theory, many laborers will no longer have to flock to the coast, and consumption in the interior will rise, leading to more uniform economic growth across China.
“Probably the factory cities and dormitories of the ’80s will disappear,” Ms. Stevenson-Yang said, “and one day people will think, ‘Wow, what was that all about?’ ”

China Caught Traders Off Guard

By ALEX FRANGOS
HONG KONG—Currency traders left the Chinese yuan party too soon. Now they are piling back in.
China's weekend announcement that it would revert to its pre-crisis currency policy caught investors who had given up on their long-held yuan positions off guard.

Turmoil in Europe and fears of a double-dip recession led currency traders to retreat from the idea that China would loosen its grip on the yuan.
"Over the last four weeks, more than three-quarters of clients were unwinding long-Asia positions, especially as things were blowing out in Europe," says Adam Reynolds, co-head of Asian fixed income and currencies at Société Générale in Hong Kong.

"As things stabilized last week, a couple guys put a position back on," he says, but mostly investors everyone missed the opportunity to profit on China's announcement.
On Monday, investors reset their bets on yuan appreciation, driving assets tied to the yuan higher.

These include regional currencies such as the Malaysian ringgit and Korean won, which are seen as proxies for Chinese growth. Both rose more than 2% against the dollar Monday.
The yuan itself strengthened 0.4% against the dollar, but within its proscribed 0.5% trading band.

China didn't change the yuan's "central parity rate," the middle zone of that band where it wants the currency to trade.
Expectations for a stronger yuan were also reflected in the closely watched market for dollar-yuan derivatives known as nondeliverable forwards, or NDFs.

NDFs are derivative contracts traded between investors that pay out based on the value of the yuan in the future.
In reaction to the weekend announcement, the 12-month NDFs moved sharply Monday in favor of a stronger yuan, implying a 3% strengthening of the yuan in the next year. On Friday, it was 1.8%.
The reason NDFs exist is that investors can't trade the yuan directly.

China's strict controls on the flow of money prevent unfettered currency trading and make it nearly impossible to directly own yuan in large amounts and with the ability to buy and sell the currency quickly.
NDFs take care of that by letting market participants take bets on where they think the yuan will be in, say, one, six or 12 months.

Watching the trail of the NDF market over the past couple of months shows how investors were prepared for a yuan move, then lost their nerve.
In late April, the 12-month NDF market was predicting a 3% increase in the yuan. But as markets swooned, investors fled their bets on China making a big currency announcement. By May 26, the NDFs were pricing in just a 0.7% increase.
HSBC currency analysts on June 10 announced the "window closed" on yuan appreciation in 2010, and predicted that the yuan would continue to trade at its current 6.8 level versus the dollar by the end of the year.

HSBC doesn't think the weekend move means the yuan will necessarily appreciate, though it now admits that it is a possibility.
"The only certainty we have out of the weekend is that China is depegging, nothing more," says Richard Yetsenga, HSBC's head Asia currency strategist.

He says China's emphasis on "flexibility" in its policy statements means the yuan is positioned to react more to the currencies of its largest trading partners including Europe and could go up or down.
"If the euro keeps going up, flexibility will equal appreciation against the dollar. But if the euro turns tail, markets are in for a surprise," Mr. Yetsenga says.
Christy Tan, Asia foreign exchange and debt strategist for Bank of America Merrill Lynch, calls the current 3% appreciation baked in the NDFs "reasonable," and thinks the there is "limited" room for more than that.
"China will need to see external and domestic [economic] conditions align before it is confident in exiting crisis response. At this point, the main motive is to appease the U.S." and other trading partners, she says.
The next thing to watch in the yuan market will be Tuesday morning, when Chinese officials set the central parity rate.

A change in the parity rate toward a stronger yuan would be a clear signal that China's announcement is being followed up with real action.
If it doesn't change the fixing rate, the "market will get really confused and you'll see the dollar rally," says David Forrester, Barclays Capital currency strategist in Singapore.

"China's emphasis is on stability, so the idea of trying to catch people out wouldn't be promoting stability."
Keeping investors guessing might be part of China's playbook when it comes to the yuan.

Chinese officials have said they doesn't want investors to profit from its policy decisions. They also want to deter "hot money" flowing into China that can quickly inflate property and stock bubbles, and can just as quickly leave, causing rapid price falls and general economic dislocation.
Some analysts figure China picked this weekend to make the announcement precisely because so many investors had removed their bets on yuan appreciation.
The timing was similar to what happened in 2005, the first time China loosened its currency, says Mirae Asset Securities Chief Economist Bill Belchere.

"In 2005, they surprised the market. The market was waiting, waiting, waiting, got bored and then left," he said.